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

Great. Thanks, everyone, for joining us. I'm excited to be hosting the Five9 management team. We have Dan Burkland, President; Barry Zwarenstein, CFO. I think this will be a very interesting conversation. I think customer service agents are no longer being looked at as call centers, right, but revenue generators. And we will get into how Five9's technology is changing that conversation with customers and how that's translating into durable growth. So what we're going to do this morning is have a fireside chat for about 25 minutes. [Operator Instructions] So again, I'd love to make this as interactive as possible. So at any point, you have a question, just tune it over to me. And before I start, Barry has a few choice words to kick us off with. So Barry, the floor is yours.

Thank you, Peter. And this will be a very choice safe harbor statement, but I do want to remind you that our discussion today will have forward-looking statements about events and trends that could affect the industry and our company and its operations. Of course, the actual results may materially differ from what we discuss here today. Please look at our most recent 10-K, 10-Qs for what are the risk factors, what could cause such factors to be different.

Perfect. Right. Yes. That's great. So I'll jump right into it. And I think, first, So yesterday, I had the Avaya management team for fireside chat. They said something to me that stuck out, and it was you really can't be a single product player in this market. You need to be able to kind of show customers that you're a platform or at least you have strategic partnerships to kind of solidify that in which maybe think about, I think, the Mitel, Five9 partnership you announced a couple of weeks ago. So perhaps maybe you can kind of just talk about that strategic multiyear deal you guys signed with Mitel, walk us through how this deal came together and how you think it changes the investment narrative.

Sure. Thanks, Peter. This is Dan. I'll gladly take that one. If you look at the Mitel partnership, we're very excited about this. For those who don't know, Mitel has nearly 70 million UC seats around the world. Over the many years, they've made multiple acquisitions. They have lots of solutions. Almost all of them are premises-based. The estimate is that they have around 1 million contact center seats, again, primarily on-premise. And so that's an opportunity. And by being selected as their exclusive CCaaS provider, they're now turning us on to all of their distribution network and resellers. And we're -- they're incenting them to lead and position Five9 along with their Mitel Cloud UC solution in order to bring it to their customer base and retain that customer base. That's the real ultimate goal, it's to help upgrade those customers to the cloud and do so with Mitel and Five9. So we're really excited about it. As far as the way that came about, it was over a year process where they had made a decision to move away from an alternative competitor of ours that was attempting to be their CCaaS provider and chose to move forward with Five9. So we're really excited about the opportunity that opens up for us. It gives us a great deal of reach, especially in the European and other international markets. They have less of a market share here in the U.S. as compared to some of the other regions, in particular in Europe.

I think my estimates came a lot like -- I think they own 10% of the market. So I was at 60 million, but we can push up to 70 million. The market is big enough, and I think most of us already know that. But if you think about -- I mean it's a massive opportunity. So kind of walk us through what the go-to-market is. Are there any joint investments that both Mitel and Five9 are contributing? Are your reps -- I mean, are Mitel reps selling pipeline product as well? Or is it just kind of you working with the reps? Just curious, kind of just walk us through what the go-to-market looks like.

Absolutely. So -- and that brings up the good point, the way that they're structured and the way that they go to market through lots of distribution and reseller channels and referral channels, that's one of the reasons it's so difficult to get a pinpointed number, because those channels own the customer. And they have customers coming and going, and it's hard to even for Mitel to keep track of how much base is really out there among those channels. But what it's done is it's given us an opportunity, really a fishing license to go work with those channels, and they can easily be adding the Five9 product to their existing partnership agreement, their contract with Mitel. And Mitel is giving them incentives to lean in and make sure they have choice. We're not exclusive to every one of those channels. But they -- and they have choice. But they're exclusive when they're selling into and selling on their Mitel contractor, the Mitel partnership. So in most of the international markets, we will have reseller agreements with those channels, and they will resell Five9 on their paper. And they'll get a wholesale price from us, which is commensurate with all of our channels, it's right in the same ballpark same margin, if you will, from that perspective. And then we provide referral back to Mitel for that lead and that opportunity. Domestically here in the U.S., it will be a little bit swinging towards primarily a referral agreement, where they refer us in the business. The customer will sign on our paper, and we'll provide the referral feedback to Mitel. So a little bit different between the international markets and the domestic markets. But all in all, it's a great opportunity to be introduced to all of those customers, and it puts hundreds, if not thousands of feet on the street representing Five9 that we didn't have before.

I mean you talked about -- I mean you kind of talked about my next question was kind of talk about the economics. But I guess, first, a lot of these agreements, there's -- are there any contractual commitments, I think initial contractual commitments or milestones that are set in place for you guys to hit or for them to hit.

Yes. There are certainly milestones, hard contractual commit, perhaps not. But as far as the pricing and the forecasting of what they're providing and as part of the contract is in place. And that's over a 3-year period, a commitment each year of a number of seats. And that again, the incentives are indicative of what those volumes ultimately end up being. So there's incentive for them to meet and exceed those targets. And every indication we have, based on what they've done in the past with other providers, we see no issue in being able to reach those.

I have a question that came in. And the question is, why did Mitel decide to go with Five9 versus some of your competitors? Kind of walk us through that competitive bid.

Yes. They had been working with a -- well, Talkdesk, most folks know that, and they've been trying to go to market with Talkdesk and they just felt they could not get what they needed from Talkdesk. They experienced selling and booking a lot of business that wasn't getting fully delivered and lived up to the promise that was made. So they decided to take a look at an alternative, they scoured the market, they looked at all of our choices. And they felt that we had not only the most easiest to do business with from a channel perspective as a partner, but also the solution set that we're able to bring to the market and deliver with and for them was paramount, and that's something that they couldn't achieve and also our support resources. Our ability to not only go to market on the front end from a sales perspective, but also an implementation and ongoing support globally they felt that we had -- we were the only company that could really serve their needs globally in all the corners of the world that they do business.

Okay. Fair enough. And then final question on the Mitel side and maybe for Barry, when thinking about your Q1, you revised your full year guide on your call. Is there an expectation that we could see contributions from this deal flow into calendar '21 numbers? Or was this more of a calendar '22 story?

Yes. It's more calendar '22 here. Between the integrations that -- the telephony integrations are pretty well done, but it's more on the software side and then the sales cycles and the implementation. So 2022 is when you'll see that showing up in the numbers.

Okay. And then I guess sticking to the partnership ecosystem thing here. In terms of your partnerships with like CDW, AT&T, and understanding that these are still fairly new. But initially, like what are you seeing in terms of sales cycles compared to some of your more mature partners? Just any feedback from your customers or any color on how those are trending would be great.

Yes. They're trending exceptionally well. Part of -- and I think the point that Barry just made about the Mitel business really hitting the books more in the 2022 range, as AT&T and CDW and others started maturing, our initial orders that we were receiving were typically for the smaller end because those have shorter sales cycles. The higher-end enterprises typically have a longer sales cycle, 6 months or more. So we're starting to see some significant business from AT&T upmarket, which is great. And that's continuing to trend in the right direction. Even though we get those orders as we speak, on the AT&T front, again, there's a window of about 4 months before the customer goes live with their first seat and then they ramp up for about 4 months after that. So even from contract to rent to full revenue, you're looking at about a 7- to 8-month window on average. So the rewards are coming from a revenue perspective as we get early indication based on our bookings that are occurring.

I wanted to touch upon the relationship you have with Accenture, Deloitte. And obviously, those are always the most, I think, in my view, most strategic partners you can have, right, because they take you a market. It's a note around your business, that's hard to kind of take away. But when thinking about those 2 larger partners or SIs, think -- are they plugging Five9 into -- are they plugging you guys into their broader digital transformation? Or are they actually building dedicated Five9 practice? Kind of walk us through, I think, the dollars that they're investing into your platform and kind of where you see that trending and how that's been going up so far, I think, year-to-date in terms of what they're developing.

That's excellent subject, Peter, and that's something -- when you look at the global SIs, it's not only Accenture and Deloitte, but you put IBM and EY and Slalom in that same category. And you look at what we're doing, they are just what you said, bringing us in as part of a bigger digital transformation story and a bigger digital transformation project that they're typically hired to do for large enterprises. Right, large enterprises are saying, "Hey, take our whole customer experience and move it to the cloud and give us innovation through these new automation technologies." And by doing so, it really is giving credibility and having an SI stand between us and the customer, because it's less selling and it's more of the SI saying "Trust us. We've done this for others. We're recommending Five9, and here's why." And so it's great to have that, especially in those upmarket large enterprises that some are still a little skittish on is the cloud-ready for me, and they can help us validate and they have done that with some of our largest customers. So that's been a great, great vehicle, if you will, like you said, for a route to market. They've been very strong. As far as their practices, we entered, like as an example, in the Deloitte and the Accenture groups, we entered through the kind of their CRM practice. They have a whole Salesforce practice, if you go to Deloitte's experience centers around the world and say, contact center, they're going to show you a bundled solution with Five9 and Salesforce together, delivering that solution. So that's really where it started and then you build tentacles out and we're investing heavily and helping them position the benefits and the differentiation of not only cloud contact center, but then the real automation differentiators that they can bring to their clients.

Sounds good. I think the next topic that I wanted to jump into was virtual agents and automation, and that's been a huge focus area for you all. So I guess the first question, and I guess, I'm painting a broader brush here, but in terms of thinking about -- I look at like the UCaaS side and you look at seats and net prices slightly been coming down, but it's not -- I don't think it's a debate that anyone's going to find here, but when you think about, I think, the durability of maintaining your current price per seat over the longer term, I look at your acquisition of like Inference acquisition and the ability to upsell virtual agents and then obviously comes at a higher ARPU and obviously, a much more touchpoints today than I think you did 12, 24 months ago in terms of automation, but help us kind of understand like I think the ARPU side of the equation with pricing coming down and then with the focus on automation, like how does that balance off, I think, longer term?

Yes. So that's a great point. And if you look at contact set and really the customer experience. Rowan coined a term 2, 3 years ago talking about the contact center changing more in the next 5 years than in the previous 25 combined. And we're seeing that right now firsthand. And a big part of that is what you just mentioned. The automation solutions, I've been doing this for 30 years in the contact center. And yes, it was the same application set, little improvements, okay, take the same application set, move it to the cloud, you get some efficiencies and economies of scale. Now what's driving folks to the cloud is the fact that if they want to take advantage of true automation and differentiation in their space, they need to be in the cloud, first of all. And we're seeing IVAs as really the main vehicle and the main driver for this. And when we talk about IVAs, it's really about okay, being able to offer the customer a choice of self-serving, right? Speaking to a voice interface, asking a question, having that voice interface immediately transcribe into text, applying natural language understanding to it, fetch the answer, very similar to a Google search we all do on our devices every day, right? Once it's converted to text, it does a search internally to the data sources of that company. And then it can speak back via text to speech the answer to the customer. So consumers are getting more and more comfortable with voice interfaces. We use Siri and Alexa every day at home. And so as that social acceptance occurs and customers get comfortable realizing they can get their answers from machines, we see the take rate on that increasing dramatically. Today, a lot of our newer -- new customers are opting in for those automation technologies, but they don't know if they're going to deflect 2% of their calls over to self-service or 20%, and that's a huge difference. The beauty for us is on the economic side, we get $200 per seat per month for human agents, the combination of our software and the usage of that, a little bit north of $200. When we -- when calls get deflected to virtual agents, we get over $400. So as that transition occurs and as companies see more and more of their traffic being able to be served by virtual agents, our ARPU actually goes up if you think about it on a per-call basis or a per-port basis. The shift is we arbitrage the labor, we see a change from human agents over to digital agents. How fast that trend will occur and how steep that curve will be is anybody's guess. The beauty here is people are testing it. They're starting to use it, and we know that curve is up and to the right. It's just a matter of how fast and how steep. So that's IVAs. And then we've also got AI-infused application called Agent Assist, which during a transaction with the human agent, we can actually be listening and do the same concept, right? We're listening to the conversation, we can go fetch data and fetch the answers, display them to the agent and allow the agent to be more accurate and more productive with their time. And then on the back end, we can do what we call Workflow Automation, which is basically taking information that was occurring in the transaction, it might have been an order, it might have been a closed ticket, and we can trigger reactions. We might want to send an SMS or text message. Thank you for your order. It's due to ship on Tuesday. We send them a reminder on Monday. We send them a survey on Wednesday. So all that follow-up to really make the end-to-end experience as good as it can be. And that's what really it's all about delivering these automation solutions to companies that can now change and deliver more options to their consumers.

So good answer. I guess my next question was I think what's holding maybe customers back is thinking about what percentage they're going to automate at what point. But when you think about virtual observer, IVA, bots, voice stream, Agent Assist, what are you doing today that's making it easier for clients or customers to adopt the full suite? Is it just them trying to figure out what they want to automate? Or are there other kind of hurdles? It's still early innings in terms of -- because again, if you look at cloud contact center is still 15%, 20% of the market is only migrated to the cloud. So are we still -- is it still customers or just moving to the cloud first and then it's the stack on automation?

Yes. That's a great subject because it can be overwhelming with all these different technologies and automation solutions. Customers have that, oh, no, where do I start? And the one place to start is, yes, we're in the very early innings, especially in enterprise, about moving to the cloud. The beauty here is this is kind of a driver, these different automation solutions to now saying wait a minute, this is vastly different. It's not just premise versus cloud, the economies and getting the servers off my premise, which was the pitch 4, 5 years ago. Now it's about, hey, if you want to truly differentiate and do these things, you need to be in the cloud. We're finding -- most customers aren't going to opt for everything in the suite and try to implement it all at scale. But they're opting for most of the automation solutions to test and the beauty of being in the cloud is you can test it, you don't have to try to look in the crystal ball and figure out how many of these am I going to need, how many virtual agents, how many in the CapEx world, you needed to predict that and purchase them. In this, it's nice because you can kind of dip your toe in the water, you can test virtual agents and then start expanding the use of those. You can test with some of the other solutions like VO, like the Workflow Automation, and you can start automating more and more of the process. And so that's something that we find getting on a cloud platform such as Five9 gives you the kind of the ability to go test those capabilities. And we're finding new customers are opting in for -- in some cases, the whole suite. But again, the question is at what scale. They don't need to predict that. They're only going to pay for what they actually use. So that's the beauty of being a subscription model is that you can kind of test each of these different areas and see how they succeed.

And I think the follow-up, just last point on automation, is trying to figure out the best way to kind of word out this question. But I think on your Analyst Day, you called out, if customers that adopt -- I think, adopt the entire suite, I think that you could 2x your ARPU, right? So say it's $400 or up north of $400 a month. So assuming 10 years down the road, if the number of agents get cut in half, right, those -- is that gap of fewer agents to sell into get closed by you? Are you all upselling, I think virtual agents? I was just trying to, I guess, frame out, you're looking out 10, 15 years or something like, what the contact center would look?

Yes. For 20 years, I've heard that -- if we're going to reduce the number of agents, we're going to reduce the number of agents. And low and behold, we all become more and more needy. Even if it's -- whether it's a voice conversation, now we're using digital means, there's still a neediness of being able to interact with a company. And what's interesting is, as you mentioned, if the human agent number does reduce, it's because they're being replaced by virtual agents. So our TAM goes up, not down. So that TAM expands to be -- instead of $200 per seat, it's north of $400 per seat -- per virtual seat. So that transition, we'd be delighted if it moved faster than what people anticipate. But yes, you would -- 10 years down the road, let's say, x percent have moved over to the machine interfaces, that actually bodes even better for us because, again, you're still taking for each transaction there's a one-to-one correlation between that port or virtual agent and the consumer just like there is with a live agent and a consumer. And the live agent to consumer, it's $200 per seat and the virtual agent to consumer, it's $400-plus a seat. So we win either way, regardless of the speed in which that goes. Now keep in mind, as you mentioned earlier, we're still at the very early innings regardless of which -- what the mix is between virtual and human agents, we've got 15% penetration at best in the enterprise.

Okay. I would assume if I think about this 15 years down the road, you and Barry would be long retired, so just in front of you guys. But the other topic I wanted to touch upon was messaging. I think from my coverage of the space, messaging seems to be coming up more and more in my channel conversations. And with that comes like conversational come going after these digital channels. So curious to know what you guys are doing today, better competes or at least provide those kind of offerings to your customers. And really, what's the demand been from your customers, right? With COVID, I'm sure digital is [indiscernible] curious about what you're offering today? And what you think you need to be more competitive against some of the porting solutions out there?

Yes. So you bring up a great subject. I did mention one example of that messaging, which is that workflow automation engine we acquired from a company called Whendu that gives us that reaction. Condition occurs, trigger reaction to that. And from an SMS perspective and messaging perspective, we do natively, both because of that acquisition that we made at Whendu, short code, long code, we can handle different messaging platforms, interfacing and integrating to our solution. So we run the gamut and then we even have partner solutions. Somebody wants to send rich content with videos, we have a partnership with a company called MMS that can deliver those videos. So yes, messaging is huge. It's continuing to capture a big part of contact center interfacing with clients and with end consumers, and we're sitting in the drivers of being able to deliver those.

That's a good question. And then maybe next on conversational commerce. How do you guys define conversational commerce? And when you think about conversational commerce, I look at it, I think on the transactional side, so is there an opportunity, I think, for Five9 to perhaps not say you're going to become a payments platform, but is there a way or is there a discussion internally when you think about conversational commerce messaging that there could be an opportunity for you to monetize some of the transactional flow that runs through your platform?

Yes. We look at it more from the IVA perspective that really the creativity and the ability to have IVAs operate in many different ways, including what you just described. So if I can transact from a monetary perspective with the system in a consistent way, I can set my IVAs up to handle that as opposed to having to bother a human agent. In a lot of cases, we have customers that -- we had a customer that does online payments services, and they went exclusively digital, no voice whatsoever with us. And they turned on the voice channel after. And it was interesting because they found that more people more of their customers didn't want to get a voice confirmation, rather than trust just the interface with the machine that gave them confirmation that their transaction occurred. When you're dealing with people's personal money, sometimes that's a way that they still feel a little more validation that occurred and it's been confirmed that things have closed. But yes, we can handle -- conversational AI is the name of the game when it comes to both IVAs as well as Agent Assist. And the combination, again, you're going to have somewhere it's with agents and you're assisting the agent and others where we're providing a full self-service model.

You have a competitive question that came in. How does Five9 compare to LivePerson in terms of workforce automation and AI because obviously, when they talk about it, they speak in similar terms to kind of what Five9 offer. So I'm just curious any color that you can provide on that competitive front of some of the point vendors out there in terms of IVA?

Yes. LivePerson is a great company. They came at it from the digital side and really delivered more of the e-mail, chat and other digital channels first. And we came at it more from the voice-centric side, and we've crossed over. When you look at the -- again, the IVA is what gives us the ability now. And by the way, our IVAs I gave the examples of using voice. You can use the same interface and the same logic behind the IVA to do chat. So even though I gave the example of, I call in, I voice in my request, it fetches the answers and speaks it back. I could do that on chat just as easily. So I can go into chat and input my question, it fetches the answer and delivers it back to text, even simpler if you think about it. We don't have to do the conversion from voice to text, text to voice. But that's something we're certainly doing and certainly competing on. And the key there is integrating and having that part of the overall end-to-end solution. There's a lot of different point solutions out there that try to say they're going to do one thing or to just the digital or it's important that you have a holistic view. I want to know that my agents did all that, and I need to see in real time who's on chats, who's on voice calls, who's self-serving and then pool together my analytics and reports that show me, what's the productivity of my agents. And if I have disparate systems handling voice from chat, it's hard to be logged into both at the same time and hard to be handling both. Companies that do that approach tend to segment their agents to the digital agents over here and voice agents over there because they're on different systems.

Okay. I think the next topic I wanted to touch on was the impact from COVID. And I think the first one was, a question I got on a prior call, which I thought was interesting is, do you expect calendar '21 revenues to be at all -- again, your guidance, obviously, proved this wrong, but if you think about employees returning to the office, is there somewhat of a headwind in '21 versus '20, meaning that some of these deals aren't as tied to a distributed workforce that we saw last year? And as employees return to the office, is there a potential slowdown? Or -- and kind of how do you -- COVID changing that and employees returning to the office, at least agents going back to call centers.

Agents are agents. We don't care if they're logged in from home, if they're logged in from formal contact center, or highly distributed into small offices. If you think about it, we create one virtual contact center for our customers. And those agents log in from a PC with enough Internet bandwidth to carry voice and they're logged in. And frankly, we don't even know where they're logging in from unless we look at their IP address and trying to figure out what locale they're in. So from our standpoint, as things migrate and they go back to, in some cases, all the way back to where they were before in a formal contact center, in most cases, our customers have said they're going back to a hybrid model, it's irrelevant to us. The traffic that comes into their customer support lines gets distributed to their agent pool wherever their agents are. And that's one of the beauties of the cloud is we have that flexibility to do so. So we don't see the return to work in the office versus work at home having any impact on the revenue perspective. We did have some small increase. I'll let Barry talk to the financial impact of what we measured for the COVID impact and how we see in the transition back a small percentage of that perhaps impacting revenue.

Sure. Thanks, Dan. And Peter, it's really straightforward. We did a pretty close analysis when we announced our fourth quarter results. And it showed that when you look at the installed base, we had corporate-wide a pickup in revenue in the mid-single digits. And we anticipate that as we go as post-COVID, some of that will go away. But people are not going to undigitize, and there's some changes in behavior that are going to be permanent. And we'll retain low single digits of that pickup. Those immutable trends that have been driving the business, the shift to the cloud and the digital transformation they did before COVID, they did post-COVID and yes, COVID has probably helped a little bit in changing in some particular situations.

Yes. And just to touch on -- you mentioned a potential headwind, I would actually flip it and say a potential tailwind because more companies, the acceleration in our market is people got caught, right? They got caught with, "Oh, I've got a restricted system that is going to make working from home difficult if they weren't in the cloud already." If they were on-prem, it was a more difficult transition to move their agents home. They had to do it with whatever they had. Nobody ran out and made a 6-month decision in a week and then said, get a system in here other than a few hotlines to help local governments and things that we participated and set those up. But it wasn't like enterprises went out and flipped their whole contact center infrastructure to Five9 or others in haste. What they have done is because of that, they've now -- in many cases, I think folks that were going to perhaps wait and look at cloud in 2 or 3 years, have decided to go ahead and start that process. And in most cases, for enterprises, it's a 6-month to 1-year evaluation process, and then there's that 7- to 8-month implementation process. So we see that as picking up. We see it in our pipeline, we see it in our bookings and the revenue follows that.

I guess so my final question here, maybe for Barry or Dan, if you want to jump in, but I would say it seems like it's a pretty good set of goal to kind of see durable 20% growth, I think, for the longer term, right? I think you just put up your strongest quarter ever. I think it was 45% of growth, raised your full year guide, trends are definitely in your favor, but what would have to be the offset to that equation? Meaning, what would have to happen? You have to see churn, attrition ticks higher, competitive pressures for the momentum that you're seeing now, like what would have to deviate? And what would have to change for you to deviate from your current path?

Yes. So tough question because It's all about the market and execution against that market. And that market is strong, firing on all cylinders both net new and installed base, both enterprise and commercial. And on top of that, international, where we're investing very heavily in having some initial successes, as you heard all coming there. And then it comes down to execution. You mentioned, for example, churn, while it's not exactly the other side of the same coin, it's in the same direction, and that's -- I don't know the retention rate, which has jumped year-over-year to 121 blended between enterprise and commercial. So I'm not sure what we focused on is bringing those big deals that Dan brought in and Dan and his team. And we feel pretty comfortable at -- when we bring those up and they become referenceable, that there'll be other deals behind it. So I'm afraid I'm going to have to disappoint you yet, Peter, and come up dry.

And Peter, we've mentioned that we're very comfortable with the enterprise subscription growth rate in the 30s and staying there for years to come. We don't see that slowing whatsoever.

So I'll take that. So that's good. So with that, I think this is a good place to end. This continues to be a very exciting story. I think execution has been flawless. I think demand shows no sign of slowing down. And then the second tailwinds, I think, around customer engagement going to be any more in your favor. So again, Dan, Barry, thank you for doing this with us and for those that are listening in, thank you for joining. If you want to follow up, just go through to reach out. And again, thank you everyone, and enjoy the rest of your day.

Thank you very much.

Thank you all. Thank you, Peter.