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

Thanks, everyone, for joining us. My name is Sterling Auty, software analyst here at JPMorgan, very happy to have with me the team from Five9 for our next session. We have Rowan Trollope, who is CEO; and Barry Zwarenstein, who is CFO. Gentlemen, thanks for joining us.

Thanks for having us on again...

Thank you.

So first of all, actually, let me thank you for making such a nice announcement on your day of presentation for JPMorgan. Timing was excellent. And it didn't cost me a nickel for all that publicity, so thank you.

[ You're welcome ].

So maybe just to start there on a serious...

So if you don't mind me just jumping in...

Yes. I'm sorry, Barry. [ I told you I'll say I'll turn it over to you and I didn't ].

Just 2 things quick [indiscernible] [ trying to arrange of things ] to the satisfaction of JPMorgan. Second of all, I want to remind everybody that, before we start, our discussion today will include forward-looking statements concerning events and trends that may affect our industry or the company and its projections concerning future operations. Actual results may be materially different from what we discuss here. Please refer to our recent Forms 10-K and 10-Q for detailed information about factors that could cause such results to differ. Thank you.

All right, excellent. So Rowan, I was starting to say -- and Barry, I do apologize for that. It -- the partnership that you announced today with Mitel, can you kind of walk through what was the strategic rationale? And what does that bring to Five9?

Sure, yes. Thanks, Sterling. Very excited to announce the exclusive arrangement that we've made with Mitel, where Mitel has chosen Five9 as their exclusive CCaaS partner. And they are going to be selling that or introducing us to their channel. Mitel is a international behemoth in the UCaaS space. I think they're #1 internationally with 70 million seats in the UC space, anyways, and they've been looking to find a new contact center partner. That's been a process that's taken some time and is very competitive, and Five9 won. And we've -- and they've selected us as their exclusive partner to bundle and to sell through their channels. So this is for us really a continuation of the strategy that we've had around increasing our distribution, with a particular focus here on international, getting access to the Mitel base; and their huge, huge network of international distributors and VARs and resellers [ who leverage ] and who will now be selling Five9. And there's a financial arrangement between us and Mitel, so Mitel will have a bounty for every seat that they sell and, I think, strategically important for them. They've been doing great work. Mary over there is just a phenomenal -- has been a phenomenal force at Mitel and modernizing the company and bringing them forward. And so we're just really, really excited by the opportunity this presents to Five9.

All right. It's excellent. So when I think about Mitel, [ or may I just turn around ] and ask you, what segments of the market does this kind of give you access to? Is it low end, mid-market, high end? Where does it bring you?

The answer is yes, all of the above. They have particular strength in mid-market and the commercial segments or what would be our commercial segment. So really it's that big, broad base of businesses that ultimately need more contact center and are looking to upgrade their existing platforms. So it's, I would say, more focused on mid-market. Now I think their focus is really on -- for us, is on that mid-market and enterprise segment.

So when you look, 70,000 -- or 70 million seats in that UCaaS market. Is there a way to think about what portion of those are in accounts that have a need and a sizable CCaaS opportunity?

Yes. I think it really is going to vary. Like I don't know that I could pull an average ratio out. So it's 70 million seats of UC that they are converting to UC as a service. So they've built their own UC as a service and their own sort of platform that they're migrating their base onto. I can't say that there's a single business out there that doesn't need Five9. I mean every customer and every business should be using Five9, in my humble opinion. And so we'll sell and be interested in the smallest of those opportunities, but I think where we've seen the most traction in our business and probably where we'll see the most traction with this partnership is going to be in that mid-market and enterprise segment. And again they've got great coverage across sort of all of those segments.

So last question on this area [ unless ] -- investors that are watching, remember there's an "ask a question" button. Feel free to click that. Enter any questions that you want, and I will bring them into the session as we go along, but my last question is, as we think about this, RingCentral has partnership with NICE inContact. I think most people believe that there's around $150 million of ARR in CCaaS in total for RingCentral. The vast majority of that would be the inContact relationship. And that's for RingCentral that only has between 3.5 million to 4 million seats. That kind of sets a pretty high bar. Is this the type of opportunity that can equal or surpass something like that?

Well, I wouldn't compare them directly because they're quite different. And RingCentral is an -- the market leader in UC as a service. You could look at Mitel as a competitor there but with the big difference being they have a huge base that they can upgrade and also that they're -- and this is different than, frankly, all of the "collaboration as a service" vendors from meetings to phones, to contact center, where Mitel's real strength is outside the U.S. So they have a big opportunity in the conversion of their base that happens through their reseller channel to be able to compete in that space. And really this is a distribution story. It's about opening up that transition story to provide them with a best-of-breed CCaaS offer. Now unlike RingCentral and NICE, where those products are bundled together and sort of OEM-ed by RingCentral, this is not an OEM relationship. So the Mitel resellers will be reselling Five9 and attaching that essentially in the reseller channel to Mitel; and to -- if the customer chooses to upgrade, then selling Mitel alongside of Five9, but that's I think the -- that's a -- quite a different story. I think they've been doing very well at their transition of the base to the cloud. And I think, by this, it's opening up the door to all of those reseller and channel partners who otherwise don't really have an option, so I look at this as really a big upside for us and a good opportunity for Mitel to accelerate their transition to their own cloud product by providing that best-of-breed contact center option. So -- but I think there's very, very large and material opportunity possible. It won't be a "next 1 or 2 quarters" thing. You'd be looking more 2022 or 2023, but it's certainly a great deal and we're very excited about it.

All right, great. I'd like to balance these sessions between current topics but also high level for investors that might be new to the Five9 story, so maybe from that high level, can -- give us a sense of how much of that contact center market opportunity still resides on premise. And what has made that shift to the cloud, where you've been really the leader?

Yes, it's early innings. I mean I'd argue sort of first inning, if you're [indiscernible] you follow baseball. It's less than 15% penetrated to the cloud at this point. And that's a -- I would say, an aggressive estimate. I believe the number is probably more in the 10% or less penetrated, so there is a huge amount of headroom to take the on-premises contact center businesses and transition them on to the cloud. We're really just getting started on that front. And so that's a look. That's a decade-long opportunity and we're at the front end of the opportunity. We've really started to see -- as you pointed out, we've really started to see some acceleration in the business in the last couple of years, but over the last 3 years, really you've seen a fairly steady climb from low 20s to low 30s and mid-30s to 40s and now 45 in the last quarter. And that acceleration in the growth rate of the company is, I think, fundamentally underpinned by the market demand for customer experience transformation. So businesses are saying, look, we've got to do better for our customers. You've got a generational shift happening towards millennials and Gen Z, who have fundamentally different expectations. Their -- the call center of yore is not cutting it anymore, and businesses are recognizing that and they understand they've got to transform. So that's the biggest motion. And lots of surveys are sort of showing that it's showing up at the very top. CX transformation is showing up at the very top of business priorities, and it's sometimes bundled in with the digital transformation story. So that's the big one. The second big factor from a market demand perspective is just the shift from every industry moving from on-premises software to cloud. And again we're at the early innings of that. So both of those 2 things together are causing -- I think really the first one, being the CX transformation, causing that acceleration, just increased demand. COVID was a -- I would say, an additional tailwind that came in for a period that really drove the recognition of, oh my gosh, like our on-premises software is just not going to cut it. Especially if we have to send our contact center agents home, that's not going to fly with on-premises software. It's quite difficult and complex to get an on-premises software working in a home environment. It's really what cloud was cut out for. Not that it was designed specifically for that, but it's sort of an ancillary benefit. So we saw -- I -- we definitely saw some -- I will say, a onetime boost from that, which is kind of coming out of the numbers now. And what you're really seeing post COVID is the accelerated adoption in enterprise. The biggest single driver of our business right now is larger companies. And this is tied to our go-to-market strategy shift that we made over the last couple of years to build out a strategic enterprise sales force and go after that top end of the market. And it's underpinned by the portfolio expansion that we have done recently. We've recently added a number of products to the portfolio, including a very exciting automation product in -- from a company called Inference. That's an IVA, intelligent virtual assistant. So a whole bunch of factors, but fundamentally it's digital transformation and customer experience and then the enterprise that are driving this market and driving our growth.

The question I frequently get of late is, okay, seeing your acceleration, how much of that was directly pushed by COVID? And as we start to return to office, could we see a reprioritization and say, okay, yes, we are focused there, but we've got these other things to deal with? And then we see kind of a slump in growth.

Yes. We've done quite a lot of detailed work actually to quantify that for investors, and so Barry, I think you could share some of that detail.

Yes. We did do that work in the beginning of the year, looked back at the second half -- well, looked back at 2020 in total, Sterling. And what we saw pretty clearly based upon prior-to-COVID trends is that the installed base business really picked up, to the extent of driving an increase in the overall corporate growth rate in the second half of '20 by mid-single digits. And there obviously was -- the follow-on question is, well, what's going to happen post COVID? Well, we don't believe for a nanosecond that people are going to un-digitize. Yes, of course, there will be some reversion to the mean, so we won't keep all of that mid-single digit. We will keep maybe 1%, 2% or 3%; and that's what we've included in our guidance. And by the way, that phenomenon did continue into the -- of the new front door being opened on premise [ easily ], on the installed base, continued into the first quarter.

Got it, got it. A couple of the questions came in from investors already. [ I ] want to hit them. First one is do you expect the ARPU to be in line with the seats that you have today when it comes to what you would sell through the Mitel partnership.

Yes, yes. I don't -- the dynamics here are very similar to our existing run rate business. One just from an economics perspective was the, as their resellers sell Five9 -- they'll get a very similar arrangement that our existing resellers have, so it's very much in line with that. So I think that the economics here are going to be very similar. We'll have to see, as we move forward, in terms of how much -- what kind of products they take, but the pricing and everything, I think I anticipate to remain fairly consistent.

Next one is how does this partnership affect your relationship and go-to-market with some of your other partners like Zoom.

Sure, yes. I don't think it really has an impact on that at all. We've -- I've obviously been in contact with Eric and some of the other folks at Zoom, and they understood what we are doing here and in a similar way to the fact that Zoom is not exclusive with Five9. We have a very strong relationship. And it's a great team over there, but we don't have a exclusive relationship there. They work with multiple contact center vendors through an API. And we're not exclusive with Zoom either, right? We sell to -- well, alongside Microsoft Teams. And so this is another partnership right in line with that, and they are very comfortable with that. So I don't think it will have any impact on our existing partnerships.

And then another one is just how has the big shift to the use of Teams and Zoom video in general impact your business.

That's an interesting question. The switch from -- to -- I don't think that, that has a significant effect on our business. That's more affecting knowledge workers. In the contact center space, you're not -- those are not technologies that businesses use to engage with their customers, right? That's a technology that we use as employees to talk to one another, but I think it's...

I just picture. Could you imagine that angry call with your cable company, waiting for that service technician, and you have to look at that angry customer?

I -- exactly.

Sorry. I just couldn't help.

Yes. You're absolutely right. And I think there are, however -- and this is something that is in exciting areas of innovation with the team at Zoom. There are lots of opportunities to introduce video in creative and innovative, new ways into the contact center. So for example, if I'm -- if I've got a physical product like a washing machine and I'm having some sort of a problem and I contact the contact center on the other end, one of the features is see what you see. So the ability to use the back-facing camera just to say, "Well, let me just show you what I'm seeing right now." And that's the kind of use case where I think we're going to start to see video be used much more, especially as we see essentially most communications now going over mobile phones and every phone has video and the Zoom platform and in particular their API -- their new APIs that they've launched. We have been having conversations with them about how can we leverage that in the contact center. So there's interesting use cases there. And I also shared an example of the contact center moving into areas of video like, for example, with drive-throughs where you have video agents taking your order instead of that kind of crackly audio system that you used to have or that you still have in most of the drive-throughs. So just simple examples like that, but I do think video is going to make an incursion into contact centers in interesting and unique, new ways. On the Teams front. The connection we have there is more about teams you see. And it's a telephone system that they are selling to businesses and we integrate with that. We are seeing more deployment of Teams in the contact center environment so that the customer -- so that the agents can talk to their supervisors and collaborate in chat essentially, and so integrating our product into that is important. And I think you're going to see us continue to do that. We were doing that, by the way, at Cisco 4 years ago, integrating into team chat the contact center app. So I think there's definitely going to be an impact on that front.

Next one is how would you characterize your product advantages relative to private competitors like TOPdesk. And there are some other legacy, large private companies in there as well.

Yes. I mean, the big competitors who we see, we don't actually see them very much. We see -- so I can't speak to them specifically, but we see NICE inContact, Genesys. We're -- I'd say we have -- NICE and Five9 have the most feature-complete offer today on the market. We've been around the longest. Five9 has differentiated against NICE and Genesys both in that we are pure cloud, whereas both of those companies have legacy premises backgrounds and technology bases that they're still struggling with. So that's one way, pure-cloud Five9. The second way is our automation portfolio. What's been helping us to land a lot of these big deals is the leadership position we've taken with automation technologies. So specifically, IVA has been the lead dog for the last 6 months since we've made the acquisition. It's doing very, very well. And then you're also seeing our built-in native workforce automation product -- or workforce optimization product Virtual Observer has also been doing very, very well. So this area of automation is hot. It's an area where we've sort of jumped out and taken an early lead, and it's a key point of differentiation for us. And the last thing I'll say is -- it's something that's the perennial driver, and it's in the name of the company. It's reliability. We do have one of the most reliable platforms out there, that most reliable global platforms, something that we take a lot of pride in. And it's not easy to do.

[ Okay ], absolutely. Next one kind of ties through to the comment you made, and just it's a good segue into what's happening in technology adoption within the contact center. It's about IVA. So you made an acquisition there. Where are you in kind of the evolution of your own solutions versus partnerships and the work that you go to market with companies like LivePerson? Or how does this fit versus even what Zendesk is doing?

Sure. So we -- Zendesk is a great partner, and there's very little overlap between our 2 portfolios. So Zendesk is primarily focused on self-service digital channels and that's their game. They partner with Five9 for contact center, for robust contact center solution. And they're a very, very good partner for us. We also leverage some of their technology in our platform. Most recently we've leveraged their Sunshine platform to really give our digital channels a boost. So we've started leveraging some of their technologies. So we have a great and strong partnership with Zendesk. And with regards to the automation technologies, I think we're in a -- that's not -- I don't believe Zendesk has any technology like our IVA. LivePerson certainly does not. I think it's very differentiated in the market. Again that's the Inference acquisition that we made, and that technology is just getting started really. I mean the company had a run rate and some very notable large customers, but it's just still at the beginning of this transformation. And the big opportunity here is that in the contact center and our buyer, if you look at the wallet spend for our buyers, 10% of their spend goes to technology for companies like Five9. And 90% goes to labor. And so there is a huge demand and a huge interest in automation technologies to make that labor more efficient. And so what we see is the labor dollars shrinking and the technology dollars growing, and the overall savings back to the company can be very significant. We shared a very large deal in our last -- just to give you one example and then I'll turn it back to you. We shared that our largest deal in the company's history, we just closed last quarter, was [ $40 million ARR, $40 million annual ] customer to us, who predicted that over a 5-year period they believe they would achieve a -- $59 million of savings by leveraging our automation technology. So in large businesses there is a huge opportunity to leverage these new automation technologies to drive efficiency and cost savings that they can either take to the bottom line or reinvest in their overall customer experience platform. And that's what we're seeing right now that's driving the very high end of the deals.

Help investors understand when you talk about automation and efficiencies. Maybe give a couple of anecdotes in terms of what is it that it actually is doing in the context...

Absolutely. It's very straightforward. So our technology is that -- IVA is a voice -- a conversational AI -- an AI-powered conversational agent that speaks to a customer -- to the end customer, right, and answers questions and perform tasks. So you can think about it as a digital version of an agent. And that technology, we focus it in on the high-volume, low-value tasks. So when we go into a large customer, we will say, "Listen, let's look at all of your calls. And let's take the top call drivers." And typically the top call drivers are relatively straightforward. They're high volume and their low value. They're things like change my address or check on an order, "Where is my food? Or where is my product?" that kind of stuff, things that today many companies rely on human agents to answer those questions. And that's a big amount of the volume that contact centers have to deal with, something that a well-written, machine-learning-powered intelligent virtual agent can handle just as well as a human being, so by leveraging that technology, the business gets to save money by essentially saying, "Look, we're going to build out the tasks that these human agents would have been doing. And we'll just have the computers answer those questions instead." Our technology is like a workflow-based technology that does that and it sits on multiple channels. So the automation you build can apply to a voice conversation. If you call in and say, "Hey, I just ordered this thing. Where is it? Can you tell me?" the computer can answer that question without a human ever having to get involved, but also it can respond in a similar way whether you're texting, right? And increasingly we're seeing most transactions move into the digital channel, so our automation works across any of those channels. So that's basically how it works. And there's examples like COVID Clinic who's implemented this. They saw dramatic savings. And it was for simple things like scheduling an appointment, "Where is the closest COVID center, the closest testing clinic to me? Where are my results?" that kind of stuff. We're implementing this across almost every industry, financial services, health care, retail, automotive. They're all looking at this technology as being fairly transformative.

Is it all just in customer care and customer service? Or what's the opportunity to move this into the sales side?

Yes, we're very focused on customer service. There are businesses and mainly start-ups out there focused on the outbound use cases, specifically sales. And so those companies are taking a similar approach, but instead of the technology talking, in our case, the biggest use case is the AI takes over completely the conversation. And it's a much better experience to have that than for example the, "Thanks for calling ABC company. Push 1 for sales. Push 2 for that," pushing all these numbers. People don't want to do that. In the outbound case, computers aren't actually selling people things in conversations. What they're doing is they're augmenting human agents, so that's more analogous to our Agent Assist technology where the AI is listening to the salesperson and making recommendations. We're -- we haven't really moved into that space yet. It's analogous to what we're doing, but it's a different buyer. It's a different sales motion. And again it's a big space right now, but I do think conversational AI is one of these big breakthrough areas that's going to power a bunch of industries, frankly.

And another question that came in from an investor along these lines is, okay, in this area you don't have a seat to sell. What's the pricing? And does this bring an evolving kind of volume- or consumption-based model to Five9?

Yes. It's a great question, and the answer is not very intuitive. It seems, on the surface, anyways, intuitively that -- well, if I'm selling technology that displaces seats, is that potentially bad or at least cannibalistic to your business? And ironically the answer is no, and here is why. The technologies that we're talking about still have a customer on the other end of them, in other words the end user, so the caller or the person who's texting. And that's happening essentially in real time, so it's synchronous. So I'm waiting on the phone. If I'm talking to a computer or I'm talking to a human, it's the same sort of conversational time. So when we replace a human agent with a digital agent, the way we've packaged and priced it is essentially it looks just like your human agent. So you pay us on a per-concurrent-agent basis, but instead of paying all the labor that you would have paid, you're just paying for the technology. So it's a one-for-one replacement. For every agent that you can replace with this automated digital agent technology, you're paying for a single digital seat, okay? And so if you needed, for example, 100 agents to handle all of your inbound requests from your customers and we can automate, let's say, 15% of those use -- of those tasks that those humans are doing, you're going to buy 15 digital agents. And you're going to have 85 human agents. The 15 digital agents, we'll monetize at approximately 2.25x the rate of the human seat. So our average per-seat price for a human seat is $204 ARPU. And the -- and that's per year. The -- or that's per month, sorry, $204. The...

I do the same thing. It's a per month, per year, so I...

Yes, yes. [ I -- really ] -- it's a really high number, so I get confused sometimes, but it is per month. The digital agent monetizes that, on average, $450. Now this is still early days, right? Like we don't have a ton of data or a scaled, a hugely-scaled business yet to really know where these numbers are going to land, but at this point, the average selling price is $450, so for us it's a significant opportunity. Any place we can sort of displace a human seat with this technology, it's a 2.25x opportunity from a monetization perspective. And the savings back to the customer, referencing that $59 million that I shared with you earlier, that's where they get the big savings because the labor cost is much more than 2x the technology. It's way -- 10x the technology.

I can already sense investors typing the question in: Does that hold internationally compared to domestic? Because I think there's a perception that, okay, the seats outside the U.S. probably monetize at a different rate than inside the U.S.

Yes, I will say it's too soon to tell. The company that we acquired, Inference, was selling globally, actually pretty good business globally. And this is -- and the number that we shared is an average number that they were getting globally, so yes, that's -- I don't think there's a huge difference there, but we'll see as we go.

And just on that geographic. So when we talk about penetration opportunities, et cetera, what is it -- the traditional seat-based, what do you see in that international market in terms of just the numbers-of-agent potential that you could penetrate? And is the pricing meaningfully different, especially when you get into some of the emerging markets?

Yes. Well, we're primarily in Western Europe right now so that's some of the data points that we have, where the pricing has been relatively consistent with what we've seen in North America, so no real shift in that -- on that front yet. It's possible, as we get into emerging markets, the dynamics will look different. More than 50% of the agents are outside of the U.S. And for us, this was not a technology problem as much as it was a distribution and reach problem. And that's one of the reasons we're so excited about the Mitel partnership, because of the strength that they have internationally. So it's really more about distribution and local market access than it is about technology.

So I don't believe in coincidences. Your commercial business, which has been getting smaller and smaller and smaller. I think you had some leadership changes. It's rebounded. It's starting to recover, and now you go and sign a really strong partner for that same base. Is all that connected?

No, not really. I mean the shift that you've seen in our commercial business was driven, as you point out, by the shift in strategy and leadership that we put in place. It's been working really well for us and so we've been making more investments in it. Behind the leadership and strategy changes that were made, we've sort of invested more money behind that and put some more resources against it, so it's just doing really well. It's still becoming a smaller percentage of the business because of the strength of the enterprise business. So this was not an attempt by us to bolster that business or to go after that or anything else. This was really an opportunity brought to -- an opportunity that was to get a huge, one of the biggest UC bases; and exclusive access to that base. It was really all about that. And I think it's more mid-market and enterprise probably where I think we're going to see the traction with them.

Question came from investors. Okay, in your most advanced customers, when you talk about IVA, how much labor has Five9 been able to displace in terms of human seats? And I almost would also turn it around the other way: When I talk to contact center managers, they kind of talk about what percentage of call volume they've been able to move over to the platform. I don't know if one is a better way to describe it versus the other.

Well, we know exactly how many because, again, it is a one-for-one replacement. So we know exactly how many digital agents are on our platform at any given minute of any given day, and we can see that in our numbers. And it is a -- it is almost a one-for-one shift, so yes, we actually know exactly what that number is. We don't share that number externally. So I'm sure you're wondering, but let's just say that it is contributing to revenue. It is material to revenue at this point.

But do you find that those customers are letting contact center jobs go? Or are they just saying, instead of having to hire, "to meet increasing demand?"

Yes. I've seen both. The -- many of our customers leverage outsourcers to handle labor. So for our customers, it's -- the reason they do that is the ability to scale up and scale down easily without having to deal with laying people off and this and that. So for a lot of our customers, this is really just a line item on their P&L. Like, okay, we're just going to pay our BPO less and that's that. We have also seen cases where there's growth, and they say, "We know we can't handle the growth. We need to put this technology in place." And so it's more about the additional volume customers are seeing and how do they handle that. COVID Clinic was one of those examples. Like, "Hey, we can't go hire 1,000 agents or 100 agents or 200 agents. We don't want to do that and train them. We're just going to leverage this digital technology." And I think you're going to see more and more of that, but I do think that the cost savings numbers are so significant. You are going to see this arbitrage happen between labor and technology. And whether it results in layoffs or not is -- I think it's important to recognize that, for contact centers, they have a very -- one of the biggest problems in contact center management is the turnover problem. The tenure of contact center agents is 12 to 18 months. So you're constantly feeding this beast; or bringing in new agents, training them, putting them on the front lines dealing with your customers and then having them attrit 12 months later. And the reason for that attrition, the #1 reason for the attrition -- and these are typically entry-level jobs, mind you. The #1 reason for the attrition is the boring nature of a lot of the volume that they have to deal with. I experienced this myself having been -- worked in a contact center. And I took 8,000 calls myself. And after about 3 months, 90% of the calls that you're dealing with, messages or phone calls or whatever, they're the same as the 90% that you took the week before and the week before that. It is mind numbing, so it's no surprise that people attrit. So the other benefit of this technology over the long haul is actually it's going to lower attrition rates in contact centers because what's left after you automate all the routine stuff is the interesting stuff. And that's the kind of stuff where you actually want to pay people more; and have better-quality human agents -- not quality but like more tenured so they get more experience. And with the savings possible from technology, you can afford to pay them more, so it actually has like a really nice sort of feedback effect on one of the -- these harder problems in the contact center.

That sounds good to me. All right, with that, Rowan, Barry, thank you so much for joining me. I really appreciate it. It's good to see you guys.

It's an honor. Thank you so much for having us.

Okay, thanks. Bye.