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

I think it's somewhere between high single digits to less than 15%, probably closer to 10% penetration rate. And I'm just looking at that from the perspective of seats, and we've got up to 200,000 named seats on our platform, 150,000 concurrent. There's 17 million -- 16.9 million agents globally. So if you add up all -- us as one of the market leaders, NICE, maybe has double us, Genesys. And you could see your way to maybe 1 million to 2 million seats. So that's where our sort of round numbers come to this sort of 10% to 15%. Gartner puts that number somewhere about 15% -- south of 15%.

Got it. And you spoke to -- there's a growing comfort on the side of the contact centers that cloud -- you don't have to evangelize cloud anymore. But what helps move that pace of adoption forward? Is it partnering with system integrators? Is it ability to have different technology partners? Is it kind of some of the additional AI functionalities you've added, like what helps get organizations over that hurdle of moving to cloud?

Yes, probably a few different things. One is we've been working really hard over the last few years to build out our ISV community. And what that's really all about is integrations with the ecosystem. So we want to make sure that our technology works with all the various vendors that when we walk into a customer's account, inevitably, there's going to be a -- we'll -- will actually be back up. In the contact center in general, there are -- it is a very broad tapestry of different companies that come together to deliver solutions for this market. So it's not just -- you buy Five9 and you're done. Even Cisco, who has a broad solution, has a very, very broad ecosystem place to make sure that they can operate in a complex environment. So first and foremost, what we had to do is make sure that we had support for the most common applications in the contact center world. And I think it crossed that hurdle, where we've got a very, very rich and robust ecosystem, ISV partners. Second, as you mentioned, is partner's. The partner channel where especially in a larger digital transformation, it is often system integrators in specialty in sort of smaller SI shops that tend to get involved and they're bringing together many different solutions. So we've had incredible traction with Deloitte, and we started -- we've begun to make really good traction with some of the other SIs. And they are typically engaged on the CRM transformation and this and that. I think having those trusted partners, especially in the larger enterprise, we really do look to outsource a lot of the transformation part of their program to SIs. The third would be resellers and service providers. I think when you're a large enterprise, you often have many partners who you leverage and rely on both from a trust perspective, but also from an arms and legs perspective to do the work. So when you call up that trusted provider like AT&T, who you've been using for the last 18 years for your contact center, what you're going to hear is, hey, our default recommendation is now 5 million. And to 5 million cloud. And they branded that AT&T Cloud contact center. So they've gone even 1 step further to say, we have a new offer for you. It's AT&T Cloud contact center. So they've chosen that as their default. So when you get those kinds of partners with that kind of trust and long-term relationships with large enterprises. That's when I think you start to see those larger enterprises get the comfort level, but, okay, we've got enough pieces in place that this move to the cloud looks more realistic.

Got it. And just in terms of how you guys differentiate in the market. Clearly, you have a strong case against kind of on-premise legacy vendors, but there's also a number of cloud vendors, whether that be NICE, which you mentioned, Genesys, as well as some kind of competitors from the smaller end and competitors kind of coming at it from different angles. So where do you find that you're able to kind of differentiate the customers? And how do you continue to build upon that?

Yes. In a few ways. First, versus the sort of most pure-play competitors, I think is the cleanest way to look at that, Genesys, NICE are two examples of those. And on that front, there's a couple of things. One, I think we have the best -- so the products, we're neck and neck roughly with NICE. NICE has an approach, which is all in one. So they bundled together and bought essentially all the assets for many of the assets that they need. And sort of like you buy it all and you buy it all from us. We've taken an approach that's more of a hybrid where we say, look, well, we will -- we offer our, say, for example, workforce optimization. That's an acquisition we made of the company Virtual Observer, but we also support Berent, who's the market leader. So we've taken a more open approach. So that's the first sort of obvious point of divergence between us and NICE is where we tend to be a much more open platform supporting the broader set of ISVs in the community. The second thing, I think, that we differentiate on is on service. When you sign up with us, we're known in the industry for having the best post-service support in sales -- post-service support. And we just really think that seriously. We're in the business of helping customers improve their customer service. We want to lead by example. And our Net Promoter Scores are off the charts for enterprise software. When it comes to post service -- post deployment Net Promoter Scores, we're in the 90s. So customers get -- and they hear this from partners like -- and partners also, by the way, recognize, hey, when you sign up with Five9, they're going to make you successful. We put a lot of pride in -- it's not just once we get the deal. That's just the starting gate for us. At that point, we really come in to -- come to life we darken the skies with our professional services people. We have boots on the ground with customers often than not obviously in the COVID era, but we just really bring out the troops to help customers be successful. And I think that's one of the things that they appreciate. So that's another point of differentiation. The final point of differentiation is on technology. We have made, as you know, quite a bit of investments in the AI space. We've taken a very differentiated approach here. So we now have our organically developed Agent Assist technology, which is all about making your existing human agents more efficient and that uses AI to do that. And second is our IVA product that we just acquired through Inference. So Inference was the market leader in IVR and IVA. IVA is interactive virtual assistant, or interactive virtual agents. That technology is the voice-based, conversational-based replacement for the IVR. So we're taking -- and that has a really strong automation and ROI story for customers, which is, hey, look, your IVR is not really solving your needs. It's helping you route your calls but customers get frustrated by those long IVR trees, they just want to get to an agent to get the answer that they want. And IVRs don't do a very good job at self-service and helping customers avoid having to talk to an agent. That's where IVAs really are starting now to come into their own, and that has really significant cost saving benefits for customers as well. So I think we're also differentiating in our AI strategy. So those are the 3 areas, sort of the open ecosystem, the partner and the sort of post sales services support and then artificial intelligence technology, we have a leadership position on that one.

And maybe just -- you clearly started with a set of smaller customers. You've moved up the customer stack over the years. And just how do the needs of those customers change? Is it more about giving them more professional services and more handholding? Or are there -- how do we consider like how the needs of a customer changes as they scale? And how have you evolved to meet those needs?

Sure. This is -- the first and foremost is scale, right? I mean, just if you want to handle 5,000 agents in a single domain. That alone is the first part of the challenge for a large enterprise. So we've been growing that sort of scale factor up higher and higher in terms of the single -- think about it an organizational unit. The second thing is, in larger enterprises, you have more complexity. So large organizations, more complexity, more hierarchy, more layers, more need to have roles and responsibilities. In a small contact center, you have with 20 agents, you might have a supervisor, and that's that. And the supervisor has one app that they can look at their stats, and they can have a very simple sort of call flow. Take that with 1,000 agents or 10,000 agents and you have orders of magnitude, more complexity. IVR trees that have many engineers supporting them full time. A hierarchy of supervisors and managers and people that need different customized reports and ability to manage their teams in different ways, and so on and so forth. So there's just a tremendous amount of complexity that comes in a 10,000-seat contact center versus a 10-seat contact center. And that's what we've been building out. We've been building that out for years. And that's been an iterative process. And as we've engaged with customers and their RFPS, they tell us exactly what they're looking for, and we've been able to sort of quickly build those kinds of capabilities into our software, but it's been a long time coming. We think when we've sort of passed some critical milestones with regards to having the viable set of features that these larger enterprises need to move on to the cloud. One of our other acquisitions that's really helped in this area is Whendu. So Whendu is a no-code integration workflow platform that's customized for the contact center. And so if you think about the fundamental challenge of working in large enterprise beyond scale, it's sort of all of the corner cases that every enterprise is going to have. They're all going to have one sort of unique capability that they need. And what we've got now with Whendu is an answer to help those customers get on board with us without having to go do custom code. This is a no-code solution. So we can hand them our workflow solution to say, "Here, is a very easy way for you to drag and drop and create your custom business processes to integrate with contact center." That's unique to Five9. We're the only vendor in the space that has a technology like that, and it is helping us win larger and larger enterprise deals. So that's something that I think we're really, really excited about. And then the last thing on the large enterprise, as you pointed out, is partner support is absolutely critical to winning in this space.

Got it. That's helpful. You spoke to earlier, competitive advantage, kind of the openness of your platform. You also spoke to kind of a number of acquisitions that you've done kind of over time, whether it be Inference or Virtual Observer or Whendu. How do you determine that buy-versus-build equation? And how has that changed over time?

Sure. Well, I'm an engineer, so I always default to "I like to build stuff." So if we can build it, we will. We started that way on AI, right? We built out the Agent Assist. We did that organically. We're really proud of the fact that we delivered on what we said, we were going to deliver on the promises we made to our investors and to our customers. However, time to market is one factor. So as we saw throughout the last year, we saw an inflection happening with IVA. And again, so this is the follow-on technology to IVR. And we looked at that and we said, "oh, gosh, here's a market transition that we think is going to happen where customers have been using the IVR as the front door to their contact center and the conversational-based IVA is really the way of the future." So we looked at the market and said, okay, who's #1? And very clearly, the market leader here was Inference. And so we -- and we had, obviously, a relationship with Inference. So first thing we did is we signed a partnership with them to get some experience actually selling their solution to our customers. And then we realized pretty quickly that it would be better for us to own this technology as of -- because we saw this as a major market transition. We also saw that for us to build the technology that they had with which is going to take us at least 2 years. And that, therefore, a better answer would be to acquire the company, make that part of Five9 and then get a 2-year head-start on our competitors. So we're pretty excited about that. And if we're right, that there is a market inflection taking place, it's a very, very big market opportunity, and we've now got the technology leadership to start with.

Got it. And that's kind of a step in the direction of AI. And so just -- those are clearly to demonstrate a large ROI to your customers from kind of using more AI within their contact center, and you've been kind of driving more of that functionality within your products. What are some of the use cases for AI in the contact center? And what are your customers and you kind of most excited about?

Yes. There's sort of 2 big paths at the base of the tree. First for the branch -- so the first branch is automation [indiscernible]. If you're thinking about AI, it's like, okay, can I just make things faster and cost less. Second branch is better insight. Better insight into my customer, and what they need and what they want and so forth. When you think about a large contact center that has hundreds of -- tens of millions or hundreds of millions of calls and contacts. That's a rich source of data that can be mined to understand sort of what's on the mind of your customers. We've really optimized for the first branch. The first branch being automation and efficiency. We think the ROI story around being able to automate what your agents do so you have fewer agents. Being able to accelerate sort of time to resolve the question of the customer, improves customer experience and efficiency at the same time. That's really the direction that we've at least that we've seen from customers that's being more interesting than the second branch. So we've kind of gone all in on that direction. And down that path, there are -- that sort of trunk goes up into 2 other branches. The first one is my existing agents have processes that they're doing that are slow. For example, when you call up to process, let's say, you bought a product and you want to return it. You get that agent on the horn, and they have to ask you all your information again, step 1, wasted time. Step 2, they then have to go in into a lot of forms. You hear them typing, literally. And they're often swivel-chairing between one system to another, from legacy system to legacy system as they try to process what you're doing. So anything that you can do to help that agent be more efficient to take that like 10-minute call and make it 9 minutes, that's a big saving. Like that's a directly translates to 10% savings on labor costs. So that's the first branch, and that's why Agent Assist technology really comes in. The first thing we're doing on that front is automating the post call wrap-up. We went and did a study of where agents spend their time and so if you take a typical 10-minute call, approximately 1 minute of the call time, approximately 1 minute of that call time is actually after the agent hangs up, so they speak to you for 9 minutes, then they hang up. Before they take the next call, they spend 1 minute typing up a summary of the call into the CRM system, okay? So what we built as our first foray into this space is automatic call summarization. We listen in real-time to the call. We translate it to speech to text. We take the text and then we apply our own patented NLP call summarization approach. We summarize the call into a sort of a 1-paragraph summary, and we proactively pop it up in front of the agent. As soon as they hit hang up, the call summary of pops up and they can look at it, make sure it's accurate, that saves them 1 minute. It doesn't sound like a lot of time. But that's 10%. If that's every single call, you're making 10% faster. It turns out for 1,000 contact center -- for a contact center with 1,000 seats, you're talking about 100 agents less. And those agents cost $2,000 to $2,500 per month. So there's very significant ROI savings on a technology like that. And then the second branch down that path of efficiency is all about preventing the call from even getting to the agent in the first place. We saw this trend early decades ago towards IVR self-service. Call your bank and find out what your bank balance is. It turns out, people don't really like using those. They're not very friendly, pushing 1 for this and 2 for that. The new move here is conversational AI. So you've heard these before. They're not -- they're -- the idea isn't new, which is instead of push 1 for sales, it's just tell us why you're calling. Oh, I call to return my product, okay? Tell me what product you're calling to return. At this point, you're into a computer-based conversation. You don't need to speak to an agent. We believe, and Mackenzie has asserted that somewhere in the order of 10% to 15% of today's customer service jobs could be automated completely over the next 10 years. And so if that's true, if Mackenzie's estimates are accurate there, that's a very, very significant market opportunity from the cost of labor there. That's on the order of $34 billion of labor spend that could be automated over the next 10 years. And that we think the primary way that's going to happen is by never talking to an agent in the first place. So if I can process that whole order actually using voice and talking to a computer or texting with that computer either way, that's a better solution. And again, direct ROI savings businesses. So that's the broader and longer-term opportunity that we're pursuing. And again, it's one of the key differentiators of us versus our competition. We are taking a leadership position here. We think it's going to be important long term.

Got it. And maybe I'll just finish with -- we just spent 30 minutes talking through questions, and I didn't really hear anything about like, oh, we're just trying to help a more distributed workforce. So in the life after COVID, just how do these trends continue? And what do you think maybe some of the market moves over the last couple of days have missed about kind of how your theme continue post COVID?

Sure. Well, I think we've heard from our customers that there's going to be a permanent shift where work from home will be leveraged by contact centers more than it has been before. Some contact centers as much to 100% virtual. So they're just leaving their agents at home. I talked to a company in Salt Lake City, who said, "we were building out a new HQ for all of our agents, and we're using Five9 and all our agents are just fine working from home, so we canceled our build contractor." I guess -- I don't know exactly how they did that. So they're not building out their HQ anymore. So there's companies that are saying 100% virtual. That's not -- that's somewhat of an exception. What we've heard is more of a blend that customers, at least the ones that I talked to, have told me they're going to support a flexible schedule, a hybrid schedule so that agents can work from home 2, 3, 4 days a week, in some cases. But maybe it's an 80-20 rule, 80%, 4 days at home, 1 day in the office, 3 days at home, 2 at the office and so on. So I think that work from home is here to stay, number one. And I think as it pertains to the life after COVID and what that means from a growth perspective for Five9. Again, most of our growth is not being driven -- our growth is not really being driven by COVID. It was sort of the final nail in the coffin of on-prem software in the mind of many customers. But other than that, the underlying trends really don't have anything to do COVID. I don't think people are going to be racing back to sort of -- this is very unlike -- say, for example, Zoom, where in the Zoom world, look, if we were in a person, we wouldn't be necessarily having this Zoom. But in the contact center space, I think this is a permanent shift, and it's a permanent sort of acceleration towards cloud. So I don't think to see that kind of going backwards after COVID, actually. I think that we're going to continue to see the acceleration that we've seen in our business. We predict that our enterprise subscription business will continue to grow in the 30s just based on the fact that the acceleration that we've seen in the pipeline and also the amount of on-prem software that's still out there to be transitioned to the cloud. It really still comes back to those basic factors. And we just think that COVID was a, in a way, a onetime accelerant of consideration and the rationale of the life that makes sense for the businesses.

Well, great. And you guys, well just have to ask very questions in one-on-one's. We didn't get to any of those. But Rowan, Barry, I appreciate you guys being here today, and it's been a great conversation. And look forward to hearing more about your story going forward. So thanks so much.

You too. Bye.