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

Okay. This is Will Power with Baird. I cover cloud software. Going to welcome our next company, Five9, as most of you know, a leader in cloud contact center. Really pleased to have Rowan Trollope, who is the CEO; Barry Zwarenstein, who is the Chief Financial Officer. Barry is going to start with a quick safe harbor, and then we'll jump straight into Q&A. And if there are questions from investors, please submit them via the Q&A portal you should have in front of you on your screen, and I'll try to introduce those questions as well. So Barry, to you.

Thank you, Will. So I want to remind you that our discussion today will include forward-looking statements concerning events and trends and they affect our industry or the company and its operations. Actual results may be materially different. I refer you to our most recent Forms 10-K and 10-Q under the caption Risk Factors for more detailed information about what could cause the results to differ materially. Thanks, Will.

All right. Thanks, Barry. Yes. So great to have you both. Great to see you back in the office environment. So...

Yes, it's nice to be back in the office, I have to say. It's actually 2 days for us, but it's been great.

Yes, that's super.

Well, maybe just to kick it off, you had a really strong Q1. You've seen nice growth acceleration in the past couple of quarters. So it feels like that upmarket push is a big piece of that. So maybe just help us understand what's driving the upmarket traction? I mean what's been -- because it feels like there's been a bit of inflection. What's kind of -- what's behind that?

Yes. Will, I think a couple of things. First is the continuing and maybe even accelerated acceptance of cloud by essentially all big companies at this point. So I guess, I was saying earlier, I've been 15 years evangelizing cloud. And there's always been somebody for me to evangelize, too. And I'm not being called in by my sales team anymore to go talk to customers to say, please get this customer to accept that cloud is a good answer. It feels like in the last year that pretty much wrapped up. And perhaps it was the pandemic that broke the camel's back. But whatever it was, we're past that. And we saw this acceleration in enterprise acceptance of cloud happening pre-pandemic, and we were sharing the bookings acceleration and traction we've seen. So frankly, the 45% growth last quarter was an outcome of the bookings that we had driven a year before and some of the larger enterprises that we put in place. Second was we structured our teams to be able to go after that opportunity. We created a strategic enterprise go-to-market team and staffed it and went out and hired new people as well as bringing in our existing folks. So that really made a big difference for us. And then I think finally, the expansion of our portfolio. So enterprises, as you know, they are more complex. They're looking for more technology to help enable their companies to transition to the cloud. And we've been steadily adding more and more capability to our portfolio, including Workforce Optimization and automation tool called Workflow Automation and then finally, Inference -- or actually an agent assist technology using AI that helps agents be more efficient. And then last but not least was Inference, which is an intelligent virtual agent. That's really driving efficiency for these companies. So for the enterprise buyers, they're now looking at a much more complete portfolio from Five9 that really checks all the boxes and frankly, is market leading. So we're ahead of our competitors in terms of some of the parts of our portfolio that enterprises really care about. So those combination of 3 factors are driving the traction in that business.

Yes. No, that makes a lot of sense. I mean you noted kind of the bookings that started to grow kind of pre-pandemic now to north of 40% revenue growth rate due to those bookings. What does that -- what do those bookings look like now? As you look next year, right, are we going to be able to sustain this 40% growth rate. I know it's not in the guidance. But how do you think about the pipeline from here?

Well, I'll talk about the pipe. The pipe is very strong. We're comfortable with our forward revenue guidance, which is -- Barry can talk about that. But from a bookings perspective, things are very strong. They continue to be in the order of what we've been sharing previously. So that bookings strength continues and has even accelerated. So we are doing really well on that front. And of course, you can also see that we've continued to execute on DBRR, right? We're retaining customers, driving churn down and adding more to the customers that we have. You can see that DBRR number went up to -- was it 121?

121.

121. So that was a nice acceleration there. And then just in terms of forward guide, Barry, I don't know if you want to comment on that.

Yes. In terms of guide, we've committed, Rowan has more specifically, over the long term to 30% growth. Now in somewhat embarrassing...

Enterprise subscription.

In LTM enterprise subscription. So somewhat embarrassingly, we've been growing now in the 40s. But we are not in any position to guarantee that going forward. We stand by our original commitment of growing in the 30s. With respect to our guidance for this year, we've got a situation where we are guiding to our record -- in the second quarter, a record year-on-year growth of 32%. We've never done anything that big in any quarter. Previously, we're like in the high teens. And for the second half of the year, 17% growth, which is somewhat similar to what we used to do, and that's reflecting the fact that we have the seasonal uncertainty. We just don't know what it's going to be. Macro is also another factor. It is clear when the macro economy is doing better, we do better as well. But we don't know to what extent it's going to do better. And then we also do have these major orders that we've been winning and the rate at which they come up now, I will hasten to add that there's much more of a fourth quarter phenomenon where it starts, but the real revenue from those major orders is in 2022, but it's also another factor that plays into it.

Yes. So when you call out the dollar-based net expansion rate, I mean what are the key underpinnings of that? Is it -- is it more seats? Is it the new products? Maybe just broader cloud adoption is getting more wallet share and within existing organizations. What are the key drivers there?

Do you want to take, Barry?

Yes. So in terms of the dollar-based expansion rate, it's our enterprise business that is doing so very well but also our commercial business. Within the enterprise, it is mainly due to the fact that we have these larger accounts. They are much more sticky than the average enterprise account, meaningfully so. And that's the fastest part of our -- great part of our enterprise business. And so we've shown a lot of success over there, and that's what's the main drivers for the 121.

Got you. So let me ask -- I mean, as you start to move up market, your biggest competitor, I guess, is probably inContact. I think Genesys Cloud has a -- obviously has a cloud product offering. But it would feel like you might start to run into Amazon or Twilio more. Or are those really sort of one-off cases? I mean, I guess the question is what are you seeing kind of competitively as you move upmarket? Is that cohort of competitors changing? And how do you set yourself apart?

Yes. There are some customers who have been opting to go the Amazon, Twilio route. It's kind of the DIY route. Use your developers to take their platform and turn it into a contact center. We don't tend to be in deals with them at the end of the RFP process because there's very different approaches. So either they're getting -- we don't get visibility. They get selected. We see them early stages, usually Amazon. We will often see Amazon early, and then they tend to get selected out given the cost and the time and the effort to sort of turn their platform into a fully featured contact center product. And so yes, we're actually really competing against NICE inContact and Genesys as you mentioned. And the reasons that we win are numerous. Our win rates remain very high, north of 75%. So we do really well. And some of the reasons recently, particularly in the larger enterprise, have been the strength of our product portfolio. So the fact that we have a market-leading IVA with Inference Solutions, so that's a huge part of what's been driving some of the larger accounts to our product. And then the overall reliability of the platform, the expansion that we made with workforce optimization and the way that we've integrated that, so we've got a lot of work to integrate and turn this into a fully featured sort of fully integrated and deeply integrated portfolio, and customers like that.

Yes. Okay. That makes sense. I guess just from a timing standpoint, I guess we've seen this in the last couple of weeks. You announced the partnership with Mitel. Why does that make sense for you? What does that open up? I mean could that be -- is that something that you expect to be meaningful over time? I know it's obviously still early, but it presumably helps on international front.

Yes. Well, there are -- for us, this is about distribution. And how do we get the ability to knock on more doors beyond our -- Dan, our President, hiring more sales heads. And for that, it's been a very consistent expansion of our channel team, looking to add more and more channel partners to get more and more distribution reach, particularly in this case with Mitel overseas internationally. We've been very strong in the U.S., and we've just scratched the surface internationally. We -- it's still single digits as a percentage of revenue mix is international. So Mitel has a very strong presence. They are a classic UC company that's transitioning their base from an on-premises system to a cloud offer. So Mitel have that cloud offer. But they didn't have the contact center product to go with it. They had a competing product that they had partnered with, which I -- which they decided to take out and put in Five9 exclusively. So we're getting access exclusively to their channel partners, to their distribution and to that large customer base. And is it potentially material? Absolutely. Yes, it is. And it's very much in keeping with our strategy, frankly, of being where -- being in every distribution channel that we can get into. So we have a partnership with Zoom. We have a partnership with AT&T. We have a partnership with Microsoft in order to make sure that when customers are making that transition from their legacy system that we are presented as an option, and hopefully, in many cases, we're the right option for those customers. So it's really a distribution expansion partnership.

Yes. I mean maybe since you mentioned that, maybe just talk a little bit about the state of the relationships with Zoom and Microsoft. And both companies have had enormous success in the phone market and obviously Zoom particularly early but accelerating rapidly, Microsoft having success and neither has a contact center solution. So maybe just talk about the nature of those partnerships and kind of traction you're seeing there.

Yes. So neither partnership is exclusive, right? We are a contact center partner, and we partner with those companies to integrate with their UC product. However, they have been strategic to us, particularly with Zoom. Maybe I'll start with them. Our partnership with Zoom is strong. It's solid. I talked to their CEO, Eric, a couple of days ago, and we're in a good place with them. They've recently begun talking about some additions to their portfolio that I would sort of characterize as PBX extensions. So they fully briefed us on their plans around what they're doing with that, primarily targeted at the low end of the market and sort of options for small businesses who want to start to move some of their -- get a little more capability in their PBX. And this, by the way, is nothing new in this industry. In fact, I think they've already had some of these capabilities previously, but they're now sort of beefing them up. We see that in every partner we deal with. Mitel is a great example. Mitel actually has an offer that's built in for small businesses. And we see this as really 2 separate markets. There is a market for a small business who has a PBX and who wants to be able to do some relatively simple things like an auto attendance, some simple routing, queuing, push 1 for sales, push 2 for support, that kind of stuff. And many of the UC companies have those very lightweight capabilities. Ring is a good example, who have sort of some built-in capabilities. But when they need a real contact center, that's a kind of a different market and a different offering. In Ring's case, they partner with NICE. In Mitel's case, they partner with us. In Microsoft's case, they actually don't have -- they have multiple partners that they partner with and same thing with Zoom. So I think this is a natural extension of the Zoom phone offering. It's part of the phone category, is the way they view this. And again, our partnership with them is real strong, and I don't see this overlapping with really what we do or the kind of customer we serve. And it just reflects the fact that there's really -- it's a big market. And you -- 1 last thing I'll say is the product that you build for a 10,000-seat contact center is not going to be the best product for a small business with 12 employees. For our small business with 12 employees, you want to get 1 little thing. It's all bundled together. It has a few little options. You jump on your mobile phone. You say this person's in sales. That person's in support. I'll give you some reports, very simple stuff. So they're really 2 different markets and importantly, 2 different economic buyers. In a real contact center operation, you have a head of customer service. That's typically the leader of that buy. They are the ones that are saying I care about customer experience transformation. That's how I measure. In the case of the former, the small business, it's somebody saying, look, I have a communications platform. And they often will talk to a consultant and say what should I get. And they're used to buying these things in a bundle. They're used to actually buying them all together because that's how the market existed pre-cloud.

Yes. So it sounds like, in the case of Zoom, they may be making some investments perhaps inorganically for the very low end to have some basic capabilities. But if they were -- but for customers that want a broader based contact center solution, presumably, they'd still look to you all or...

Absolutely. Yes. I mean I just reiterated that our partnership is still solid, and we continue -- we're continuing the traction we've seen, which has been quite successful, although not huge, right? We've just started really with Zoom. I mean they just started, frankly, in the big scheme of things on their Zoom phone traction. So it's less than 1% of our revenue. It's not material, but we do view them as a great partner and continuing to be a great partner.

Yes. No. Okay. Yes. No, that's fair. I mean is there an opportunity at those, whether it's they or Microsoft for an even deeper integration? I guess what I'm thinking of is like RingCentral with NICE inContact is pretty deeply integrated. I mean would there be an opportunity to actually deepen the relationship?

I think that's a natural direction, and certainly, if you talk to customers, that's something that they would like to see. In fact, with AT&T, our relationship with AT&T, they've actually pushed us to integrate with RingCentral because they are selling RingCentral as their UC product and Five9 exclusively as their contact center. And so now we've actually gone and done that deeper integration with RingCentral. So I absolutely see that there's a trend towards more and deeper integration between these companies, between the UC companies and the contact center companies. The question is how do we get there. Zoom's been a great partner because we've been able to do some of those deeper integrations through our product teams, relationships and so on.

Yes. Okay. That makes sense. I guess since you mentioned AT&T, segue, how is that going? I mean I know -- I mean, interestingly, they started by sort of bringing you into enterprise, mid-market and enterprise as opposed to just SMB. Kind of where are you in that journey with AT&T?

It's going great. Well, we have incredible relationships with the AT&T team. They've been really excited about our acquisition of Inference because they had previously been selling Inference. So we've tied those 2 things together now for them, so they can sell Five9 plus Inference together to their customer base. They've introduced us to essentially many, if not all of their largest accounts. So we -- now those are long sales cycles, so don't expect anything anytime soon on that front. But having those -- again, having those doors open, there's only so many doors we can knock on, right? I mean, we've got, what, 1,500 employees or something right now. It's a big world. And so AT&T has given us that expansion and reach, and it's coming in ahead of our internal projections. But also just be cognizant of the fact that, for service providers, that's a really important channel for the future, particularly international, but they don't move really quickly. They're the kind of beasts where it's really slow, but once you get them going, they can really shake the earth in important ways. And you can look back at RingCentral's history with AT&T and see that, a few years ago, just in UC as a service, I think they were clipping in on 50 million a year, for example. Now that's not a number that I would put out there to forecast for us, but just to give you an idea of the scale of these companies, quite large.

Yes. So I think we're at the tip of the iceberg in terms of [ as a ] service provider opportunities. I mean is AT&T -- does that provide a blueprint to expand internationally there? I mean Mitel is one piece, but it's a little -- it's not a traditional service provider. Should we expect more partnerships?

Absolutely. Nothing to announce today. Absolutely is key part of our strategy, right? Keep growing that distribution channel, and it's going well for us. And I mean we've been building out the muscle memory, the infrastructure, the team at the company that we need to be able to do that. It's something that has been a part of my background anyway. It's just having that experience coming from Cisco. And we've hired folks that know this business inside and out and also importantly, have the relationships. So yes, no nothing to announce at this part -- at this point, but we'll call you as soon as we have something to announce.

Yes. All right. That sounds good. I'm going to weave in just a couple of investor questions that have already come in here. One of them is how do you think about the competitive threat from CRM vendors like Salesforce and Zendesk?

Yes. So Salesforce and Zendesk are both great partners. I'm a huge fan of what they're both doing for the contact center, and they also recognize that they can't do everything. And their focus in and around the customer relationship management platform and the 360 view of the customer has been really great, frankly, for the industry. They've also recognized, hey, we can't do it all, right? So Zendesk is one -- just to take them one by one, Zendesk has a low-end product called Zendesk Talk that I think I mentioned earlier. So they've got a basic rudimentary product for handling voice. They, of course, tend to focus on the digital channels, text and e-mail and those sorts of things, but they bring us in for any kind of real scaled contact center opportunities. And they're much further down market, but as they continue to move upmarket, they leverage Five9 as a partner to help serve those customers. And then on the sales force front, things have been going really well. They did sign a relationship. So competitively, I was just hitting the thrust of this question. They did announce a partnership with Amazon about a year ago now. And since that, they also, at the same time, told us privately -- and we've said this publicly, so it's not anything new -- that they want -- they still wanted to have partnerships with other contact center vendors, even though they signed Amazon. I think they recognized and knew even back then that the DIY approach that Amazon brought to the table was not going to be for the vast majority of their customers. And so our business has actually accelerated with Salesforce since they did that Amazon announcement. We continue to lean in heavily. They really haven't gotten extremely competitive in this space. We are very much -- we really weren't hand in glove with Salesforce, one of our most important partners.

Yes. That's good. That's good to hear. I had a question here as well just asking about leverage you're getting from relationship with Google around natural language processing, AI. Anything you'd call out in terms of -- how is that today with your broader AI capabilities, right? I mean that's -- we'll go there next probably.

Yes, absolutely. So Google has been a great partner for us. We chose GCP as our cloud platform, and that's been enabling and underpinning our expansion internationally. We've closed -- some of the very largest deals that we've been closing are -- were companies actually in Europe or MNCs in the U.S. who were -- had big presences outside of Europe. And so having the ability to quickly expand new data centers and new footprints to keep up with this growth, we chose Google as a partner for that. With the -- we also were -- have been using Google AI technology at the heart of our automation portfolio, but one of the things that we've done as we acquired Inference is that we've shifted that a little bit in that we now -- essentially, we sit on top of Google and Amazon, and the customer can make the choice. And we have a relationship with both companies where the -- an economic relationship, a commercial relationship with both companies where the customer essentially gets to choose whatever is best for them. And the reality is that Google, Amazon, even IBM, Microsoft, we have some -- there's some legacy technology out there, [ nuanced ] and so on. They -- I would say, Amazon and Google are at the forefront of the maturity curve and having the best technology. So what we're seeing customers do is choose either Amazon or Google based on their particular business and which of those natural language processing and tech to -- speech technologies work best in their particular industry. So there are some sort of nuances there. We make it really, really simple for the customers to do that. So we now are at a place where we're kind of riding on top of and allowing both Amazon and Google and the others to all compete for that business and it's been really successful. Customers love that approach because it means they're not locked in to one or another. And we've done the hard work to make it all visual and drag and drop to implement those technologies.

Yes. Okay. That makes sense. Well, let's touch on Agent Assist, IVA. I mean maybe just talk about what inning we're in, the traction you're seeing. I mean it feels like we're seeing a lot of interest early on, but I think we're still really early. And what can those mean in terms of ARPU revenue contribution over the next few years?

Very early days, but when we dove into this 2 years ago at our financial analyst day just under 2 years ago, we shared the strategy that we were going to go after this automation opportunity. And the big opportunity that was in front of us in terms of a TAM expansion play was to get access to the labor spend in the contact center. So think about the wallet spend. For every dollar spent on tech, there's $10 spent on labor. And that labor is often very inefficient. They're doing high-frequency, low-value, very rote kinds of calls or messages with customers. And our strategy has been go figure out how we can use technology to make that labor more efficient. Two prongs to that strategy. The first is Agent Assist, which is can we help an agent real-time. Like he wants a call or a text or a message receipt lands with an agent. Can we help them be more efficient in the call? And the way you do that is by -- well, there's a bunch of ways of doing it but maybe providing recommendations and shortcuts and try this, try that kind of stuff, which leads to efficiencies of different types. One could be a shorter call but two, could be a higher upsell rate. One of our first reference customers on that front is using us for exactly that purpose in selling -- upselling flood insurance when they're doing home insurance renewals, for example, something that the agents weren't good at doing on their own, that they've automated with our technology. That's great. There's other things you can do with Agent Assist. But what's really getting the traction right now in our customer base is IVA, and IVA is essentially trying to handle those many calls, text messages, e-mails on its own without ever having to hit an agent. So for some of the largest customers, they're looking at that opportunity to do 2 things: one, upgrade their legacy IVR, right, which is the call trees that nobody likes and move to a conversational experience that is much, much better. So you improve the customer experience. And at the same time, the IVA is typically much, much better at keeping the call and actually resolving the call without ever having to hit a human. So in some of the large deals that we've shared recently, like the biggest deal we've ever sold in our history, frankly, that we announced last quarter, $14 million of ARR, a shipping company. They saw the -- they are actually implementing our IVA to reduce the total call volume. And they looked at, over a period of 5 years, the opportunity to save $59 million in their total spend by offloading a lot of the calls and text messages from human beings and sending them to an AI engine that's powered Five9. So this is really the game changer for us. It's the new story that we have to customers that they're looking for. It's a massive efficiency play, and we have the best technology. So it's actually one of the, I would say, the most notable big driver, and it is contributing to revenue in a material way. In terms of...

So...

Okay. You asked that just to finish that up?

Yes.

Sorry about the long-winded answer here, but I'm excited about it. In terms of ARPU gain, for every agent that we replace -- so if we shift from a human agent license where we sell, on average, about $204 ARPU or monthly ASP, so ARPU, we are -- yes, we are -- and then we say, look, for every agent that we can automate in terms of -- we can't do everything they can do, but if you got 100 agents and we can automate 10% of the tasks, that's 10 agents of automation. So instead of selling 100 human seats at $204, we sell 90 human seats at $204. And then we sell 10 seats, 1-for-1 swap with our IVA, and that IVA is monetizing at an average rate of $450. So it's doubling or more than doubling our opportunity on a per seat basis right now.

Right. Yes. What -- no, it's great to see the success there. It seems like, yes, you've got some really nice tailwinds there over time. I mean I -- we're going on like 1 or 2 minutes left. I guess another question, I guess, I'd like to throw in there, as you think about product road map, is there more to do on the WFO front? And obviously, Virtual Observer has been a great fit. Some would argue, you've got one competitor that might have some deeper, broader capabilities there. Is that something you need to have, the more...

Yes. Yes, it's an area that is actively being disrupted. I mean the biggest disruption to WFO is actually coming from the Agent Assist kinds of technologies because it's sort of doing the WFO work in real time. It's coaching. It's providing guidance and tips, training and so on. And so that's really -- you can think about Agent Assist almost as an automated WFM or workforce management, is how that market is unfolding. So our investment there is important, but literally, just in the WFO space, there is certainly more that we can do. It's a very hot area of innovation, particularly with AI, and we continue to do well, especially in the pandemic -- post-pandemic world, as we come out of that. Customers have recognized, hey, when you have agents at home or in a hybrid work environment, you can't have your 8-year supervisors walking the halls anymore. You have to use technology to scale how you train, how you drive compliance, how you sort of engage with your agents and do schedule and all that. And that's -- those projects have really picked up in terms of the sales on those products as a result of the pandemic and in a post-pandemic sort of hybrid world. So yes, it's in an area of investment for us and a very exciting future.

Yes. Okay. That's a lot of great insights. I really appreciate it. I have 20 more questions I could go through, but I think we've got to wrap for the time purposes. But thanks so much, Rowan and Barry, for joining us. Have a good rest of the day, everybody.

Thank you, Will. Thanks for having us.

Thanks.

Thank you all. Take care. All right.

Bye.