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

Hi. Thank you, everybody, for joining us today. My name is Samad Samana. I cover software here at Jefferies, including the enterprise communications space. With us, we're very excited to have today from Five9, Dan Burkland, President; and Barry Zwarenstein, CFO; and they're kind enough to join us to share their thoughts today in what I think is one of the most exciting places in software right now. And so just for the interest of time, Barry, I'm going to turn it over to you. I know you had a couple of opening remarks that you wanted to make. And then we'll dive into Q&A.

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

All right. Great. Well, thank you again, both, for joining us. I think maybe let's just dive in. [Operator Instructions] But I think it's on everybody's mind, contact center as a service is seeing an inflection due to COVID. And I think maybe why don't we start there and see how the last couple of months have trended and how customer behavior is continuing to evolve as we're longer into this. And maybe any learnings you can share on the customer side and how that -- how we should think about that in terms of Five9's execution and then the competitive environment?

Sure. Sure. Thanks, Samad. This is Dan. I'll take that. If you look COVID for the most part, when it was an immediate reaction of, "Oh, gosh, move the workforce to home." Unlike a video application where you can download, subscribe and you're using it the next day, Contact Center decision processes are pretty lengthy. And we experienced was customers figured out how to go work from home with whatever they had, whether it was -- if it was cloud, it was much, much easier because the cloud solution doesn't care or know where you really logging in from, and it still allows you to gain all the same efficiencies as you would in a formal office. The premise side is a little more difficult, right? You had to get home, figure out how to get through the firewall, you're logging into servers that are in that building you worked in, and it was just a more cumbersome exercise, but they got there. And now I think a lot of companies have looked at how do you, looking forward, take advantage of, okay, it's work-from-home. The light bulb went on for a lot of companies that said, aha, we can observe our employees. We can manage them. We do have the tools. We have a virtual observer product that let you get in and you can see what they're -- you can monitor your calls. You can see what their desktops' doing. You can monitor their performance. And you can even, through tools like this, see what their environment's like and if it's conducive to being an agent. So all that work from home -- that piece of it kind of went to the background and now companies are really looking at the process of the 2 drivers for our industry have always been the digital transformation and really the move to modernize and move your contact center to the cloud so that you can innovate. And we set out a couple of years ago, made the mantra that, hey, the contact center's going to change more in the next 5 years than it has in the previous 25, and that couldn't be more true today. What we see is a lot of new technologies to automate. Things like IVAs, AI for Agent Assist and some other practical applications, workflow to be able to follow-up and do lots of text follow-up and messaging and trigger events to occur within. And so there's a lot more available to companies. And for the first time in many years, organizations because of COVID, are looking at this thing, "Oh, my gosh." Especially for industries like retail and others that really got impacted hard. Well, we have customers that closed hundreds of stores and they use their store for the experience, their brand, their image, their -- the experience they deliver to their customers. And they had to go to an exclusive e-commerce web-based solution to interact with their customers. And now in many cases, the only conduit to their clients and their customers is through the contact center. So every bit of their image and experience and how they're being perceived is done with those contact center employees. So it's more and more important for them to invest there and deliver an experience that's delightful to the customers. And so we're seeing customers that are starting to accelerate that process of, gee, we were going to wait 2 or 3 years to look at contact center once we depreciate and sweated these assets. And some of those decisions are now coming to being pulled forward, where they're taking a closer look because they recognize, well, this time, because of COVID, they're having to differentiate on that experience they deliver from the Contact Center. So that's building the pipeline and seeing some acceleration.

And maybe let me -- I think sometimes in our seat, we get -- we focus a lot -- end up focusing a lot in the short term. But I'd love to know, either from Dan or Barry, either one of you, when you think about where Five9 differentiates itself, right? When you think about that customer experience, when you think about delivering that engagement from the brand to the customer. How do you -- where do you think Five9's biggest points of differentiation from a technology perspective that's really resonating with your customers today? And forget even COVID, right? Hopefully, that's the thing we're not talking about, right, when in the future. But just from a pure technology perspective, what do you think really makes Five9 stand out to its customers?

Yes, that's a great question. And I think the key there, and you brought it up, which is regardless of COVID happening, most of the sales cycles and the enterprises are 6 months to a year of full valuation. And so our business, most of -- everything we've booked and seen has occurred and started well before COVID. And the real trend there was the company is recognizing that, that requirement to deliver a -- the best experience, and some of that is with giving added tools and added technologies to help the agent, deliver a more personalized experience and customer experience. And what I mean by that is, there's a few ways to do that. One is, we talk about AI-infused applications that are getting a ton of buzz and a lot of interest. And then the question is, when you mix IVAs or voice box in, chat box, you've got AI, you've got workflow. It can be overwhelming to customers about where do I start here? How do I incorporate all this? And a big part of what we do is the handholding and consulting services that we deliver to our clients allows us collectively, together, to determine which applications will give them the most return because nobody can really take on and completely flip their support model to go from a very manual process to a fully automated process. So a lot of it is figuring out where are those ROIs. And I'll give you a couple of examples. Agent Assist, we initially came out and talked about that is during the call, the agent's having a conversation with a client. The system is listening to the call, transcribing it in real time, understanding through natural language understanding and then fetching answers and coming back to the agent with suggested responses. And while that's very useful, it can be very useful, it's disruptive to that process and that scripting that the agent's used to. So we decided, practically speaking, flipping to what we considered kind of a secondary application but much more practical and much more measurable on the ROI, which is we can assist the agent with wrap up. After they're done with the conversation with the customer, because we've transcribed the entire call, we can pull out summary data. We can automatically disposition the call and we can stick all that information right back into the CRM with 1 click of a button from the agent. And the key there is in many contact centers, the agent may take 2 or 3 or even 5 minutes putting in their case notes, putting in their information into the system, which oftentimes is not real accurate. Every person interprets the conversation they just had differently. But in this case, we can automate that and wrap-up mode after the call may go from 2 or 3 minutes down to 10 seconds. They can just peruse the notes, hit submit, and they're done. So that's a very compelling ROI that we can deliver to customers today. So we're getting a lot of traction there. And then the other one is through our acquisition of Whendu, we have workflow automation. And what we mean by that is when -- the title Whendu: "When this occurs, do this." And so we can take conditions that are inside the contact center, around the contact center as far as orders being placed and trigger events. And one easy example for everybody to resonate with, when you contact a company and you place an order with them, typically, that's the last time you hear from them. They got your order, they got what they wanted, and you're done. Well, we can now trigger workflow to say, great, you placed an order. I want to send some-odd 24 hours later, a, "Thank you for your order. It's scheduled to ship Tuesday." And then on Monday, I want to send another reminder that says your order's due to -- scheduled to be shipped tomorrow. I want to confirm that you received it, and then I might want to send you a survey to follow-up and ask how your satisfaction level is. That creates customer delight. In many industries, they were like, wow, this company reached out to me 4, 5 times after I placed my order to make sure I was being taken care of. Without any human intervention, we can automate that full process. Those types of applications are what's resonating most and what's differentiating Five9 in the industry.

That's good to hear. We're always trying to make sure we focus on the big picture, and not just the short term. But Barry, right after I say that, I'm going to switch to you and ask you a more of a short-term oriented question, which is when you guys last reported, you continue to highlight the upmarket success with larger and larger customers. And I guess I'd love to hear, maybe from your perspective, of not only what's driving that success, but how do you think about the impact to the growth rate over time? And whether that's something that will continue to improve that enterprise penetration, and how durable that enterprise growth is as we think about both the short-term and the long term?

So why don't you let me talk a little bit about the durability and this magnitude of that enterprise growth and then turn around to Dan, because he's one that's actually going to talk more convincingly about why we've been so successful going up. So -- but the key factor is that what we report to The Street is enterprise LTM subscription growth, it makes up over half of our business. And we said to The Street that we'll have a free handle on that for the foreseeable future. And we say that because the forces that have been building up that Dan talked about namely premise-to-cloud and digitizing that customer experience have only just begun, and there's a huge, huge market out there for that. And so we see that continuing for many years to come. Dan, in terms of going out to market?

Yes. The out-to-market success has been -- not only more and more companies are recognizing and trusting the cloud to be secure, scalable, reliable, always on 24/7, very difficult for an individual entity to manage a 24/7 set of capabilities across multiple sites when we can do it from the cloud much easier. And we have the innovative SaaS architecture that allows us to innovate and deliver new functionality much, much quicker and much deeper across the board in that. But one reason is also the systems integrators, primarily. We've spoken about these on the calls. We did more business with the 5 big SIs in Q1 than we did all of last year in 2019, and we repeated that again in Q2, more business in Q2 than all of 2019. Part of it was we had a Deloitte relationship for about 4 years. We looked at replicating that with E&Y, Slalom, Accenture and IBM, and they're all hitting on all cylinders. And it truly helps a big enterprise as a Five9 knocking on their door, and we say, "Trust us. We can do this." It's much more powerful when we have a systems integrator that has an existing partnership or relationship with that client to stand up before that client and say, look, we've vetted these guys. We've worked with them before. We're putting -- we're recommending this because we're putting our partnership and our relationship with you, Mr. Client, on the line. And so they're really trusting that SI. And those SIs wouldn't put their neck out if they weren't very confident that we can deliver and we've done that and that's been a big proof point. And then the other is bringing on an AT&T, who's taking us into some of their large, large accounts as the OEM product for AT&T Cloud Contact Center. They used to carry a big portfolio of products. They've said, "No, we're going to go exclusively for customers looking at contact center with the AT&T Cloud Contact Center," which is 100% powered by Five9 now.

Great. While we're in the neighborhood of talking about partners and large organizations that are very supportive of Five9. I know Salesforce.com is the gold standard in the cloud, and they're a pretty important partner. So I was just curious if maybe you could just talk about how important that partnership is in terms of customer acquisition. And then they've talked about, for the first time, allowing integration directly into service cloud by -- of the voice side, and I think they'd opened that up to their CCaaS partners and just...

Yes.

How do you view that relationship evolving and how important it is?

Yes. It's a great partnership. It's critically important that we continue to have very deep integration and the deepest in the market, we believe, to go and their product teams have validated that as well. As an example, not to get too far in the weeds. But if you think about -- in order to play nice as a partner with them, they have digital channels like we do. In other words, they have a chat and e-mail products as we do. We don't compete with them on those. We'll gladly let them be the chat and e-mail engine for receiving chats and e-mails from their clients. The difference is when they receive those, they have no under -- their product, their platform doesn't understand agent skills or current presence or availability to handle those. So they put them in a repository, in a bucket, if you will, and they rely on the agents that don't have Five9. If you didn't have Five9, you'd cherry pick those. You'd read a text. You'd grab it. You'd pull it down. You'd respond to it. You'd pull down an e-mail, and you'd respond to it. And what's interesting is what Five9 has the ability to do as the routing engine is we can look at the context within those digital channels, applying natural language understanding and say, aha, this is a billing question. It's from someone, and it's about this; who's properly skilled right now and available somewhere in the enterprise to handle this and route it to that person. So we -- we're the intelligent routing engine that really adds value to their digital channels. The reason I share that example is that's one example of many that -- where we bring great enhancement to what Salesforce can deliver. So that partnership is always going to be key. It's important for us just -- even if it's not -- they're not out representing our product and trying to sell our product, but they're oftentimes asked to endorse. The customer will say, "Hey, we're looking at Five9. We're looking at moving forward. What do you think?" And it's so important for them to say, "Oh, great partner. We've got hundreds of customers, and we've got others like that can do it." So it's more of an endorsement than when we sell into their base very, very heavily and that's been great. It's good partnership.

That's great to hear. I wanted to ask another one maybe on the technology, the philosophical approach. I know that there's a core omnichannel routing component and the agent desktop, but then when we think about WFO and analytics, I don't -- I'm curious, especially following the acquisition of Virtual Observer, maybe just what the company's strategy or view is on build versus buy and having maybe that full suite that includes the routing, the WFO component and analytics as well.