Five9 Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 5 speakers on the call.

Operator

Thank you for joining us today. On the call are Mike Burkland, Chairman and CEO Dan Burkland, President and Barry Worensen, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, expected ARR from certain customers customer growth anticipated customer benefits company growth the anticipated benefits from our recent acquisition of ACS enhancements to and development of our solutions market size and trends our expectations regarding macroeconomic conditions Company market position initiatives and expectations, technology and product initiatives and other future events are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be entirely relied upon by investors, Actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration and efficiency, including increased inflation, increased interest rates, Supply chain disruptions decreased economic output and fluctuations in currency exchange rates lower growth rates within our installed base of customers Achieve the intended benefits from the acquisition of ACS and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

Operator

In addition, management will make reference to non GAAP financial measures during this call. A discussion of why we use non GAAP financial measures and information regarding reconciliation of our GAAP versus non GAAP results and guidance It's currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the Investor Relations section on Five9's website at investors. Five9 dotcom. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non GAAP. And now, I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland.

Speaker 1

Thanks, Emily, and thanks to everyone for joining our call this afternoon. I'm pleased to report strong Q3 results with revenue growth of 16% year over year, Primarily driven by our LTM Enterprise subscription revenue growing 28% year over year. Adjusted EBITDA margin for 3rd quarter was 18% of revenue, helping drive an all time record for operating cash flow of $37,000,000 or 16% of revenue. Let me start off by reminding you of the 3 continuing trends that drive our confidence in this market. 1st, Enterprises are developing plans at a greater sense of urgency to replace their on premise contact center solutions as legacy vendors have retrenched and slowed Or even stopped development in some cases.

Speaker 1

Also, a reminder that in terms of cloud replacing on premise, We believe that the penetration is still less than 20%. 2nd, companies are enthusiastically pursuing digital transformation initiatives To enhance customer experience, cut costs and increase revenue. In this context, remember that contact centers are mission critical systems, which are a source of brand loyalty and differentiation. And 3rd, AI is becoming an even more important catalyst for enterprises to shift to the cloud. AI Automation is clearly

Speaker 2

an area of focus

Speaker 1

for enterprises as demonstrated by our greater than 80% attach rate on $1,000,000 plus ARR deals in the quarter. Now I'd like to discuss the 3 main growth drivers for our business, namely our platform, our large upmarket and our international expansion. Let me start with our platform. As you recall, in August, we closed the ACS acquisition. We have experienced significant momentum with the ACS solution as the number of ACS opportunities in the pipeline has increased over 30% in this very short period of time.

Speaker 1

As a reminder, APS is a fit for our $1,000,000 plus ARR customers, giving us continued strength in our March up market. For example, they're opening doors for several Fortune 100 deals, although it's still early days. A good portion of our innovation continues to be around our AI nomination portfolio. And we are seeing significant traction as a result of this innovation. For example, Our professional services team worked on more than 250 AI deployments during the quarter.

Speaker 1

Additionally, Bookings for our Agent Assist product increased 150% year over year driven by our AI summaries customer trials. It's clear that our practical approach to AI continues to deliver real tangible value to our customers. This is directly tied to our core AI tenants, including our beliefs that AI should be available across our platform, That AI should be democratized and available to all customers, that AI should remain engine agnostic And that AI should be applied in a responsible and ethical manner. And now I'd like to focus on our large upmarket and international expansion. I'm pleased to report that we continue to see strong momentum upmarket in booking $1,000,000 plus ARR deals.

Speaker 1

As a reminder, $1,000,000 plus ARR customers make up more than 50% of our recurring revenue. I'm also pleased to report that our pipeline for strategic deals double year over year in Q3. In addition, we had a record number of enterprise and strategic RFPs in the 3rd quarter, Which increased 66% year over year and 21% sequentially. This March up market and our continued international expansion are increasingly being driven by our ever growing network of global partners and their dedication to leading the Five9. I'm very pleased to share that IBM has extended their relationship with us as a global SI partner, reselling 5 9 along with their CRM and ITSM offers And also as a technology partner, integrating Watson X with our AI solutions.

Speaker 1

This is a common model amongst large SIs As we are complementary and tightly integrated with solutions such as Salesforce, ServiceNow, Microsoft, Google and others. We have now established ourselves as a global brand with the help of key strategic partners like IBM, PC, TELUS International, Deloitte and Accenture to name it to you. Our partnership strategy is built not only on recruiting new partners, but also on enabling and empowering partners Within our methodology of sell this, deliver this and build this. This approach was one of the key drivers Who has been our partner for the past 3 years celebrated their largest quarter with several new customer loyalty wins and over 4,000,000,000 of incremental ACV added in the quarter. Their success is built in part on their ability to implement Five9 solutions integrating with their enterprise management platform and other services.

Speaker 1

Our leadership in the channel is further validated By the 3 leading technology solutions distributors in our industry, Telarus, Avant and Telesys ScanSource, each recognizing Five9 as their number one keypad supplier. Furthermore, Our recent channel survey by Baird ranked Five9 number 1 for top speed test solutions sold by the channel and number 1 in easiest These partners along with many others are helping place us in a prominent position within a global channel community. In closing, I'm very excited about our continued momentum out market globally and with the success we are having with our AI automation offerings. The opportunity ahead for Five9 has never been better. And I want to thank all of our employees who bring passion and purpose to their work every day to make this a reality.

Speaker 1

And with that, I will turn it over to our President and CRO, Dan Burkland. Dan, go ahead. Thanks, Mike, and good afternoon, everyone. I'm pleased to report that we had a strong bookings quarter. Our pipeline reached another all time high with our strategic accounts pipeline Doubling year over year and our sales of AI and Automation Solutions are seeing unprecedented momentum.

Speaker 1

As you know, the very high end of our market is lumpy With regards to the timing of bookings. However, I'd like to remind you that the large enterprise category of $1,000,000 to $5,000,000 of ARR He's the bread and butter of our business and in aggregate is a larger contributor to our revenue growth than the mega deals. Now as I usually do, I'd like to share some examples of new Builder Lens during the quarter. The first example is a healthcare insurance company That was moving away from an Avaya on premise version that was taking on its life. They chose Five9 along with one of our leading UC partners With deep integration in order to gain visibility and provide seamless transfers between contact center workers and back office employees, all from a single UI.

Speaker 1

We will also include our chat, e mail, SMS, QM and Interaction Analytics, and we anticipate this initial order The result in approximately $2,300,000 in ARR to Five9. The second example is a hospital billing and collections company. They were using Cisco that was being managed by a third party, making moves, adds and changes cumbersome and also long lead times. Ben evaluated the major CCaaS providers and chose Five9. We are including the full omni channel solution with email, chat, SMS as well as both voice and digital IVAs.

Speaker 1

We are also providing them with QM, Interaction Analytics, WFM and AT and Assist And they expect to reduce call handle price by up to 50%. We anticipate this initial order to result in approximately $2,300,000 in ARR to 5.9. A third example is a utility company serving many markets in North America. They were using a hosted Cisco solution That was nearing its end of life. It shows Slide 9 from all the major CCaaS providers and we'll be implementing our core offerings along with the advanced solutions Including chat, email, agent assist, our complete WFO suite powered by Verint, performance management and gamification.

Speaker 1

This customer will also be deploying our voice and digital IDAs for self-service to pay invoices, check the account balances and canceling our moving service. We anticipate this initial order to result in over $2,200,000 in ARR to Five9. And now share two examples from existing customers who expanded their use of Five9. This first example is a global pest control company who has been using Our system for several years and was recently acquired by a European company who is using an on prem legacy solution. The North America operations team was able to do a side by side comparison with real production traffic to compare performance Over several months, they chose us for our superior reliability as well as our AI and automation portfolio.

Speaker 1

We anticipate their spend to increase from approximately $2,100,000 in ARR to approximately $4,200,000 in The Glass Example is a leading global ticket sales and distribution company, where we began providing our solution throughout Europe more than 5 years ago. In early 2022, we used the strong success we established with them in Europe to parlay this into their U. S. Operations where they saw increased call volumes. We now continue to expand as we replace our legacy on prem solution.

Speaker 1

This recent order Increases their spend with us from approximately $1,200,000 in ARR to over $2,200,000 in ARR. So as you can see, we are executing extremely well in landing some of the largest brands in the world as well as helping our existing customers And we imagine how they deliver CX to their customers. And with that, I'll hand it over to Barry to cover the financials. Barry? Thank you, Dan.

Speaker 1

3rd quarter revenue exceeded our expectations, growing 16% year over year, primarily driven by the 28% growth and I also have enterprise subscription revenue. As a reminder, we believe we are well positioned to renew a certain number of growth in the cities We're going to buy prescription, one of the macroeconomic pigments on our solvays to thrive. Our advisors made up 87% of LTM revenue and our commercial business, which drove the business that is mainly 15% We will again in the single digits on an LCM basis. Now I would like to provide color on our recurring versus total revenue. 3rd quarter recurring revenue, which made up 92% of total revenue, grew 18% year on year, The same year over year ending the 2nd quarter.

Speaker 1

Same quarter recurring revenue grew 4% quarter over quarter, The same CapEx rate as in Q3 of last year and new logo deployments offset slower installed base growth. Speaking of new loan deployment, note that the international rollout of the parcel delivery company and the deployment Our health care environment remain largely on track, considering the inevitable ebbs and flows of implementation across multiple regions. Total revenue, however, grew sequentially at a slower rate of 3% in the 3rd quarter, which was 5% in the Q3 of 2022, primarily driven by the lumpiness of our professional services revenue, Which declined 3% sequentially, coming off of a record high CS revenue in the Q2 of 2023. This type of fluctuation is typical for operational services revenue, which has experienced negative sequential growth And the 1 quarter in 9 of the last 10 years. Our LTM dollar base retention rate by 100% At a time of 2 percentage points sequentially, mainly due to the underlying net revenue for the continued growth in our total base.

Speaker 1

We expect Q4 healthy and deleveraging rate to be either flat or slightly down, And we expect a pipeline of inspections in 2024, assuming no major changes in the economy. Longer term, We continue to expect our retention rate to trend towards a high 120 by 2027 due to a higher mix of enterprise customers, A steady margin one. We have higher retention rates and higher ARPU from our AI and Automation and other offerings. Telecom adjusted gross margins were 60.6%, a decrease of approximately 80 basis points year over year. As we mentioned last quarter, we are making upfront incremental investments to support our new and older momentum.

Speaker 1

We're continuing our ability to report year over year growth and adjusted gross margin in the near term. 3rd quarter adjusted EBITDA was $21,300,000 representing a 17.9% margin, a decrease of approximately 60 basis points year over year. 3rd quarter non GAAP EPS was $0.52 per diluted share, A year over year increase of $0.13 per diluted share. Turning now to cash flow. We generated operating cash flow of $37,000,000 Correct, Gordon.

Speaker 1

Building in part, our continued strength in the SOHO problem, which stand in at Citi today. We have now delivered 29% of quarters of positive LTM operating cash flow. 3rd quarter free cash flow of $31,500,000 was also at all time high. We remain optimistic about our application for continued cash flow generation Given our long term outlook, our potential in all non ADSL. And now I'd like to discuss our guidance for the remainder of 2018 as well as provide high level commentary regarding 2024.

Speaker 1

We currently expect numerous indicators With a focus on consumer discretionary spend, given that the direct impact of Sydney's strongest vertical in the second half, mainly Consumer. Based on JPMorgan Chase data, the nominal year over year growth in discretionary credit and debit card spending These areas progressively throughout the 3rd quarter from 5% in July down to 1% in September, which is the lowest growth of the year. Importantly, always a note that we have managed to find value, not non sustaining A broader transaction volume growth, which drive contact center inquiry volume. In this regard, The 1% nominal growth in spending in September of this year, a revenue of transaction volume growth. Given this trend, We are adopting a prudent approach to the 4th quarter and are assuming weaker seasonality in our consumer vertical.

Speaker 1

Therefore, we are guiding the 4th quarter revenue to a net point of $287,600,000 which implies a quarter over quarter growth rate of 3%. This 3% sequential increase is in line with our typical guidance spend Turning into the Q4, despite the recent seasonality expected to have consummated vertical due to the offset on the ongoing strength of our Englover deployment. Accordingly, we are maintaining the midpoint of our annual revenue guidance at $9,900,000 or 17% year over year growth. As for the bottom line, we are guiding for the non GAAP EPS To the midpoint of $0.48 per diluted share, and we are raising the midpoint of the full year to $1.93 per diluted share, which represents a year over year increase of 28%. I will now now turn the call back to the preliminary high level commentary on our current thinking for 2024.

Speaker 1

For those of you who have been qualified for some time, you know that For the 5th year through 2020 and again in 2020, we started EQing them with prudent revenue guidance of 16% year over year growth at the midpoint. For 2024, our outlook generated 16% year on year growth All approximately adopted 1,050,000,000 in revenues based upon the ongoing strength in our new and older business And less challenging compares in our store base on the assumption that the economy does not get deteriorated further next year. This, as you know, is a starting point, and we will update our outlook as the year progresses. We expect revenue to continue to follow our typical pattern, We're signing more than 50% of the annual revenue being generated in the CMA stronger second half of twenty twenty four. In terms of non GAAP EPS, we are comfortable with the current treatment expenses of $2.15 per diluted share for the full year in 2024.

Speaker 1

In addition, we'd like to highlight outlook on the quarterly profile of our bottom line. If you look at our historical financials, non GAAP EPS is typically amongst the lowest of the year in the Q1, And we expect this to be the case again in 2024. Therefore, we anticipate non GAAP EPS In Q1 2024 to be in the high-20s per diluted share, which we expect bottom line to improve slightly in the second quarter and we'll meet you in the second half, especially in the 4th quarter. Please refer to the presentation posted on our Investor Relations website For additional estimates, including shared value factors and government expenditures. In summary, we are pleased with our clinical results.

Speaker 1

And while we remain prudent with our outlook, we continue to execute consistently against this massive market, And we believe we are well positioned to accelerate our business once macroeconomic conditions improve. Operator, please go ahead.

Speaker 3

Thank you so much, Barry. And everyone, before we begin our Q and A session today, we please ask our analysts to limit yourself to one question And now our first question will come from Ryan McWilliams with Barclays. Please go ahead, Ryan.

Speaker 2

Hey, guys. Just a double click on the Q4 commentary. So Are your customers ramping agents as you expected for seasonal use cases and you're simply taking a prudent approach around like Coal volumes during that period or anything gets different there? Thank you.

Speaker 1

So yes, they are relatively competitive today and We are taking a prudent approach and that this is an alignment of data. I really want to emphasize that we're getting more credit card And because there's no number that we track it very well, Remember the 531 for July, August, September. And Containing month by month, especially in our business as well on the consumer verticals. And so we look at that. We look at the fact that credit card delinquency, volume on delinquency by the 20 year high.

Speaker 1

We looked at the fact that the most recent JPMorgan survey on consumer discretionary spending So I'll explain that we've had 7 quarters of both nominal and real transaction reduction. And we expect to And that's what we've always done and it's worked out for us. Appreciate the color. Thanks guys. Thanks, Chad.

Speaker 3

And we will move on to Terry Tillman with Trist.

Speaker 2

Hey, good afternoon. Thanks Mike, Dan and Barry. My question and

Speaker 1

it is one question, but

Speaker 2

it might almost delve into like a 2 parter. Maybe Dan for you in terms of you did emphasize the idea of the $1,000,000 to $5,000,000 deals. There's a lot of bread and butter there. In fact, you did say that A bigger proportion of your growth, which I think is an interesting data point. But what about the $5,000,000 plus deals?

Speaker 2

So those 7 and 8 figure transactions, How do you feel today about the volume and velocity of those over the next 12 months versus 90 days ago? So not pinning you to a quarter, But how do you feel about those and the activity? And then secondly, unprecedented adoption of AI and automation, unprecedented is a pretty important word. How much are you expecting those to increasingly play in those larger deals? Thank you.

Speaker 1

Yes. Thanks, Eric. Great question. I'll start with if you look at the Mark, the $1,000,000 plus deal, because of that $1,000,000 to $5,000,000 range, absolutely is the biggest growth driver for us from a revenue perspective. There's a lot of them, if you think about it.

Speaker 1

That's typically a contact center with 500 seats or above. Those big large mega deals, there's very few of them and they're that's why they're so lumpy and that's a market that's just starting to look at CCaaS for the first time. There are quite a few, but there's only a few that come up for grabs each year. And we've been fortunate enough to capture the early adopters that we've talked about before. So we've always said, don't expect those each and every quarter.

Speaker 1

We saw great momentum from the $1,000,000 to $5,000,000 range. And remember, those implement quicker, they turn to revenue quicker, and they're much more predictable in that cycle about how quickly that will happen. As far as looking at the high end pipeline, like you said for the next year, couldn't be more optimistic about it. If you look at what's happening from a demand perspective, Mike mentioned it in his comments about the number of RFPs, 66% Increase in the number of RFP, 21% sequentially from Q2 to Q3 alone. And that comes from a couple of things, like The end of life being a lot of the premise based systems were the end of development on the systems, which implies to customers that they've got to make this move to the cloud.

Speaker 1

So we see that whole market, the $1,000,000 plus all the way up to the mega deals, they've got to make this transition to the cloud. And they're starting on that process now. The thing that makes me feel like there's no better time to be in this space is that all those companies will make that transition and look at the millions of seats that are out there to do so, and it gives us great optimism. But remember, there's a sales cycle and then there's an implementation cycle. And so we don't see it in our book right away.

Speaker 1

And so we couldn't feel stronger about it. And I feel that there's a lot of business coming in the top of the funnel, Which gives us great optimism about the future. The second part of your question, is AI and automation I'm proud to get his momentum there. We have an attach rate of our $1,000,000 ARR deals Right around 80% for some one or more of the applications In our 8 AI and automation applications. And that attach rate has been very, very strong.

Speaker 1

The RFPs that are coming out are requesting it proactively now, and that's really the majority of the conversations that we're having and the positioning of our Solutions are all about how can we help improve, reinvent, deliver a better customer experience And it's all centered around how do we automate, how do we bring in these new technologies, how do we help not only automate to let the end user self serve, do we automate to help our agents be more effective and be more efficient with their time? A big one is call summaries, being able to just summarize the call for the agents, study on how we're completing their doubts after a close call wrap up, if you will. All things that help those customers do more and serve their customers better with less resources. So it's it couldn't be a better time. So thanks for the questions.

Speaker 3

And we'll now move on to D. J. Hynes with Canaccord.

Speaker 2

Hey, guys. Good to see everyone. Mike, Dan, maybe I could ask you To double click on some of the ACS commentary, integration progress, you gave us some color on kind of how that's contributing to deal flow. I'm curious also, I mean, ACS the past, it's been a business that's worked with other large contact center vendors in the state. How have you been treating that?

Speaker 2

How are you thinking about it now that you own the asset? Any color there would be interesting.

Speaker 1

Yes, sure, D. J. The momentum is off to a very quick Start with ACS. Again, we closed that deal in August, as you know, not very long ago. As I mentioned, the pipeline for ACS Solutions, combined pipeline, if you will, the Bayon plus ours now is up 30% in just a couple of months.

Speaker 1

They've also opened some doors for us to sell CCAS into their base and some major Fortune 100 accounts and It's right on track, so to speak. I'd say ahead of schedule in terms of the impact it's having on our business, the influence it's having on our deals And the influences that's having on just prospects on our customer base as well as their customer base All also adds that their employees have really leaned in and ours have as well and the integration of our team is just going perfectly well.

Speaker 2

Great. Thank you. You bet.

Speaker 3

UBS's Seth Gilbert has the next question.

Speaker 2

Hey, this is Seth on for Taylor. I was wondering if you could elaborate a little bit on the timing of 3 of the large steel ramps. Maybe more specifically, is the partial delivery service still scheduled to be fully deployed by the end of this year, healthcare conglomerate by early 2024? And then maybe a little bit of an update on where the Fortune 50 global health care insurance company is and their ramping lifestyle would be great. Thank you.

Speaker 1

Yes. They're on track. They're proceeding as planned. The parcel delivery service rolled out the Americas right away. They've recently rolled out Europe And we're in the process of rolling out Asia Pac.

Speaker 1

So that is right on track to, as you said, conclude right around the end of the year or beginning of next year. And then if you look at the conglomerate, the healthcare conglomerate, they're in process and proceeding as planned. They've got like 12 different businesses or companies underneath them. So each of those are Operating in parallel, rolling out in parallel at different stages. We expect that to go throughout the rest of 2024 Before they're at full strength.

Speaker 1

And then the one that you mentioned, the health care insurance company, that's going to be a longer ramp. They haven't even started yet. And so that will not hit until start hitting revenue until second half of twenty twenty four. Thank you.

Speaker 3

And moving on to Jim Fish with Piper Sandler.

Speaker 2

Hey, guys. Thanks for the question. I guess, Barry, for you, It's right on the first one to ask this. What does it go right or wrong at this point to hit that 16% 'twenty 4 guide? I The 16% has tended to be conservative in the past, but with the Q4 guide, you're exiting at about 17% for this year.

Speaker 2

So Just walk us through the confidence for 16% to be kind of that sustained rate, prudent sustained rate, especially as you're lapping some of the larger deals in terms of what they added to this year. Thanks guys.

Speaker 1

Yes, Serge. So, Value points for us. Think of it in 2 companies, new logos And secondly, installment. In terms of new logos, we have a huge backlog And Dan, I think you mentioned earlier on Monday night, that's a meaningful part of the revenue. In fact, While both the Fast and Delivery Service and the Healthcare Company are helpful towards The The results in the waterline and oil are much, much bigger by constantly announced.

Speaker 1

They're the product faster and they're on the side that they can make a difference. So between that backlog and what we called the go ahead, the gentleman sitting there on my right, With this, that market machine in the industry and that can only be used for both businesses as well aside from the backlog. So that's our new side. On the soybean side, we take a lot of comfort from the fact that we are beginning to lap the weak Macro conditions that we've experienced in the recent quarters. And we would be saying in our prepared remarks The Q4 may be either flat or down slightly.

Speaker 1

And this, we felt pretty balanced about 2024. And they're making a living and giving it themselves

Speaker 2

Thanks, guys.

Speaker 3

We'll now hear from Scott Berg with Needham.

Speaker 2

Hi, Mike, Dan and Barry. Thanks for taking my questions here. Barry, I wanted to follow-up on the question on the 2024 guidance a little bit, Kind of a 2 part question there is, 1, how should we think about linearity of the revenue? You have a couple of large deals coming online as That's been fully discussed here, but just to know if the kind of cuteness for the on the revenue side is pretty linear. And then what are your assumptions around Seat growth in your installed base.

Speaker 2

You've obviously had some challenges in Q3 and you'd be more prudent here in Q4. How should we think about your You'll kind of calculus around seats on the installed base next year. Thank you.

Speaker 1

Yes. Thanks, Scott. So in terms of Delimality, we every year have done a very consistent pattern about a little over half Within the second half of the year, quarter 51, 52, 1 year, we've been 53 and the balance of quarter in the first half. In terms of the year over year comparison, it was a seasonality out in the recent notes from somebody that is compared to a toddler In the first half, so you'd expect better and bigger increases in the second half year over year. In terms of the Looking at the dollar education rate, that's the best indicator of what's going to be happening in this quarter.

Speaker 1

The quarter will grow, This is all about the logos EBITDA logo being a little bit smaller on average than The global churn. We our global churn is excellent, some of the 90s or 90s. And When we talk about it internally is that when inevitably the American economy turns around, We will benefit from that directly because we stay open. We will set up this piece overnight. And so with the transactions pick up, agents will pick up and we'll see that by the way.

Speaker 1

And by the way, just as an aside, we'll see on a highly profitable basis.

Speaker 2

Excellent. Thanks for taking my questions, guys.

Speaker 3

We will now hear from Arjun Bhatia with William Blair.

Speaker 2

Perfect. Thanks guys for taking the questions. I fully appreciate the conservatism in Q4, right? I think we're all kind of Moving through the choppiness in the macro. But Barry, I think you mentioned that you had started or there were data points that suggest that in September, Things have gotten weaker.

Speaker 2

Have you seen any change in your transaction volumes in September? And Just as you think about your vertical exposure, is there opportunity for other verticals to offset perhaps some weakness In the consumer vertical as you look at Q4

Speaker 1

2024? Yes. So Our indications on that is similar to what we expected when we set that guidance, although Meaningful upside thus far. We just haven't started about, are we 2 weeks ago? In terms of the Consumer, in the month of October, it's pretty much in line, nothing to make what we were

Speaker 3

Moving on to Meta Marshall with Morgan Stanley.

Speaker 1

Great. Thanks. Maybe, Dan, a question for With so many of these deals kind of having AI attached or kind of some sort of AI angle to them, Just what are you seeing in terms of bottlenecks? Either in do they take longer to get signed? Is it data privacy?

Speaker 1

Is it just what is the scope of what they want to do? Just trying to get a sense of where people are on figuring out what they want To actually what type of virtual floors is there up to you? Yes. The attach rate is wonderful. Do they take a little longer?

Speaker 1

Yes. I think on average, if you look back a few years, yes, but the whole lot takes slightly longer, Which also comes with moving up market as we've done. That's why it's a gradual profit. It's not a significant metric It impacts anything from our perspective. And yes, the customers tend to They sign up for an AI application.

Speaker 1

We go in, we implement and oftentimes our professional services team and consulting teams We'll work with them to find new use cases, additional use cases and really do a cross sell, up sell kind of in progress while they're implementing the solution, Which tends to happen with any innovation that's new to the buyer and they have not a replacement in that sense. So they're experimenting, they're finding new use cases and we see the great momentum that I mentioned with our AI and automation portfolio Across the board. And I would just add to that, AI Automation revenue is growing faster than any other product area for us. That's just revenue. And I already talked about in my prepared remarks about 250 projects, AI and automation projects being worked on by our professional services team In the quarter, so we're starting to see kind of the end result, if you will, right?

Speaker 1

The lagging Indicators of some of the things we've been talking about over the last few quarters in terms of investment bookings and attach rates starting to show up in revenue, revenue growth as well as A lot of active projects, not to mention the continuation on the bookings I mentioned, the HSS in terms of 150%.

Operator

Great. Perfect. Thank you.

Speaker 3

Samad Samana with Jefferies has the next question.

Speaker 4

Hey, guys. This is actually Billy Fitzsimmons on for Samad Samana. Barry, for you, and I hate to ask a similar question to what other people have already asked, but I do want to Triple click on the 2024 outlook. And then just so we're all clear, and maybe to ask what Jim and Scott asked in a slightly different way. But Obviously, that 16% number is a starting point and it remains early.

Speaker 4

But can you just walk us through maybe some of the other factors that were Incorporated into that number, how did you think through things like continued strong deal activity, continued international expansion, channel moment, AI enabled product adoption into that outlook. And does that 16% number incorporate kind of continued weakness in some of the more And verticals are a potential improvement. If I could sneak in one more for Dan. You've talked the last couple of quarters about Strong channel momentum. What inning are you guys in that journey?

Speaker 4

And where can that kind of go from here? Thank you.

Speaker 1

Those had slowed actually in Europe as well this last quarter down to 28% because they too are facing macro segments. But we are operating at very good IPO there, and that superior growth rate We'll almost certainly continue in 2024. The channels, I'm going to Parker, I'll ask either Mike or Dan to answer that, I'll be very passionate when it comes to that and travel more and more to other international side. And then but just generally, the And the new logos. On the new logos, you're looking at 3 very different people.

Speaker 1

On the until May, we've not said there's no particular verticals that we should be worried about at all. So you need to be prudent this side of the year. And can I just layer on a couple of things? The optimism around Point 4, quite frankly, it's built mainly on our backlog. It's all the bookings momentum that we've had over the last few quarters that have yet to turn the revenue As well as again, that flow of demand that we're seeing is flat.

Speaker 1

And this is this RFP Number that I talked about, 66% growth year over year and 21% sequentially. You can see that accelerating And we can see the accelerate and we can feel it. And again, those are enterprise and strategic RFPs. A lot of these enterprise deals will You know, the shorter sales cycles and potential revenue impact in 'twenty four. But the good news is Barry said that DVRR Functions that are very reasonable, you can kind of do the math in terms of what 16% revenue looks like from a dollar perspective, What that contributes next year, if BBRR is relatively stable, which we believe it will be, You can see it doesn't take a whole lot of turn ups from our backlog to drive 16% revenue growth.

Speaker 1

So we're very comfortable with that. And if I could start on the channel, Dan, and you can chime in. In terms of what unit we're in, I would say we're in about the 2nd or 3rd inning in terms of our channel maturity. And This is very similar to what you saw, I would say, 2, 3 years ago in terms of just larger enterprises adopting cloud. The channel has been kind of holding on to legacy and on premise stuff until a few years ago when they started opening in with us.

Speaker 1

And again, being named number 1 by the top 3 technology distributors, that's a huge, huge accomplishment Our channel team, we've got the best in the business. Jake Fudeball and his team have absolutely crushed it. So We're kind of touching above our weight in some respects, but I do believe we're still in the segment there. And just to add to that on the channel front, If you look at the large announcements that we've made with big partners, IBM this quarter, TELUS International, BT, we're just getting started with them. And they own and really help manage digital transformation projects in the largest company in the world.

Speaker 1

And they have now made that pivot to Mike's point over to we've got to go into lead with CCAS and lead with Cloud Solutions And Andy with AI Automation. And so we're in the process of educating, training and certifying those folks to come up to speed And they will be a force multiplier for us in a tremendous way. And if I give you one statistic, Just a short time ago, if you look at 2019, we had 19 partners that brought To us, you asked about pipeline and how much of that top of funnel comes from the partners. We had 19 partners that brought us over $1,000,000 of ACV, contract value deals in that year 2019. This year, we've had 63 Such partners bring us over $1,000,000 in ACV and that number is only continuing to grow.

Speaker 1

And so as Mike said, we're in the 2nd or 3rd innings. I would argue that from a revenue influence and lead opportunity, we could be even in the first inning, especially at the high end of the market because That really hasn't been available to us until just recently. And we like the position we're in. If you read the Baird's survey that they did And look at where we sit when we do sign up a partner, how they feel about us compared to our competitors in this market. We were rated number 1 in almost every category of who's going to win this market, who to invest in I, he's the easiest to work with.

Speaker 1

We really pride ourselves. And Jason and his team are doing an amazing job of enabling the partners, educating them And making sure that we operate with integrity in this space, because they want to turn to somebody they know they can trust to deliver what they're promising to their clients. Well, there is somebody that's probably still about the 16%.

Speaker 4

Well, thank you very much. Appreciate it.

Speaker 1

Thank you.

Speaker 3

Moving on to Peter Levine with Evercore.

Speaker 1

Great. Thanks guys for taking my question here. Maybe to add to that last question, I know you opened up The channel, I think, to do more pro services to start offloading that, I think, earlier this year. So maybe just walk us through kind of where that evolution is today. And then second one is the battery.

Speaker 1

As I know there's a you talked about scaling up to 70% gross margin. Can you maybe help us frame the trajectory When we get there, is it more of the partners? Is it just help us understand subjecting to that 70% gross margin target? Yes. Peter, great questions.

Speaker 1

I'll go first on what we call project pull through, as we mentioned, and that is enabling Our 3rd party partners to do implementations for us. And that was a strategic initiative that I kicked off about a year ago, And it's going amazingly well. Internationally, a majority of our deals are being implemented by 3rd parties. And Yes. And even domestically, we've seen a dramatic increase in the percentage.

Speaker 1

We haven't disclosed that yet, but we will in the future. It's a growing percentage and right on track in terms of what our KPI objectives were when I rolled this out. So I'm thrilled to see the progress of, again, 3rd parties being trained, enabled and Actually, dealing with climate and we solved for one of the critical success factors is NPS scores. As you know, we deliver With our own professional services team, the NPS scores in the mid to high 80s consistently year in and year out. We're holding our partners for that same NPS score And they're delivering on it.

Speaker 1

Again, we've been very strategic and very stepwise in terms of who signed up, how we train them up And I hope you can be successful. And we have in order to explain that how the current margins we believe are going to get to the 30 plus. You have to understand the revenue breakdown because each has different drivers and different amounts. So the revenue breakdown 35% subscription. By the way, the first of that is enterprise, but the rest of that is commercial.

Speaker 1

And it is essential like many other companies to better efficiency and not having to scale to every single megabillion that that brings to the group all Because that's what we've been doing over there. So that can get to into the single digits, high single digits. That's not a driver. It's helpful. The 2nd agenda is UCED.

Speaker 1

And then with the third party in the 30, That's not going to internationally, we have some opportunity. We want to validate this as there, but there's no way to set things in that. The key thing is happening Is that there's a shift in the mix from usage to perception every year, 1 to 3 percentage points. And just to illustrate that completely, we're in a conflict in April 2014, this is about 35% of the total is now half of that, And that's going to continue. There's a big shift there.

Speaker 1

Now we come to the prescription. And there, it comes down to the very same point The basic juice over there is definitely worth the squeeze is the fact that we've got fixed costs, same fixed costs and we just we have the revenue very fast there. That's why if you look individually at each Q4, the We went

Speaker 2

past

Speaker 1

the And that move that remigration is something that's also on the side

Speaker 3

C. P. Panagrahy with Mizuho. Please go ahead with your question.

Speaker 1

Hey, guys. Thanks for taking my question. 50 CEOs are the large deals and strong pipeline. But I just want to ask about With that, our growth rate we are seeing in this kind of environment, are you seeing more deals to be? Are you seeing more like some customer looking at More on data AI strategy before signing the deal.

Speaker 1

Any color would be helpful. Yes. As far as deals getting extended, there's a natural when you bring something new to the market and you bring something that haven't seen before. It's not a replacement. It takes a little longer.

Speaker 1

But as I mentioned earlier, it's insignificant. It's not something that keeps us up at night or even is a concern during the sales It's just make sure you have that extra meeting. In some cases, you have to go to the data security folks and legal make sure that we have the right documentation there to protect their data because in some cases, we're taking data from a transcription of a conversation And moving it to a 3rd party to have that summary as an example when we use JBT to summarize our transcriptions. We're having a third party do that, Obviously. So there's just extra steps in the process, but we make sure we've aligned to those and have our sales teams Yes, directed to us.

Speaker 1

So it's great. I mean, the interest is there and everyone's gotten through it. I think we're past The times of having to create those documents, and so now it's just a matter of having the templates and moving forward. Are you seeing customers evaluating their AI strategy? So that as part of that, they're delaying anything?

Speaker 1

Or We think that's a separate process. Thank you for asking that question. You think absolutely we're using our AI strategy as a Key criteria and evaluating it extensively, and it's oftentimes the thing that wins business for Five9. We believe we're Actually pioneering and leading the market. When it comes to AI, that very study mess that out.

Speaker 1

Our customers are explaining that to us as well. We've made a couple of strategic acquisitions It allowed us to kind of hit the ground running and not have to develop from scratch ourselves. So we believe we're winning the market in this area And we're excited that even the deals that happen that may not have a big revenue component tied to the AI, Their decision criteria is precisely because of our AI strategy and our AI portfolio and roadmap and the way that we're going about it, it's been we want to do business

Speaker 3

Matt Vandely with BTIG has the next question.

Speaker 2

Yes, good afternoon guys. Thanks for taking the question. I guess Staying on the theme of AI and some of the automation features, you mentioned 80% of new deals had that. But I guess the next level of question that we're wondering is, 1, how much additive to the deal value do you think that's bringing on new deals? And then second part, maybe more importantly of the installed base, what is the penetration rate on that?

Speaker 2

And how much are you adding there Knowing that, so earlier in the year, there's a lot of concern of you cannibalizing your normal seats, but how much of an uplift on sort of a net dollar retention are you seeing as customers add that today?

Speaker 1

Yes. Thank you for that question. So we messaged few quarters ago, in and around 10% of the net new bookings with AI and Automation Suite and it remains that. A slight uptick to that is what we're seeing. But keep in mind, that's just the initial order.

Speaker 1

That's the customer that says, great, I'm going to migrate off my own premise Legacy system into your cloud and yes, let's start with an IDA or an agent assist that. Once we get in there and I alluded to it earlier, The PS group gets in there and starts talking to the people on the floor, not the buyer, people on the floor that are running the contact center And the types of calls that they're getting and how we can help their agents be more effective, we start putting these things and that's where we're seeing increased momentum We've got 250 projects that we're working on for a couple of reasons. One, we talked about pivoting and selling more software when the Seat pads were slowing, the growth was slowing and we've done that very effectively. Secondly, once we get in and we find there's many more use cases When we first started out, sales force is going to delay their sale to keep adding more and more use cases. They're going to go close to do that, the customer is ready.

Speaker 1

And so we get a lot of that add on. And then thirdly, if you look at the actual applications themselves, they've matured. We talked about Agent Assist. We talked about Agent Assist 2 or 3 years ago. But today, it includes something called summaries.

Speaker 1

I can take the transcription. Can summarize it in about 3 seconds. I can deliver that summary back. I can bump it straight into the CRM. The agent tomorrow can look at that summary of what happened in today's call and make Better judgment and get right to the point very much quicker.

Speaker 1

So and it cuts back on that wrap up time for the agent. So we're incorporating this AI Again, unprecedented level of momentum and interest in the whole suite. And it's both for net new, Well, we're getting a great attach rate, but it's really the installed base that's starting to really see an appetite for the for doing more than just dipping their tail in the water as we've talked about

Speaker 2

Great. Thank you.

Speaker 1

Yes. Excellent.

Speaker 3

Now moving on to Michael Turrin with Wells Fargo.

Speaker 1

Hey, great. I appreciate you taking the question.

Speaker 2

Nice to see everyone. Barry, you have some commentary on the retention rate. I know we've talked about it in the past, it's one 110%. And it sounded like you have some confidence that can maybe bounce back at some point in 2024. So Just want to understand the trajectory a bit better.

Speaker 2

There are certain milestones you're looking for, how much of this is delivering that impact from prior periods and just also Gauge confidence and the potential for that metric to get back up into those 120s over time and the drivers there. Yes.

Speaker 1

Slowly, gradually trend higher. So And we, in the near term, come down to 2 things. It comes down to, A, the macro, just The other thing that's important is that some of the longer term The health care company, for example, is a good example. They start renting, and that gives us a very nice tailwind Because I did and maybe start on a tiny basis just portioning that. Are you with me?

Speaker 1

Yes. Okay. Then on long term, the basic fundamental reason that we have confidence around reaching the high 120 Is the fact that these $1,000,000 plus customers, which are growing every quarter, though, making the numbers every year, Because there are many more than since I was referring to as migrants, we need them off. Those have an appreciative higher startup based retention rate, And that mix impact on that fast growing $1,000,000 loss, which is much faster than the rest of the business in dollars and in dollars,

Speaker 3

We have Time for one additional question, which will come from Will Power with Baird.

Speaker 2

Hey, good afternoon. Thanks. Thanks for the comments on our short answer.

Speaker 1

Let me ask you about the

Speaker 2

strategic deal pipeline comments, doubling year over year. I mean, it sounds like you continue to see very good momentum up there. I know you've kind of touched on that, but Perhaps dig into kind of the key drivers of that. And how do we think about kind of the confidence level in converting that? How do we think about conversion rates going forward versus what you've seen?

Speaker 2

And anything to kind of keep in mind on that front? Yes.

Speaker 1

Mark, if I go back 2 to 3 years in time, some of these large enterprises in the big meetings. They were just checking what was out there. They had really no interest and no immediate need to move to the cloud. Two things, two factors are happening, 2 main drivers. One is the legacy platforms that they're using today and many of these large companies have All of them, right?

Speaker 1

They have all 3 of the major platforms to Avaya Cisco Genesys. And all of them are either end of life or being told they're not going to further develop on those. So the sign is there that they've got to get off those platforms. That's 1. Secondly, I'll give 2 factors.

Speaker 1

2nd, we had to demonstrate in the TCAS world, particularly Five9 has demonstrated that we can scale And delivered in the liability that they absolutely require a single digit before they even consider moving. And we've done that improvement because of those 2, I'll say 2 early adopters. They were like 2 that made decisions far before anyone else. And I mentioned this in the last meeting, the others have now taken notice. Uh-huh.

Speaker 1

If it's good enough for them, it must be good enough for us and we're being pushed by our legacy provider And Barry is likely to be pulled by this AI and automation that's coming about and they realize the only way to take advantage of that is to move to the cloud. And so that's why the RFP volume is up. That's why even ones that haven't issued RFPs yet are taking meetings to say, help, how How do we start this process? They're turning to the FIs. They're turning to us because they recognize, oh, no, this process may take us a year or 2 to get through.

Speaker 1

And they're almost feeling like there's pressure there to do it quickly because they want to take advantage of Got automation, and it may take them a year or 2 just to get through a decision process and start to implement. So that's why we're seeing such great momentum. And Will, I know Dan won't brag, so I will brag for him. We've got the best store market team in this industry by far. And so when you think about Pipeline doubling and our ability to go convert that and win business, I have so much confidence in this team.

Speaker 1

And it's A team that has actually grown so significantly over the years from our competitors. There are so many People would want to be on the Five9 team, quite frankly. So we're able to track the best and brightest on this team, and they are just superstars. So I have no doubt that they're going to convert way more than our fair share of that pipeline into wins for 5.9 and you can see it in our win rates. So I'll leave it at that.

Speaker 1

Great. Thank you. Thanks, Will.

Speaker 3

And again, this does conclude today's Q and A session. Mike, I'll turn it back to you for closing comments.

Speaker 1

Yes. Thank you very much for joining us today. I'll just say this, I think I'm so excited about the future for Five9. We have Seeing this dramatic inflection, quite frankly, within John talking about in terms of large enterprises, adopting the cloud, Shifting off of his legacy on premise solutions. And I think the most exciting metric that I talked about today is the leading indicator, the leading, leading indicator, That is the RFP growth.

Speaker 1

So, 66% growth in RFPs for Strategic and Enterprise, 21% growth sequentially. So, That is a very good leading indicator for the inflection in our business opportunity. Thanks, Vijay.

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Earnings Conference Call
Five9 Q3 2023
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