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

Hi. Good morning or afternoon, I guess, depending on which time zone everyone is in. I want to thank everyone for joining us for our 23rd Annual Needham Growth Conference. At the moment, I have Five9 joining us. We have the company CEO, Rowan Trollope; and CFO, Barry Zwarenstein. Thank you both for joining us today. Before we get started, one bit of housekeeping. We're going to keep our commentary here to 25 or 30 minutes. We will open it up to audience Q&A, just like as we're live in person. There is a Q&A button in the upper right-hand corner of the presentation window. Feel free to click on that, enter in any questions or you can submit them directly to myself at [email protected], and we will take those as we finish. But before we get started, Barry, I will turn it over to yourself.

Yes. I just wanted to remind -- thanks, Scott. I just want to remind everyone that our discussion today may include forward-looking statements concerning events and trends that may affect our industry or the company and its operations. 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 certain factors, amongst others, which could cause our results to differ materially from those described in these forward-looking statements. thanks, Scott.

Sure, you bet. So I don't know who wants to take this, Barry or Rowan, but for the one person in our audience that does not know who Five9 is, how about you give a brief overview of the company.

Sure. Thank you, Scott, for having us on again. Really appreciate it. So Five9, we're a software as a service company that services the contact center space. So if you call into a business and there's people that are entering the phones or responding to your e-mails or online chats through the web. We handle all of that communication essentially from the moment you hear the ring of the phone or you see the UI on the website for the chat, all the way back to the agent and what the agent sees on their screen and all the integrations that happened on the agent's back-end systems with the company's CRM platform to pull up your customer information. All of that is part of the contact center as a service play. And we've been around for about 18 years, public just going on 6 years now. And I've been with the company for about 3 years. And most of our growth is coming from the enterprise segment. So that's just a quick flash review of Five9.

Great. I have so many topics to cover. I actually had to shorten the list down from what I initially started with. You guys have had so much going on in this space. But taking these fireside chats this week to really start with kind of a review of the pandemic and the impact that it had in respect of industries and the businesses themselves. I guess, to start that off, from an industry perspective, within the contact center, how has the pandemic changed this market, if at all?

We've spent quite a bit of time on this, Scott. I'm glad you led out with this because it's been quite a subject of internal discussion, trying to understand all the puts and takes associated with the pandemic. I think how we have netted out on the pandemic effect on the contact center industry is that it's probably been a net like positive in the sense that contact centers have become the new front door for business. If you can't go into a facility and that business wants to still operate, and they need a way to engage with their customers. If they can't do it in person, they're going to have to leverage the contact center. So we've seen that effect on our installed base bookings and revenue. We haven't seen it so much affecting the overall net new acquisition of new customers, which, as you know, is a much longer sales cycle and deployment cycle. So on that front, we haven't really seen it be a positive or a negative. I think the other positive that's hard to quantify associated with the pandemic is just putting a premium for every business on all of the forms of digital engagement that you're going to have with your customers. And the real, I guess, the real money question is what happens after the pandemic? Do businesses kind of just go back to the way that they were, servicing customers in person for those kinds of businesses that do that. Or do they say, "Gosh, this is -- we've discovered some better ways to engage with our customers from a digital perspective. And we want to have that be a permanent feature of the way that we talk to our customers. And that's what we're seeing more of as a sort of it's a one-way function. Customers say, wow, this is -- we were forced to adopt these new technologies. But now that we've done it, we're not going to go back just because we're allowed to open our store. Certainly, there'll be a shift of some form or another as people go back into stores and retail outlets. But for the most part, we think they're going to continue to leverage digital and the newer sort of ways of engaging with their customers. So I think net positive on the industry, but really just more reinforcing and accelerating trends that were already happening, the way I look at it.

Okay. I guess boiling that down from the industry down to the specific impact on Five9, I view the impact is kind of twofold. On the one side, you had companies that immediately had a need to stand up new contact center operations. You guys have been pretty vocal on those. There clearly was demand in March and April. That was new and probably not necessarily in your sales pipelines at that point. But in my conversations with Dan Burkland, who's the company's President, for those that are not familiar with Dan, he said that some of the normal sales opportunities froze, just like we saw that was common in most of our software space. So I guess is this view point accurate where you've had some positives and maybe some pushes, and then if so, is it kind of a -- would you say a net benefit for the company with what you're seeing the demand trends look like today?

I would say you have to look at it by specific industry. So with regards to Dan's comments, absolutely. We saw some companies go out of business on the SMB side. We saw some companies have to delay payments in affected industries, airlines, travel and entertainment, et cetera. But then we saw some industries where there was clear acceleration, anyone that was -- had a strong foothold in e-commerce. Really or at home food delivery, for example. All those things, my perspective is they were kind of a wash, where we really saw the -- if there was a clear benefit of the pandemic in terms of revenue for us, it would come from industries that had to shift from in-person, mostly retail, basically, leveraging our platform more. That's what -- that's essentially what it really comes down to. And that's not a huge -- that's actually not a huge uplift to the business when you boil it all down. It's -- it would be small, low single digits is my guess.

Kind of looking at the industry again here is that your September conference, Rowan, you had a chart up that was super interesting to me because I talked about the amount of time and agents on the phone during the pandemic nearly doubled versus an unchanged level over the prior decade or so. I guess, so much for the death of the telephone contact center like we've been hearing about from other vendors, at least. But do you continue to see this elevated usage level? And if you do, how do you think about usage kind of going forward in the context of it?

Yes. We saw throughout 2020, a strong usage improvements from our existing customers. And when we looked at a customer-by-customer basis, as we shared in that chart, demand into the contact centers was off the charts at the beginning of the pandemic. It did come back down and somewhat normalize. We -- with regards to how companies handled that increased surge, they ultimately hired more agents. That's the only way they can handle that, that's #1. #2 is, we've seen a very strong demand for more automation. So if you're getting 2x of volume into your contact center because that's now the front door to your business, the solution to that problem to 2x the number of agents. Most of our customers have come to us and said actually no that's not what we want to do, we are going to hire some more people, but we're more interested in what do you have to say about automation. How could we deflect these calls, how can we help self-service these calls? So there's been a huge push in that direction. And frankly, led up to our acquisition of Inference at the back half of last year, really on the heels of our OEM agreement with Inference. And the reason for that is that we saw this -- we saw and predicted our thesis was we were going to see really strong demand for automation in the contact center. We saw it once we launched the OEM and we decided, let's move now to take a leadership position in this emerging category. And we've been sharing this story going back to our last Financial Analyst Day, which is the incredible TAM expansion opportunity that's there, if you can tap into automation of labor, which to kind of boil it all down, represents what we believe is $34 billion of additional TAM for Five9 and for the industry over the next 5-plus years, and so 5 to 10 years. So we -- that's more than a doubling of our TAM. And so that's why we've been moving so aggressively towards automation technologies. So at the end of the day, pandemic and everything that happened in 2020 really drove a spike in contact center volumes as it became the only way to access many businesses and those businesses said, it can -- the answer to this cannot just be hiring more people. We've got to get smarter and leverage more digital technology. Five9 has emerged through our acquisition and through our own organic development as the leader with the best technology unquestioning in the automation of contact centers. And so that's -- it's nice to see that we're getting traction in that space because we saw it as such a big opportunity and the pandemic just made it even more real than it might have otherwise been. I think it's accelerated that demand for automation dramatically.

I have several automation questions. We'll come back to them in just a minute just because they flow well. But -- yes, that's definitely the feedback we've had from a couple of industry analysts that we've spoken with is the crazy interest in automation for the first time. At least in -- so it's great that you're seeing it. I guess, moving on from the pandemic because I think we all want to move on from the pandemic. So we will, at least. Customer experience or rather experienced management, depending on who you are, is the new way of sweeping through corporate marketing and support teams, like it's the greatest thing since sliced bread. On a side note, sliced bread has only been around since 1928, and apparently, according to Barry, it's only and really available in the United States, which I didn't know that before. That was crazy. But anyways, experience management is really kind of a decades old theme when I speak to anyone in the contact center space, but it's new in kind of these other areas. Is the contact center industry or Five9 specifically benefiting from this new focus and experience management?

Yes. I would say, unquestioning, yes, we are. The way that it gets reflected to us, though, is the level at which we have conversations within businesses. That's number one. So when we -- we can have a conversation with essentially any CEO of any business, and it's one of the top -- one of the top of mind subjects for those leaders. If you look back last year, there was a really interesting study, which basically sure, I think, was IT spend priorities, were customer experience was number one. That certainly hasn't been the case for most of human history, at least in the last 30 years I've been in this business. The contact center and the customer experience part of this equation was not the top priority for most businesses, but it clearly has emerged that way. And we play a part of a bigger story there. We're all about the communications channels, both digital and analog and connecting you to your customers. But there's a lot of other players in that space, too, including Salesforce and CRM category of players and so on and so forth. So I think it's definitely benefiting everyone. It's absolutely clear that it's a major priority. It's been accelerated by the pandemic. And thank God, because, I mean, just personally, as a consumer, I'm sick and tired of calling businesses or contacting them and getting bad service. And so I think we're at the beginning of a wave of sort of putting that in the rearview mirror. And in order to do that, it requires a lot of technology spend and it's going to require more automation than ever.

I guess kind of within that vein is you've made or the company has made a really big bet around AI in several product areas of the company. And this kind of touches to your automation thesis theme from before. But I guess there's 2 part question here is, can you talk about how you're leveraging the AI technologies kind of within the product set to be able to harvest or access maybe that additional $34 billion in TAM. And you talked about creating -- taking a leadership position with this overall functionality. Where do you think that strategy is truly compared to those competitors today? Because some have at least some flavors of it, some don't. We want to understand kind of exactly maybe where that sits, you think.

Sure. So the automation play in the contact center really comes down to a simple equation, which is start from the basis of, look at the average contact center for every dollar they spend in technology, they spend $10 in labor. So it's a 1 to 10 in order of magnitude, higher spend on labor. So the question is, if you're going to save money in the contact center or do more with less, you're going to have to go after that labor spend. It's not about cranking down the screws on your technology spend or getting more efficient, but it's like let's go after our labor spend. So when we have conversations with customers now and now sort of bringing our portfolio and the position we've taken, there's 2 ways we can go about helping them optimize that labor spend. One, helping the existing human beings that they have in their organization, be more efficient, so get more done. And that, again, it comes down to, can they take more calls or handle more incidents from customers in a given 8-hour day. And then -- and so then we have a technology that specifically addresses that we built organically called Agent Assist. It's an AI-based assistant that does essentially predictions and recommendations in real-time for a human agent to help them move faster. So if you're taking an order like an RMA from a customer, a very common use case from a customer, RMA. The agent has to do a bunch of typing and clicky-clack stuff that's coming on the back end to make that call go faster. Agent Assist is really there to help in that process. So it's listening live to the conversation. It's using natural language processing to understand the context of what's going on, what is this customer calling about. It's making predictions to the agent to say, hey, click this link, if you want to access the RMA form, it prefills the RMA form based on what the customer has said. So the customer has said -- the customer may have said in the call, hey, I'm calling about my order 10125, it was shipped to the wrong address, I wanted it to go to this address instead. And all that information can actually be extracted automatically so that the agent doesn't have to retype it and inject it into the form. So that's part one. And we've built that organically under our Head of AI, Jonathan Rosenberg. The second way we can help customers get after that labor spend is by fewer agents. And the way you have fewer agents is you identify what are all the tests that those agents do, and you say, there's a bunch of strategies we can take to automate some of those tasks. And one of the laws of the contact center is that it's a Pareto's law, that it's 80% of your volume is usually low complexity, highly repetitive and mundane tasks. And so we can talk to a contact center and say let's get after the highly repetitive, low-value add kind of tasks and automate them in such a way that you don't ever have to talk to an agent. And there's a few ways you can do that. One, you can do self-service on your website, knowledge bases and customers search for the answers themselves and so on. And that's been going on for a long time. But it -- but there's a new approach to doing this, which is speak to a virtual agent. So since computers in recent times have gotten very, very good at having sort of natural conversations with people, and we've all experience this with Alexa or Google home assistant or maybe Siri, they're not perfect yet, but they're much better than they were. And so what we're selling as a technology that does that. That is essentially a virtual agent that you can speak to as a customer, ask your complex question. And for the 10% or 20% of the tasks that the company has identified could be easily automated. That human conversation can now be done by a virtual agent in a way that's delightful and fast and also low cost. So that's the second piece of technology that we're selling, virtual agents. We're selling those through our Inference acquisition. And I said that we took a leadership position that's based on Inference, the acquisition that we made has been rated as a market leader. They were small -- relatively small company, but we are now taking that and mainstreaming it, including it into our product. We'll be kicking that off this year, actually, by embedding it into every sale we make, so that every customer gets to have taste of this technology. It is truly sort of next-generation wow technology that when we show it to customers, there's been the promise of this idea that you could have virtual agents that talk to human beings to solve these problems. It's never really paid off because it was pretty deep learning. We're now in an era where we demonstrate this technology, which we can do in minutes with a customer on the phone. It's that wow moment, the light bulbs go off and they go, okay, I've got to have this. This is going to really -- they have line of sight directly to very significant cost savings for their business. So those are the 2 ways that we're getting after, I would say, the biggest opportunity from an automation perspective in the contact center, which is automating labor, and we're really, really excited about it heading into 2021 and beyond.

I've had -- I feel that a lot of questions kind of this area. And the #1 question is, does -- do some of these virtual agents or some of this automation ultimately cannibalize your human seat installed base over time. Is -- can you help -- I know you guys have talked about this a couple of times. But can you talk about kind of the pricing differences and how you actually view this as sort of the positive economically going forward?

Yes, very positive for us. So one way to look at it is the customer is still going to have the volume of engagements with their -- a business is, let's say, that they have a given volume of engagements with their customers. So we'll call that 100 engagements with customers, whether that's texts, messages, phone calls, whatever, e-mails. What this technology can do is, say look, in order to handle those 100 engagements, you need 100 agents, let's just say, at any given time. We can automate 10% of the highly repetitive rote engagements that you're having. So instead of paying for 100 human seats, which we monetize about $200 per agent per month, you're going to actually buy 90 human seats. And we are going to sell you 10 virtual agents. And the 10 virtual agents are going to do the same things that the humans do, but -- those very specific tasks. So they can automate those routine rote tasks. So we're still selling 100 total sort of agent seats. It's just 10 are virtual and 90 are human. And then where this is an upside for us economically is the 90 seats that we sell in the humans, those are the same price, $200 a seat, but the virtual seats that we sell are $400 a seat and, so we make money -- when we make money on doubling our ASP per seat for anything we can automate, we can more than double our ASP per seat. And the business saves money because instead of paying 100 agents, $2,000 a month, they pay 90 agents, $2,000 a month; and 10 agents, $400 month, but that goes to Five9. And so they're saving a lot of money, and we're making -- we're capturing. They're creating -- we're creating a lot of value, and we're capturing some of that value for ourselves. So the simple way to look at it is whatever we can automate, however many humans we can automate, we're doubling our ASP.

Got it. My math says that should be net accretive over time. I like that. I guess the last 2 questions I have. We have several questions from the audience. So I'm happy to take those is first, one more on the industry. We've seen several kind of new large vendors vying for some share in the contact center space over the last several years. Amazon, CRM, Twilio, even Medallia is moving in with some transcription services. Now Five9 is interesting, obviously, because it has the most important kind of core piece in the contact center, a very deep CTI system along with everything else that's been built around it. So the competitive dynamic is probably less impactful on your core system there. But what does all of these new large vendors moving into your kind of large space tell you about the contact center industry.

Well, I think first and foremost, it tells you that they're on to something, that we're onto something. That this contact center space turns out is quite interesting. If you didn't see Google and Amazon and Salesforce circling around, you'd have to ask yourself, is it really that interesting? It really is that interesting. And the good news is it's a big complex space with a lot of things to do. So for example, we're not in direct competition in many ways. Well, in some ways, we compete with Amazon. But for the most part, they've taken a developer platform approach, which is what they're good at, at coming after this contact center opportunity. So they've said, look, there's a segment of the market that are tech forward companies who are looking for highly customized sort of engagement platform. We can give them a set of platform APIs to help them build that. Twilio has done the same thing. So they've come at it from one end. Google has come at this from a totally different angle, saying we think we can take our AI technology, encapsulate that as a set of -- sort of APIs and help customers really in the area of conversational management, which is we partnered with Google. We also partnered with Amazon. Amazon has done the same thing. So they're selling an underlying technology, which is the conversation management platform side of things. Salesforce, I would say, has been nibbling around the edges of this space. Clearly, they're in the space from a service cloud perspective in managing incidents, but they've partnered -- they are our biggest partner. They are -- they sell into essentially every contact center vendor as a Salesforce partner. They've also chosen to resell Amazon. So they saw such a big opportunity here, I suppose, but they said, gosh, we're going to resell. We got to pick someone who we can go resell to our customers. Since they've announced that Amazon acquisition, our partnership sales with Salesforce have gone up fairly dramatically. So it's a -- again, it's not a zero-sum game in this space. There's a lot changing. It's a big industry. And I think all of this is validation of the fact there's a lot of value to be captured in this space.

Last question for me is on the go-to-market strategy, and I've kind of taken a different angle on it is my estimates, I put a note out last summer that talked about how I think you guys only have maybe 2.5% to 3% of the contact center market share today in terms of seats, and maybe that's 4% on the high side. You guys haven't exactly disclosed the exact number, at least recently. But the net result is, obviously, plenty of growth runway. But the company has become much more aggressive on the go-to-market side over the last 2 years, typically in the partner area. Rowan, you hired a new partner person that led partnerships at Cisco, I believe, to come in and expand this opportunity here at Five9. But how do you manage the volume of opportunities coming from these partners kind of going forward? And I ask the question because I see a real scenario where post COVID, that market kicks in and demand for contact centers continues to increase. But these partners might be able to drive you more deals than you're used to handling. The company's prior historical model has been manageable growth. I couldn't tell you how many times Barry has talked about manageable growth. But I see a scenario where these cloud vendors probably bring more than what you're used to. How do you manage that scenario properly?

Well, as we get more experience, manageable growth ceiling goes higher, first and foremost. So it's a scaling equation. It's not a hard limit. And you can look at our hiring in sales and marketing and go to market. That's been increasing fairly significantly over the last -- specifically over the last 2 years. And so we've been preparing frankly for that and we've been seeing it. And you can see our growth numbers over the last 3 quarters have sort of steadily risen. I think channel is clearly a contributor there. One thing that doesn't change, though, and I think it's important just to reemphasize this is the RFP rate, the rate at which we see companies RFP-ing their contact centers generally tends to be fairly stable. When they've got a contact center on-prem system that they bought 3 years ago, it's a hard lift to get that company to say -- to go throw that out before it sort of fully -- they've swept the equity on their investment on that thing. So I think there's a natural limiter to this that we've seen play out over several years and probably will play out over the next 10 years as on-prem systems continue to sort of hit their end-of-life and then the company say, okay, we got to go upgrade this infrastructure. There's an additional tailwind which we could just summarize as sort of digital transformation and customer service transformation that is accelerating that somewhat. But there is a natural limiter, which is just on-prem system, life -- shelf lives that are going to mostly drive a lot of this. And that's not really changing very much. We do see this big new opportunity that's independent of that, which is selling automation. So if you have a -- if the transition from cloud to prem -- sorry, prem to cloud is -- has a real significant benefit to it like automation, which we think it does, well, that could be an accelerator to that. And we've got a great finance team that helps us manage our spend in a very nimble way. Barry actually has -- I think it should be patented funding process called Xplan, which is very real-time dynamic process for funding our organization, where we -- as we see the revenue come in, as we see things start to play out, we're able to very nimbly go and hire and attract new resources. So look, if we do see a spike in channel leads coming in. We can react very, very quickly to that, and that's thanks to Barry his team.

Barry, you're going to have to share that with me, but I'm afraid you're going to have to kill me once I know. So...

Yes, it’s a secret sauce I have to say.

All right. We'll try to take a couple of quick questions here from the audience. We've got about 6 or 7 or 8 minutes left is why doesn't the company think that COVID has led to more net new customer acquisitions even after 10 months, past the start of the pandemic. I think most were expecting it would be an accelerated move from on-prem to the cloud contact center providers.

Yes, we just didn't -- we were already seeing an increase in our pipe, pre pandemic. And because these deals take 6 months to close, and in the case of enterprise, it's 4, 5 months to close, another 4, 5 months to deploy. So sometimes like in that 1 year average time frame from a lead to a revenue deal. None of the acceleration -- or very little of the acceleration you've seen in our revenue over 3 quarters of 2020 actually was pandemic driven. And so as we look to the pipe, while there were some small exceptions for, as you mentioned, Scott, the companies that needed to quickly ramp up contact centers for things like PPP or work from home, special stuff, et cetera, et cetera. Those were not a real big driver for us. At the end of the day, it's more of a consistent trend on the net new front of businesses continuing to replace their on-prem systems and move to cloud. Again, where we did see the pandemic acceleration was in our installed base and usage from those segments where they could no longer operate in person like retail. So somewhat ironically, we expected retail would be a net negative for us. And in fact, it turned into a net positive because while the overall business in the case of retail may have gone down, and face headwinds, their e-commerce part of their business has really thrived, and we were a direct benefit of that. And I'd expect that to continue while we are still in a sort of lockdown mode.

Next question is kind of an extension of some of the commentary you gave maybe with CRM and just the CRM vendors generically, really cut the question in half a little bit only because you touched on most of the first part. But do you see the spaces merging at some point, contact center vendors and CRM vendors or service desk vendors? And then how do you distinguish between the analytics software associated with kind of both areas because there is some overlap at times?

Gosh, there's so much overlap between these categories. I think they're going to -- when you say merge, I mean, the way I think about it is, I think Salesforce and others in the CRM world are going to continue to do more and more in the engagement side of things. And so Zendesk is a great example of that. And Zendesk is a big Five9 partner. They've got their own contact center offer. It's very lightweight. It's called Zendesk Talk, I think. And so in a sense, it already has converged if you look at Zendesk. With Salesforce, they're 1 step away. They have a partnership with Amazon, where they resell. But essentially, they have everything in there. Their salespeople have almost everything in their bag to sell to a contact center with Amazon now included and ConnectNow. Again, our business has really benefited even post that Amazon Connect announcement because Amazon Connect is quite limited in terms of who it targets and so the Salesforce reps are still actually referring lots of deals to Five9 and other vendors in the space. At the same time, there's still a big opportunity on the UC front. As companies upgrade their phone systems, hanging off of that phone system is inevitably in every business as a contact center. And so if they're looking at that UCaaS transition, they always need to have a contact center to go with it. And so it may not even be a customer service transformation story in those businesses. It is just a legacy prem to cloud transition of the rest of their collaboration technology, starting with the phone system. So where you see RingCentral or Zoom now really I think they just made an announcement like 1 million -- they sold 1 million phones. We are -- we're one of their top partners, if not their #1 partner, and in helping them with those deals. And in many of those, we've seen strong lead flow increases in Zoom because those customers, as they adopt the Zoom Phone technology or consider adopting it, they say, what do I do about my contact center and so we're getting a lot of pick out there. So I think there's really 2 go-to-market motions, the UC side and the CRM side that are powering the rising tide in our business.

Well, with that, we are up against the clock. So we will have to cut it off here even though I only got through about 1/3 of my questions, but that's all right. We'll take them off line, I'm certain. I wanted to thank everyone for joining us today. Rowan, thank you so much. Barry, I didn't have any obligatory financial questions, unfortunately, or at least we didn't get to them, but I look forward to talking on the quarter call in a few weeks.

So do we. Thanks a lot, Scott.

Take care, everyone. Thanks again.

Thanks, Scott. Appreciate it.