Five9, Inc. (FIVN) Earnings Call Transcript & Summary

All right, awesome. I think we're ready to go. I'm DJ Hynes. I'm Canaccord's senior software analyst. We're delighted to have the Five9 team here. We have CEO, Rowan Trollope; CFO, Barry Zwarenstein. Thank you all for attending. This is the 40th year we've been doing this growth conference. We appreciate your support. We're going to do a fireside chat. There is a box on the webinar where you can type in questions, I will be moderating that. So if -- we'd like to keep this as interactive as possible, so please send those questions in, and I'll work them into the conversation. I think before we kick things off, Barry just wants to do a quick disclosure.

Before we start, I want to remind you that -- I want to remind everybody that our discussion today may include forward-looking statements concerning events and trends that may affect our industry or the company and projections concerning our future operations. Our actual results may be materially different from what we discuss here. Please refer to our most recent forms 10-K and 10-Q for detailed information about the factors that could cause our results to differ. Thanks.

Awesome. All right. So Rowan, you guys just knocked it out of the park again. Another strong quarter, accelerating growth, nicely profitable. Maybe just to kick things off, can you give us kind of a high level recap of the quarter and talk about what you're seeing in the markets?

Absolutely. From a numbers perspective with the headline, we had a 29% growth, so we accelerated to 29% in, what has always been our toughest quarter, Q2. So that was nice to see in the face of not only a tough quarter but also COVID in the background. Our EBITDA grew to 18.3%. So really a solid execution at the top and bottom line. And I think what you're seeing here at Five9 is just more of that clockwork-like execution that we've become known for. Through thick and thin, whatever is going on in the outside world, we're continuing to execute. There were some important announcements in the quarter. We announced the CDW partnership on the heels of our AT&T partnership that we announced last quarter. And they are a key -- a large partner in the U.S., who do a lot of contact center business. So we're excited to get them on board and selling Five9. And the channel partner, in general, both AT&T and CDW being new. But the channel partner, in general, really feels like it's turned the corner in the contact center space adopting cloud and moving forward with those. So you're seeing kind of growth in our business being driven by enterprise and then growth in our business being driven by channel as one of the underlying factors for the acceleration, but broad-based growth also at the company. So we look at our business in sort of enterprise and commercial, with commercial being sub-50 seats and enterprise being greater than 50. Both of those segments grew in their net new and in their installed base at record levels across the board. So all 4 of those growing at record levels for the company. And bookings were -- set a new all-time record for the company for any quarter. So we saw that on the numbers side.

Yes. All cylinders, not a whole lot to pick at. Let's talk about the demand environment. So I think in March and April, there was this rush for work-from-home enablement. And that's obviously a driver for cloud adoption. I think you guys benefited some with maybe expanded seats. I guess now that folks have kind of figured out their near-term strategies, do you still feel a sense of urgency in the market? Or are the conversations really more kind of longer-term strategic projects that are driving your growth? It kind of gets at the question of like pull-forward versus just a broader acceleration in what's happening in the space.

It was more like a broader acceleration. And the conversations are more -- not the emergency, oh, my God, we've got to get to work from home. I think everyone's now, if they have the ability to do it, they did it. So that really happened in the beginning of COVID and was limited. And now we're kind of just back to normal, I guess, you could say, with longer-term strategic large customers considering cloud. I think probably there's like you could chalk up COVID in terms of the demand environment. And the effect on the demand environment for Five9 is like another straw on the camel's back of on-premises. And so like did it break? Well, it got a lot closer to breaking this -- because of this.

Yes. Yes. Is -- the on-premise guys who kind of figured out a workaround to get their agents home, does that buy them a little bit more life? Like is it now? Like a little harder to displace them because they've kind of rejigged their environment?

I think maybe the opposite, I think, is probably a little easier because -- in the sense that it's very -- it's much -- a lot more heavy lifting to get an on-prem environment, working with at home and agents. And so I think we have been through that pain and we have -- we do have customer examples of this, anecdotally, that we saw go through that pain and then talk to their cloud counterparts who sort of said, "I don't know what you're talking about." We just had our agents log into the web browser from their home computer and they're done. So I think it's driven more awareness of the power of cloud. Even if they did manage to get it working in an on-prem world, there's a lot more to maintain from VPN tunnels and making sure that you get voice-over-IP quality to the home, and whether they -- in many cases, customers had to switch from hard phones to soft phones, so that was even more heavy lifting. So I think just all of that's driven more awareness of the power of the cloud to solve these in these type of cases.

Yes. Yes, makes sense. Okay. Let's talk about the channel expansion. Let's start with the global SIs, then we can talk about the 2 newer opportunities. So who are your key partners on that front? What was the catalyst to getting them to like really buy in? And then what are they doing for Five9 from a go-to-market perspective?

So we can start with the SIs, as you've said. Deloitte, it would be our biggest partner on that front, although we've got quite a few. Slalom is another one that's really been a good up and comer for us. They're entirely a Salesforce shop. The impetus on both of those, the contact center, if you look at the 3 market leaders in the contact center today, us, inContact and Genesys, none of us are UC companies. We all sell line-of-business buyers. And that's very much in line with the digital transformation sale and that the SIs have been so successful with. And you see the CRM companies like Salesforce having a big play there. So we often are a part of these broader transformation initiatives at larger companies where the SI is saying, "Hey, you need to look at your customer master and a 360-degree view of the journey that they have with you," and contact center becomes one of those pillars of that transformation. So they've seen a lot of success with us. And I think we did -- we shared this on the call, but we did twice as much business in Q2 as we had done in all of 2019 combined through SIs. So it's been a really, really successful channel for us.

Yes. Let's talk about kind of more strategic partners. And I think AT&T is probably the biggest opportunity. Maybe the back story on like that relationship, how that came to be? How long you've been working on it would be interesting? And then I'm curious kind of what you're seeing in the channel today? And then what you think it could look like down the line?

Sure. So at AT&T, well, I came from Cisco before I joined here, and certainly, had a lot of good relationships with the SPs, but the relationships alone were not enough to get them to really make a move. It had to -- it actually came from customer demand. So what we have seen pretty consistently is -- and I think AT&T is notable in that they've been much more forward-leaning than the other service providers, and they are moving much faster their AT&T business division. And so they ran a process for about a year, and we kind of went through that process, and ultimately, got chosen as their exclusive partner. They did something interesting in that they're white-labeling our products. So not just sort of carrying it as yet another offering on the truck, but actually it's AT&T branded, they're putting their name on it and they're putting it out there. And that signals a pretty big shift for a company like AT&T in terms of -- they've been very heavily involved in the hosted solutions that were provided by Avaya and Cisco and Genesys even. So it's just kind of switch over to all in with the cloud SaaS player. And they did that, obviously with the Ring also. But to do that on the contact center, I think is a big deal. It's going to take a while. These deals take a while to get to the point where they're driving material revenue. But we're already closing business together and have the teams working. We've been training their sales reps, where -- we've delivered the first tranche of integrations with the white labeling and the rebranding and so on. And that will continue to happen over the coming months and quarters. But at some point, yes, we do think it will become material to our business.

Yes. And you touched on this a bit, but the investments needed to kind of support them. Like where are we in that process, enabling that channel?

Yes. We've been busy on that for 6 months building up the team. So we had to build up the team who understood how to do business with service providers before we actually won this deal. So we started the channel build out really in earnest about 18 months ago. So that team was put in place before that process with AT&T began. They leveraged their relationships and build out the -- competed for the business. We're still in the process of hiring. We've been hiring marketing people to help with the collateral for the AT&T sellers, training folks to help train. Dedicated -- we're looking now for more dedicated sellers who understand selling through an SP channel. That's a different beast, a different animal than the regular reseller channel. So we've been hiring on that front. And then we've been investing in R&D. So we were able to allocate our R&D resources to the white-labeling and the back-end integration stuff that we needed to do. But we've got this phased plan. So it's not a sort of a binary event, like a huge amount of hiring and then a bunch of work and then it all happens. It's -- we've built up [ phases ] where we sort of hire over time and get closer and closer from an integration perspective with them.

Yes. Okay. So then you alluded to the CDW in Q2. And you can comment on that, but my question is, I'm more interested in kind of the partner philosophy in general? Like are there more opportunities like the CDWs out there? Or are the interests -- are your interests more in securing kind of a few key partners and then going really deep with them, right? So it's almost like the quantity versus quality question and kind of how you try and run that channel?

Yes. The strategy is quantity -- sorry, quality over quantity initially. So we picked up a few partners when we're going to go deep. But the channel -- if you look at some of our competitors, they went out much earlier than we did and leveraged their relationships with partners to get them to carry a cloud contact center product. And in many cases, those did not go very well because the channel partners themselves weren't ready to take on the services and support parts of a SaaS business. And -- so we have taken the approach to select a few large partners and go very deep with them, make them successful to build up the muscle and make sure that we can vet properly the partners. We have an amazingly high -- I think one of the things we're known for in the channel is we've an amazingly high Net Promoter Score on deployments, it's 97%. So we do an excellent white glove job of deploying onto our platform and getting customers to be successful, and that's part of what's driven the success. So we've had more inbound on the channel front interest-wise than we know what to do is, we've picked a few that we're going after aggressively and then we think we can replicate that playbook over time as we get it right in these individual partners.

Yes. Yes. Okay. The frequency of large deals seems to be increasing, the really big deals, right? I think you said you had -- with the 2 record deals in the quarter and they fell within like 2 weeks of each other. What's driving that? Is it just enterprise acceptance of the cloud has hit a tipping point? Is it something Five9 specific? Is the channel helping to contribute? Just any color.

Yes. It's a combination. Partially, it's customer acceptance. Part of it's channel. So we're getting introduced to much larger accounts through some of the channel partnerships, especially AT&T. And then the last part is, we did change our strategy on the go-to-market front, and we created a new team, a strategic sales team. And that strategic sales team just killed it. We saw them just have huge success. And that's where all those big deals are coming from is our strategic sales team. So we created that, and we put some of our best sellers there. And that was a big shift for us, and that's working really well. I mean, frankly, all of the segments are working well, that one is working particularly really well.

Yes. But remind me, when was that strategic accounts team kind of put together?

I think maybe around 6 -- no, it was in the beginning of the year.

Yes, just the beginning of this year, yes.

Okay. Yes. So it's -- they're still -- I don't want to say still getting their footing, but maybe there's more to come. Okay. Awesome. Let's talk about the product a little bit, which is, I think, where your heart lies. What do you think have been the biggest changes in the technology in the 2-plus years you've been at Five9?

In Five9's technology, well, number one, we've made a significant investment in R&D. And we've done a lot of modernization, moving to a public cloud. So we now have a public cloud platform that we're building on with containers and microservices and sort of really modern platform. We continue to maintain our own IP and our own data centers, but the leverage of public cloud allows us to move much faster. So that's a big milestone that we hit this year. About half of our engineers are working on -- when they're not working on reliability and that kind of stuff, they're working on our next-generation cloud platform. So we've really had a significant shift over on that front. And then we've been able to launch some exciting new products organically. We did our inorganic moves of Virtual Observer and Whendu sort of at the end of the year and beginning of this year -- end of last year and beginning of this year. Both of those are going really well, but we're also proud of the organic engineering work that's going on. We launched our Agent Assist AI technology. So we hired our CTO of -- and Head of AI, who launched these first 2 products in this quarter. One is generally available. That's the IVA. So that's a speech-based conversational assistant -- that conversational agent that essentially replaces your IVR, your traditional push 1 for sales, push 2 for service, with a conversational version of that, which is much better and more effective. And then secondly, we got our Agent Assist technology, which is a real-time recommendations and prediction engine plugged into production with 5 of our customers. So that's in the early phases, but now we can start getting real production data and seeing how customers like it and so on. So really great progress organically from the fundamentals to new products, and then also from an inorganic, that strategy is working well for us as well. Both of our acquisitions easily cleared the Board plan that we had set. There are pretty aggressive internal plans for sales targets, and they're doing really well.

Awesome. I want to double click on both of those. So maybe let's start with the AI stuff. Just broadly speaking, I guess, where do you think customers are in terms of readiness to adopt that type of technology? And then it seems to me like maybe your thinking has evolved a bit in terms of kind of what parts of this effort Five9 should own versus partner? Just and maybe I'm misinterpreting, but how should we think about your AI efforts? And then how do you think they could impact the numbers over time, which I know is a harder part of the question to answer?

Yes. The -- there's 2 -- well, with our 2 offers, it's kind of just an anchor to our 2 offers that we now have, the IVA and customers' readiness, and you started out by asking customers' readiness. So with an IVA, interactive voice assistant, customers are very ready for that. That has been a well-known technology for decades, started with IVR, where you have to push numbers. But now it actually transitioned to -- the legacy of this IVA is the -- a speech-enabled IVR. So really directed still and can't handle -- you kind of just have to say sales or speak to an agent or say -- it's just automating the process using your voice and pushing 1 or 2. It's still a tree. The new generation of technology that we're seeing much more interested from customers than we had expected is the true conversational version of that, where you can sort of just say, "Tell us what's your problem is? And you can say, "I bought a product 3 weeks ago, and I want to return it," and it figures out what questions to ask next. "Oh, what's the order number?" And if you include all of the information in your upfront statement, it doesn't ask many follow-ups. But if you just say, "I need help." "What do you need help with?" So much more interactive. So customers have been more interested in opting that. And that's a -- we're selling that on a per virtual agent basis, and it costs more than a typical seat where there's a human agent involved. And it works 24 hours a day, 7 days a week. So it's a really efficient technology, if you can deflect calls using that technology. Second is real-time assistance for the agent. We thought that was going to be the more interesting piece of technology. We think it's going to be the more interesting piece of technology over the fullness of time, but I think the market is more ready for an IVA today. So on the Agent Assist, it's really all about real-time predictions and recommendations to agents. The 5 customers that we have in production today, we're focusing there on -- and it's all about making those agents more efficient. How do we do that? One way is after-call work. So we're real-time transcribing the call from speech to text, and then we're using our own patent-pending natural language processing technology to summarize the call in real-time presented to the agent at the end of the call. Here's the summary, 1 paragraph summary in English of what the call was about, and they could just accept and submit to CRM, something that normally would take them 2 to 3 -- 2 minutes, 1 minute, 2 minutes to do it. But that's quite a good cost savings opportunity. So we're pursuing both. And we're leveraging Google as sort of our underlying partner from a speech recognition and conversational AI perspective, and then building our own technology on top of it.

And do these feel like '21 revenue contributors, '22 revenue contributors? I'm not going to ask you to quantify, but just like when do you think that we get to a point where they're material enough to matter?

We might be able to have it sooner because it's a well-established category. And then following that, we'll start to see Agent Assist. And I wouldn't expect Agent Assist to be material for us for at least a year. Because once we have to get on board, and even if that kicks off now, so it's going to be a year or plus out. But we'll keep having these interim milestones where we can track progress and see how the market's unfolding.

Barry's smiling. It means he likes your answer. You didn't make any promises that he can't keep. Let's touch on the M&A strategy a little bit. So you talked about Whendu, Virtual Observer. Maybe what did you see in those assets? You said the strategy is working. But any comments just generally on kind of the buy versus build question? Look, I think it's topical for investors, just given the recent convert.

Yes. Both are beating the internal plan we've set up for them on a sales basis. So that's going really well. And the virtual -- and we've integrated the companies. They were relatively small, so that wasn't very difficult. We also -- we started with, I would say, there are 2 very low-risk acquisitions. In that, we already were primarily responsible for -- we were responsible for almost all of the revenue for Virtual Observer. And so it wasn't a question of whether we could sell this technology. So having it in-house isn't driving a huge ramp on the top line because we were already selling it, but it is helping us from a margin perspective. And I think it's also helping because we've now got a plan in place to integrate that in with our overall product look and feel and integrating the identity management and everything else. So what we also saw in the quarter, though, with Virtual Observer, I guess, good timing from our perspective, in that, as folks go to work from home, workforce optimization, which Virtual Observer is in that category, workforce optimization is really a critical technology. If you were to walk around an in-person contact center, you see these carts that are raised platforms where the supervisors sit, and they literally look at the rows of cubes and they listen, it's pretty old school, the agents and they walk around and they manage in-person. You can't do that working from home, you need technology to do it, and that's what Virtual Observer is all about. Interestingly enough, it's about -- it has a screen recording and the ability for a supervisor to review the active call, and how long is -- have there been umms and awws and all that kind of automation that makes the work from home for agent more productive, and it's virtually required in running work-from-home operations. So we believe that this is somewhat of a new normal for contact centers. And so we think that the demand for workforce optimization is going to go up as a result. And we saw strong demand, both for Virtual Observer and Verint, we also partnered with through Q2. They both did very well. On the Whendu front, it's much smaller and not material to revenue for the company, but very strategic, in that it's helping us land these larger and larger deals where there's always 1 or 2 use cases that the customer says, does your product do X or Y? And if you have to say no in an RFP and your competitor can say, yes, to this edge case, that's not -- you don't want to be in that situation. So Whendu let us say yes to more of those questions because it's a simple no-code workflow, you can just drag and drop and click. So that's really helping us on the -- on that part of the enterprise selling process.

Yes, makes sense. I'm going to ask one more. We're out of time. Barry, I didn't get to you. I'm sorry. We'll do it next time. But this one came in through the audience. It gets that competitive dynamics a little bit. So any specifics when you compete with a pure Contact Center as a Service competitor versus a combined UCaaS, CCaaS offering? Like do you win -- are your win rates materially different? Like how do those sales processes differ?

Yes. We tend to get -- we don't tend to compete against the UC bundlers that much because it's a different buying motion. If that tends to be an IT buying motion, that's often led by Unified Communications. The sales buying motions that we draft off of is the line-of-business buyer who's looking to do a digital transformation or dramatically improve their customer service kind of -- and so on. So that we don't really bump into UC that much. Different buying center, different sales motion. When we do bump into them? We have partners. So where we get pulled in much more by the UC partners, so Zoom, Microsoft Teams, Fuze, there's a bunch of other companies who we partner with. And when they're selling UC, they typically need to add contact center. When we're selling contact center, we don't ever really talk about UC. It's a completely different conversation. So there's an asymmetry in that, which I think benefits the contact center industry. And you'll see that, the 3 leaders in contact center, inContact, us and Genesys, none of us really have a UC offer to speak of. Although Genesys has something, it's not really that meaningful. So it's because of the fact that we have this line-of-business buyer.

Awesome. Right. Yes. Perfect. Awesome. We're going to leave it there. We're bumping up against our time. Rowan, I always enjoy these conversations. So thank you. Congrats on all the momentum you guys are seeing. Barry, good to see you. I'm sorry we didn't get to talk. We'll do it next time. Thanks, guys.

Bye.