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

Thank you for joining us today at the Barclays TMT Conference. With me from Five9 is CEO, Rowan Trollope; and Barry Zwarenstein, CFO. Rowan, how are you doing today? And did I nail the pronunciation? I mean, I feel I got.

You did. You're fairly accented. Did not betray you.

It pops up in mysterious ways. Like I'll be in a meeting and I'll say water and people like freak out. So glad I got that one. So just for those on the line, we're not going to be taking questions from the line during this presentation. But if you do have questions for the team, and we're going to dive into the weeds. So we're really happy to go anywhere you want. Please e-mail me at [email protected]. And now, I'll hand it to Barry for the safe harbor.

So thank you, Ryan. Just want to remind everyone that today, in our discussion, we'll be making forward-looking statements about events and trends that concern the industry and the company and its operations. Actual results may be materially different. Please refer to our most recent Forms 10-K and 10-Q under the caption Risk Factors and elsewhere in such reports to get detailed information about what could cause the results to be materially different. Thank you, Ryan.

Thanks, Barry. Rowan, I enjoyed your five contact center predictions for 2022 webinar that you recently did with Sheila McGee-Smith.

So with that in mind, I'm trying to do my own little contact center prediction webinar here. But just to start, the agent experience has certainly changed, right, moving home. And we talked a lot about how -- what that means for contact centers in general. But what do you think the future of the cloud contact center is post-COVID?

Well, we're definitely seeing -- from our customers, anyways, we're seeing a desire to continue to leverage at-home agents. So I think that's a feature of the landscape that's not going to change kind of going forward. However, we are also seeing -- we're going to be in this hybrid mode as some of those agents go back. We have no idea exactly where that's going to land. But I think the second thing that we're seeing in a post-COVID world is really this labor crunch is affecting our customers a lot. And not just customers, but prospects. So we're hearing firsthand, and this ties back to the remote work concept in that it's harder to hire from a pool of agents that happen to be geographically around where you are. What do you do? Well, the option to sort of hire more remotely for contact center reps sort of opens itself up. So it could be that this sets the world down a path, or accelerates and move, towards more of the gigafication of the contact center world. I think that's definitely a possibility. We've seen that in a few companies. A couple of Five9 customers like NexRep and Liveops who already do that. They essentially turn the contact center labor pool into a gate market, has a bunch of benefits. But it does rely on at-home work and the ability to support agents sort of working remotely and working from anywhere. Not something that's going to work for all customers. But I think it's an acceleration of the potential move towards the gig economy and the contact center. We'll see. We'll see how that goes.

Okay. There's a whole lot I want to dig into there. Just from my point of view, turnover is rampant in contact centers, right, with the agents. So if you already have 100% turnover, even pre-COVID, and those are my numbers, my estimation. But like the difficulty of training people remote and getting them on the phones is exacerbated by some of the things you mentioned. So definitely want to dive into that. That has a ton of interest. So for me is like how is the agent experience changing? But first, can you just talk about how -- Five9 definitely leads the way in terms of some of your voice capabilities and routing features. But I guess, how do you think the next steps are beyond voice are in the contact center? And how are you supporting those?

Yes. Well, that's something that's a transition that's been underway for a long time towards digital channels, adding those. I think it's -- what's happening here is that most contact centers have added digital channels. I mean, most, if not all, right? I mean, there's probably rarely -- you rarely would find one that hasn't. But how well they integrated those into their core platform is questionable. And so you're going to get one experience if you go chat. You're going to get a different experience if you SMS with them versus if you go on voice with the customer. And so what we've been doing is helping customers not only consolidate those channels all into a single routing platform and all into a single user experience for the agents, but also back-end reporting and analytics. And the message to our customers has been digital first, right? Not just add digital and then like, oh, the customer happened to wanted to do an SMS with us or whatever. But like you should really be directing customers down those digital channels as the first place that they engage. The second thing that we're talking to customers about is that the thinking in the industry has been that you have sort of think about is like digital channels and analog channels. And that's really a backwards-looking view on the world. If you look forward, voice, as it exists today, is largely kind of this PSTN-driven experience that has a lot of croft built up around it that makes it a bad experience, like dialing a phone number. I mean, just first and foremost, like that's kind of a pain in the butt. Why can't I just flip something? And then when I get that phone number, I have to wait and it's -- and then I go through an old IVR and then I get transferred. Maybe the volume isn't that good. All of those -- all of that croft drives people towards digital channels because it's like, I don't want to do all that stuff. But not exactly, or it's not that the quality of the audio experience and the fact that people don't want to talk. That's how what's actually driving this. It's the extra stuff on the voice experience. So what we've been talking to customers about is if you want to look forward, think about voice -- let's use a different word, the audio experience. Do you want to have an audio -- a digital audio experience with your contact center? The answer is yes. Hey, we've got a great platform for that because the way we think about the future is all of these modalities, our digital, at the heart of their sort of -- all modalities are digital, including voice or what we would call audio. And so what that's opening the door to for our customers is the idea that voice could become a first-class citizen in the mind of the customer. And we're seeing that actually in -- with mobile phones and all the new apps that are out there, take Clubhouse or Twitter Spaces, people actually like to talk. They like their voices. They're very useful instruments. They're very high fidelity. People are generally better at talking than they are typing. They're certainly faster at talking than they're typing, especially the speed that I talk. So that's really a huge benefit. And people don't like being forced down the digital channels other than the fact that it's better than all the c*** that existed before. So as we move forward, we're saying, look, all channels are digital channels and audio experience can be a radically better experience, and we put together a platform to make that happen. And the fact that we can now do speech-to-text in real time, and we can use automation on real-time conversations makes all of that possible, like IVAs and all the other technology we talk about. It really is about leveling the playing field for all of these modalities and making for a really rich digital experience for customers that's delightful.

No, I like that answer because your focus is on what drives the best customer experience outcome, right? Not we want to jam people down the voice route or the live chat route. And you touched on a lot of the things that I think are improving NPS scores across the board, but also like the long-term tailings of the space. Things like IVA, things like AI actually having more use cases finally in the contact center. But just for those who maybe are newer this market opportunity or the cloud contact center market, can you just describe maybe from -- like COVID kind of changed how mid-market enterprises, I guess, look at contact centers and how it also shifted some of your like bookings numbers and those tailwind you see?

Well, I think that this was a shift we were already seeing in the sense that you could think about customer engagement and all the interactions that you have between a business and a customer is sort of the world that we play in. And certainly, COVID created for those, call them, legacy -- not legacy, but call them, in-person businesses. It forced a lot of those businesses to kind of fix up their sort of online experience. So a retailer, for example, who couldn't have customers walking into their stores during a lockdown all of a sudden saw all the gaps in their digital experience and said, "Oh, my gosh. We've got to fix this". So while e-commerce was a facet of their business, it became the entire business for some period of time. Now we're seeing that shift back, but it's sort of like once you've seen something you can't unsee it. And that drove customers to say, "Holy c***. We've got to make this a bigger priority". And so that was probably a good thing, frankly, to give a lot of these incumbents a kick in the pants to say, "Hey, this is really important". The new vendors in most industries kind of got this out of the gate. They're like, look, that's kind of what a lot of the competitive basis is these days is kind of digital-native experiences that sort of add retail or in-person experience as a secondary. Like take the simple sort of canonical example of this is Amazon and the Amazon Go store. It's like a digital experience that you then backed into a in-person experience as opposed to the other way around. So this really gave -- COVID gave a kick in the pants to all these companies to say, "Okay, we can't just ignore this digital experience". And we're really at the heart of that because our platform is about managing interactions between a business and their customers in a remote setting. And so that is by telephone, by message, by chat, by chatbot, all the automation, the insight and all the stuff we can get there. So it really did accelerate, I think, the awareness of the importance of the contact center. And the way that we sort of summed all that up was during the pandemic, the contact center became the front door for business. And in some businesses, they're not going back. They're saying, you know what, this is actually better. And we like this. And by the way, that's driven by customer demand. Customers are saying, we like this experience better, customer as in the end customer. We don't want to go back to in-person in many cases. For the other companies that are going back to in-person, and for somebody like me, an extrovert, that's a good thing, I like that. However, I also want to make sure that the digital experience is not a second-class citizen because that's not a brand I want to work with. I don't want to go into your store and do all this stuff and have a great experience. And then in the event that I have to contact you online or something else, it's an awful experience. That's definitely going to drive my buying preference towards a brand that gets it and does both -- and does well on both of those sort of approaches.

Excellent. Yes, I really -- that sense of urgency, I think, definitely was a shift during COVID. And I'm stealing one of your lines, but that's why I sound smart, right? When you said like we really took about a center out of contact center, right? And especially like when I worked in the contact center, we always say, we're never going to be able to do this work from home. And now I think people had to work from home and now they saw the light. Now, they're not going back. So I think a lot of the trends you're seeing are persistent and durable, and that's kind of the trends that we're pulling on here in our research. But Barry, like as we think about a lot of these long-term trends that benefit your business, you gave some guidance for your retention rate for the next few years at your Investor Day that I think people are happy to see. So can you talk about some of the -- how like -- these highlights that we just mentioned goes into your high -- like high 120% area net retention for the next few years?

Yes, Ryan. I'd be delighted to do that. So the way I typically introduce this topic is to say, with a disclaimer that there's few certainties in business. But one of the certainty is as close as you can come to it, is the fact that our belief that we can take 123% over time up into the high 120s. And we derive that confidence from a number of factors. The most prominent one is the fact that we have such momentum in the upper end of the market. You've seen the numbers, the big deals that we're getting. And logically, the bigger the customer, the less likely you are to land the full customer upfront. And so when we went public, we had three customers that were more than $1 million ARR. 2 years ago, when we had our Analyst Day, it was 29 of such customers. Now it's 123 and continuing to increase. And so various companies, as I alluded to, have significantly higher dollar-based retention rate. In addition to that, over time, we will also be increasing the ARPU, and prominent in that is something like the IVAs, which sell at $400 a port for a digital virtual agent versus the approximately $200 that we have for live agents. And then there's also a little bit of a tailwind from the fact that we have 16% of our business that is commercial. And the commercial part of the business as dollar-based retention rates that are meaningfully lower, high 80s, low 90s. And while it's only 16% -- it is 16% and it is growing somewhat slower than the enterprise. So you get a little bit of a mix benefit there as well. Now just to conclude, I said there's very few certainties. Something that we can be even more certain about is that there will be fluctuations along the way. And in no small part because those big customers that I alluded to, and this has happened in the past, they come onto the platform at different times and they ramp at different rates.

Excellent. And Barry, just to stick with you, as we think about heading into the next quarter, can you just remind us how, as we think about the year-over-year comparison versus the fourth quarter of 2020, how we should think about like the Inference acquisition in that quarter, potentially impacting the comp upcoming? And then also, like the COVID-related revenue last year, was that more weighted towards the fourth quarter than the third quarter?

That's a lovely question. And thank you for that opportunity.

Yes. Very fun, right?

No, no. Because it's a simple story, and here's an opportunity to tell it. So first of all, you mentioned Inference. I'd like to park that on the slide. When we first made the acquisition a year ago, there was approximately 2% benefit per quarter. We bought it mid-quarter. But it has now become so integral to the Five9 situation -- offering, including displacing some of our organic offerings on the IVR side and so on, that it no longer makes sense to talk about that as an inorganic type situation. We're no longer going to be sharing that. So let's just talk about COVID. And here, the story is very straightforward. On our fourth quarter earnings conference call, we said that our total corporate revenue is being elevated by that new front door, the center out of this contact center as you talked about, due to COVID. So mid-single digits increases in Q3 and Q4. We had the booking trends, et cetera. Subsequent -- and we also said at the time that we expected to give up all but say 1% or 2% of that COVID benefit. Roll forward, and we get several quarters of trended data. We're not pass COVID, but it seems like the patterns now are well established, and two changes from what we said originally. First of all, there were actually three quarters of COVID benefit, Q2 -- Q3, Q4 of 2020 and Q1 of '21. So three quarters through Q1 of this last -- of this year where the year-over-year comparisons are difficult given the onetime COVID benefit. The second thing is that the COVID benefit has not gone away by all of our measures. And the best way for the suite to do that is to look at our sequential growth rates. And for example, in the third quarter, we grew sequentially by 7%. That's exactly the same rate we grew each quarter before COVID, plus or minus 1 percentage point. So -- and we would encourage investors until we lap the difficult compares, which will be through Q1 of 2022 that they look at the sequential growth rates. For example, in the fourth quarter, we gave a sequential growth rate of 7%. That's a higher sequential growth rate that we've ever given. And by the way, I said, don't look at year-over-year. So I'm going to contradict myself to some extent. But that translates into a 29% year-over-year growth rate, which is the highest we've given for any quarter. And reason is that the business is structurally stronger because of the onetime COVID benefit not going away and more importantly, because of the success that we've enjoyed moving upstream, as I described earlier.

Excellent. We talk a lot about AI and Inference. One of the things that stuck out to me was 2/3 of your Inference sales, maybe pre-acquisition for now, are the non-cloud contact on customers, right? So in many cases, it's a foot in the door for new business for Five9. But Rowan, and I want to kick it to Barry to see what he thinks from a financial perspective and how it fits into your long-term targets. But this AI opportunity, it seems like it is here today and you guys did a good job of showing -- where it's showing up within your largest customer. But how do you frame that as like a catalyst for Five9 or how you can help customers with that in the near term?

Yes. Well, I think having -- we're in a situation just, if I back up, where the market -- the technology is reaching maturity at a time when market demand is sort of accelerating. And so this is like a perfect -- it's really good timing. You have labor shortages. You have crunches on business who are trying to figure out how to -- they have to spend more to kind of improve their legacy customer experience but they're not going to be able to do that. So how do they to do it? They have to drive savings. So you kind of have this like need to have savings and difficulty getting headcount. And so as a result, we're asking us, how could we be more efficient? And so this is like a really big opportunity for Five9. And so since we did acquire the market leader in this space, Inference systems, it's featuring very [ simply ] in all of our large enterprises -- large enterprise deals. Every company that's got a contact center at scale, call it, 50 heads or more, even 25 realistically, has really got to be thinking about this labor issue. And it's such a big opportunity because our new lens on this market is we're looking at all of the spend. Previously, okay, a couple of years ago, before our Financial Analyst Day in 2019, I think it was, we really looked at the technology spend in the contact center as our total opportunity. And that was what we talked about 15 million agents and $200 a month gives you a $24 billion category. What we're now looking at is saying, look, the real opportunity here is the full spend in the contact center, and we want to address the full spend. The full spend is 10x -- roughly 10x larger than the technology spend. And that includes all the labor cost. And so we got started on that path by saying, look, what we need to do is provide a way to optimize that labor. WFO helps you optimize human labor. And so we've been really successful with our VO acquisition and with our Verint partnership. That's just about taking human beings and making them more efficient. But the other side of that coin is that we've now added digital agents and selling digital agents to customers. So that's what's really starting to get traction. We shared some of the numbers in our recent earnings. I mean, the attach rates are extremely high in large enterprise. And this is finally, by the way, something that you really only can get with cloud. There was a question in the past around, well, prem versus cloud, what does cloud buy me? It gets you all the kind of normal cloud economics and always upgraded to the latest version and all that. All that's great. But now you have a catalyst, which is a technology, digital agents, which you just cannot get on-premises. It's not possible. And so that's also starting to accelerate customers saying, okay, we were thinking about doing this, but now we have to do it. And the numbers are so compelling, we -- when we go into a contact center with 1,000 agents, if you can get in there and understand their call drivers and you can say, look, 100 agents of calls, 10% of your calls, are possible to automate. Now you're talking about real significant savings. We can capture some of those savings. The customer captures some of those savings and how they redeploy them, maybe take the bottom line or solving their growth problems or what have you. But net-net, it's a significant and new opportunity for us and for the industry in general.

And then, Barry, should we see like a large acceleration from the revenue standpoint. I guess, how much of that is baked into long-term guidance for this AI opportunity?

So Ryan, while I complimented you on the prior question, this is a less good question because there's a less crunchy answer.

I know.

So basically, Rowan described it well, there's a huge arbitrage. 88% of our strategic deals have the AI IVA attached. We -- but we're unsure exactly what the extent of it will be. There's use cases that are being tried out, what percentage of the agents will take up the IVAs. We know it's a win-win situation, no matter what. So we've included some gentle progress over there. At McKinsey, for example, say by 2030, 16% of the transactions that are ideal for IVAs, a repetitive, where's my stuff, change the password. But we're not quantifying it explicitly. I think we've been pretty candid with a lot of quantification. That's why we're pulling back from.

No, that's perfect. But I'm just trying to get like you don't need to see a massive uptake in AI in order to hit your long-term guidance. That's kind of view on top. That's great. And look, a lot of things you mentioned, I think, help with the agent experience, too. I'm looking to see what comes next from Five9, things like one do workforce optimization. Like I always tell people, when I had to train, they gave me a binder, and I got to read that for 2 weeks. And then I sat directly behind some one. So I don't know if you're going to replicate me sitting over someone's shoulder in a COVID world. Well, look, just -- we had two questions come in, and I'm sure you're well versed in answering these now. But just from the Microsoft standpoint, they recently announced their Dynamics 365 contact center. I know you partner with them and you see a lot of lead gen as a result, you guys have called out. But any thoughts on how you compete with that new offering at this point?

Well, we haven't seen it in market yet. I don't think it's in market. There was a -- so there was some presentation slides. So we have a competitive sort of view of what they said. But until we really see it in the market, an actual software, I'd say we can't really -- we can't know where they're going. However, this isn't the first time a CRM company has said we're going to -- in this case, it was announced by the Dynamics team, not the Microsoft Teams Group, who sort of redoubled their partnership with us. So we're really doing well with Teams competitively in the market. But I do see this as more reinforcement of the interest in the CRM world of being closer to the contact center. And we'll have to wait and see just how competitive it is. Remember, Salesforce has done this numerous times, right? They have continued to kind of circle around this contact center. They built something like click-to-call using Twilio back in the day, that wasn't really a dialer. It was just sort of like some additional enhancements. So I would say let's wait and see when we actually see some software not slides.

Yes. You don't want to comment until you really see it. I definitely understand that. And then when it comes to the recent announcement into Genesys by Zoom, Salesforce and ServiceNow, I guess, what's your take away there? And do you think there'll be anything on your side with those partner channels going forward?

Yes. So they -- it seems to me like it's -- the first read I had was this is a great validation of the kind of contact center market in general. I mean, here, we have one of our competitors, albeit a legacy on-premises vendor for the most part, getting a headline, kind of splashy, $20 billion number, whatever, from a valuation perspective. So I see that just as more validation of the contact center space than anything else. And in terms of who was in there, it was notable Microsoft was not in there given Tony Bates' relationship with Microsoft. But certainly Zoom being in there, I think, was indicative. And I have -- I only -- I have talked to Eric, and he assured me personally that they're going to continue with their partnership with us. And we remain a very important partner for them. That being said, I also -- I told Eric like I also think you're a competitor, right? He's going to compete in this market. He has to, whether it's through partnership or with his own software, he's got to do something. And so I'm sort of treating Zoom like a competitor. They've got a long road to go. And announcing investment in one of our competitors is -- certainly doesn't make them less competitive to us. It makes it more competitive. So we're absolutely in a competitive and cooperative stance with Zoom at this point.

Excellent. Yes. And I think we've done a lot of education on the contact center market, but I think we'll even have to go further into bifurcating who really competes where and for what capabilities, right? Like I think you did a good job of calling out the CRM was much more big of an inbound lead driver for you guys versus the UC, right? So you might see some players become more competitive in that UC side, right, where...

Yes. We are -- I mean, look, that was the thesis behind the Zoom transaction that was we were seeing more and more interest in the down market for a UC, CC combined offer. That hasn't changed. We're just continuing to service that through partnerships because we don't have a UC product. They don't have a CC product. So the other UC vendors need to partner with contact center vendors. So we continue to drive those partnerships and relationships. But that is a facet I think, of the evolved -- the emerging -- how the market is evolving. We're seeing that -- we're not seeing that as much in the large enterprise. If you look at what's driven a lot of our growth recently, it's the strategic enterprise and the larger side of this equation. And so we've been really investing heavily there. That's where you tend to find buyers who have a lot more political cloud. Maybe it's just the size of their budget is so big that they don't have to sort of just take whatever IT gives them. And so as a result, while we always are involved with IT, at the front end of the sale and even often throughout the whole process, it's really the line of business buyer driving that sale. But again, these are really two separate buying centers in the same market. You've got the UC consolidated comms buyer who are buying UC systems and contact centers alongside of them. That's a really legitimate market. It's just we don't have a product there. And we think it's better to keep our focus on the line of business buyer for the time being.

Yes. And that's generally more like an SMB sale in terms of customer segment...

Historically, it has been. We don't know. Maybe that's moving up. We're not sure. But historically, that's where we saw it. We saw -- well, really, it was -- we also see buyers in the SMB segment that are LOB buyers, and that's who we target. So for example, our commercial business grew, as you saw, 30%, last quarter. I think I got that number right, Barry? It's growing well, and that's not UC buyers. Those are absolutely contact center buyers. So at the same time, there's a big move towards -- in that category towards UC plus CC. RingCentral is doing a good job. 8x8's out there competing not as well, but they're certainly in the market. And I think those companies are seeing that there is a real significant need for a consolidated offer.

Excellent. No, I really appreciate you guys walking through the contact center landscape. I always been doing talk about contact center, and I'm jealous of some of the capabilities that the agents you service get to use today. But look, that's all the questions we have and that's the time. And we'll circle back because investors weren't able to ask me questions because we have some ongoing issues. But if you do have questions for the team, maybe you watch us after the fact, please me at [email protected] and get them over to Barry and Rowan. Guys, thanks so much.

Thank you.

Yes.