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

All right. We'll go ahead and get started as folks continue to kind of walk in here. My name is Will Power. I cover cloud software for Baird. I'm really pleased to have Five9 with us today. Five9 is the leader in cloud contact center capabilities. We have Barry Zwarenstein, who is the Chief Financial Officer; Dan Burkland, who is President and Chief Operating Officer. We're going to jump into fireside. I know -- I think Barry has a couple of quick comments, and then we'll jump into some Q&A. And there are placards in front of you that have instructions so that you can also submit questions via email. And I'd love to make this as interactive as possible. So please submit those as you see fit. So with that, Barry?

Yes. Thanks, Will, and thanks for having us. Just want to say that we'll be making forward-looking statements today about events and trends and the impact on the industry and the company. Actual results may differ materially. Please refer to our...

To kick it off, for folks that might still be less familiar with the story, Dan or Barry, maybe just a little bit of background of the company -- focus areas, target markets.

Thanks, Will, and good morning, everyone. Five9 is in the cloud contact center space, as Will mentioned. What that really provides is that software to help companies deliver exceptional customer experience to their customers. And traditionally, this software had been provided in hardware-based systems on-premises for several decades. And this is not an elective or optional software. It's required. It's mission-critical. Anybody who has customers and need to communicate with their customers needs to have contact center software. And it's critical in two ways, primarily in helping bring inquiries that come into a business, whether they be voice, the prevalent channel, chat, e-mail and other channels, and determine the intent of the inquirer, why they're contacting the business and then determine who the best resource, the most skilled and currently available anywhere in the enterprise might exist and then be able to connect that interaction to that resource while also triggering CRM or other data sources to deliver the data so that, that agent or representative can be most effective in the interaction that they have with that customer. So if you think about that, we can serve clients of all sizes. We started out really coming to market back in the early 2000s, handling the small- and medium-sized business. We've scaled our business up over the years. IPO-ed at about $100 million in 2014 and have been growing the business very consistently since, typically in the -- for years, it was in the high 20s. Lately, it's been in the 30s and even into the 40s. We have a balanced approach to our growth so that we're looking and being conscious of both top line and bottom line. And it's allowed us to really expand our business and be a leader in this industry. And we'll talk about some of the barriers to entry and the competitive advantages that Five9 has. But we've seen really an acceleration to the adoption or the migration, if you will, from those premises-based systems to the cloud, not only because of the traditional premise-to-cloud benefits that we all know about most software solutions, but because of the innovation that we've been able to deliver over the last several years along the lines of incorporating AI into the solution, as well as being able to help offset or deflect some of the inquiries away from the labor force, which is the most expensive piece in the contact center, and automate or provide self-service options to those customers so they can be served without having to interact with a human agent, which is super expensive. That's been an inflection and allowed us to go further upmarket and really deliver a compelling ROI to larger and larger enterprises. And today, we can serve folks at the small end as well as the very largest contact centers in the world.

That's great. Thanks, Dan. Yes, there's a lot I want to unpack there. But maybe first, Barry, for you, just thinking back, Q1 results, strong numbers. Love to just get some color as to how you've looked at kind of the key drivers, perhaps sources of upside? And what really provides you with the confidence and visibility for the remainder of the year?

Sure, Will. So yes, we had a good Q1. The beat versus the guidance that we gave to the Street was indeed at the higher end of the range, it was 7%. And typically, pre-COVID, we would beat the guidance by between 4% and 7%. The two key drivers there were, first of all, professional services. Dan talked about the bigger companies that we are progressively and successfully landing. And we've been staffing up quite significantly, starting in the second half of last year on professional services, and that helped. And then secondly, just the turning up of the new seats that we have for our new logo that we've been entering. With respect to the rest of the year, we have a backlog of seats. We have excellent visibility through our net dollar-based retention rate, which is currently at 120%. And so we feel pretty confident about the outlook for the remainder of the year.

Okay. Great. I think one of the big positive -- I don't know if it's a surprise or not, but big sources of upside has been the success you're having in enterprise. And the last couple of quarters, landing kind of almost in a successful quarter, some of your biggest customers ever. So maybe just help us understand the drivers of that. Why now? Is it about the go-to-market reach? Or just larger enterprises now finally coming to the cloud with contact center following other applications already moved to the cloud? What's driving that? And what's the road map from here?

Yes. So if you look at the space, we've been helping customers move to the cloud through their digital transformation initiatives and really be able to then gain the benefits of having one virtual contact center globally, if they're a global organization. We were selling into those smaller and midsized enterprises. And when I say midsize, it's compared to the latest trend, which we've seen success in the very high end of the enterprise market, the largest companies in the world that are now making this move to move to the cloud. And they hadn't done so for several years because the benefits I described earlier, which is, okay, the cloud gives you just as secure, just as reliable, just as scalable, all the same features you had on the premise. That was the pitch for a long time. And large enterprises said, do I want to go through a massive disruption of a year or 2 to migrate everything to the cloud if I'm going to have just as good. And so that we're looking for something really compelling, that ROI that would give them the value add. And that's when the advent of AI came about. And we're able to automate throughout the customer's interaction journey and think of it this way. If you -- we can automate at the front end by -- we've all called into systems where the system is answering and trying to identify and delineate why we're calling and segment us so we can be routed to the right skilled agent. But today, we have technology, and we've all used spoken user interfaces with Siri and Alexa at home. So consumers are being more -- getting more and more comfortable having that interface and having really, a conversational dialogue with a system. And so what we now can do is find out why the caller is calling. And if we can self-serve them entirely without human interaction, we can save the very expensive labor, as I mentioned earlier. Secondly, we can apply AI during an interaction with an agent so that if the conversation is occurring between a consumer and an agent, we have the ability to listen in, transcribe that call, apply natural language understanding to the text and go fetch answers for the agent. We've all been on the phone where an agent is finding answers and looking up in a billing system or a database or a knowledge base to get the answer. We can now let the agent focus on the consumer and let the system go find the answer, bring it back to the agent and display it for them, making them more efficient and more effective in the interaction. And then post call, we can trigger events and trigger actions. Will, thank you for your order or -- I can send you a text that says our system is scheduled to -- our inventory shows it's going to ship on Tuesday. I'll send you a reminder text on Monday. I'll send you a follow-up survey on Wednesday. And all that can be now automated as opposed to having a team of people reaching out and closing the loop with the customer. So we're applying automation throughout that journey in several ways that are unique and customers are finding that that's a very compelling reason to implement the solution, but they only get those automation solutions from the cloud. So oftentimes, what we're seeing now is customers saying, great, I want to move forward with Five9. Move me up to the cloud so that I can eventually -- if not day 1, I want to take advantage of those automation solutions.

So what kind of go-to-market has helped enable some of these big new logo wins? I mean, is this just upsizing? That your direct sales have partners become more important? What's still to come on that front?

Two things there. And not only did the innovation and technology have to appeal to those larger companies. We had to be ready. The industry had to -- we had to scale our solutions. And we've expanded our technology to be 10x the capacity that it once was to be able to handle those larger customers and deliver greater reliability but at the same time, the go-to-market motion had to change. So a couple of years ago, we implemented and took our field sales organization and really segmented them into swim lanes, if you will, and created a strategic accounts team that really focused on value to those large customers. And that's not done just alone with a direct sales force. It's done with the leverage that we gained from the partnerships we have. For those very large deals, it's primarily the large global SIs with the likes of Deloitte, EY, Accenture, Slalom and others and IBM, we're able to be brought into those big accounts. And initially, it was them standing before their client, embracing and endorsing what we could deliver. And this is such a mission-critical solution that that's really what it takes, in some cases, to break into a new market like that is to have that third party be able to validate and say, yes, we'll put ourselves on the line here and deliver this for you. And so the large SIs is one key engine or one key factor that we're using to get to those large accounts.

Okay. So I mean, you've announced some of these big deals, where there's a parcel company, a health care company this last quarter. As you look at these bigger wins, when do those become revenue contributors? How long does it take? And my suspicion is that helps enhance the visibility given the length of implementation. And then I guess the second part of that is, what does the pipeline of those bigger deals look like? I mean are there -- how many more of these might there be over the next quarters or years?

So great question. And if you look at those large deals, one thing to keep in mind just from a mindset, if -- people go, oh, 10,000 seats and above, lots of -- there's only a handful of customers that fit that profile. And the reason if you stop and just think, if I have 10,000 agents in my contact centers combined, concurrent agents that are taking calls and they take 10 calls an hour, 6 minutes a call, which is typical average, that's 100,000 calls an hour that, that company is taking, or in a 10-hour day, 1 million phone calls. Well, how many businesses have 1 million people calling them every day? That gives you an idea for the few companies, and they're very few, your utility, your cable company, some consumer products or delivery service like you mentioned. But -- so there's very few. So it's -- we want to set the right expectation. What it does do when we sell the largest of the large contact centers that we've announced the last several quarters is it does give us validation that we can operate for the very, very largest, the tens of thousands of agents that those two companies have. And if we can serve their complex needs globally, we can definitely serve the folks that are kind of in that next tier down, but still very large. And so it's helped us in the $1 million ARR customers that we have now is 134 as of December. We announce that number once a year. And so we've got those $1 million customers used to be 1 a quarter, 2 a quarter. You talk about three examples each quarter on big wins. Now I'm figuring out and selecting among many, which million-dollar customers for that quarter we're going to discuss. So it's definitely been a trend up market, and the success continues to bring further success. As far as -- and they were very networked, right? When you sell into the Fortune 50, CIOs typically will find each other and talk to one another and make sure that we're delivering on our promise. And that was a very big part of the Fortune 5 company that moved forward with us is they found the parcel delivery service and said, how did they do for you? And we get glowing reports and accolades about how we leaned in. And their quote to us, to Rowan and I in a letter, was we helped -- you helped us deliver Christmas to the world. It was pretty powerful. Pretty exciting to see that feedback. But -- so product is one side of it, but how you deliver and how you help a customer extract the most value and really continue to optimize for their environment is one of the key elements, too.

So what do you think -- I mean as you talk to your customers and you look at some of those signature wins you've had, what's helped differentiate you from some of their key competitors, right? I mean the two that stand out would be CXone and Genesis, and there's a raft of others kind of playing in different parts of the landscape.

Yes. It's twofold. One is on the product side that we mentioned, being able to deliver that innovation. Some companies are trying to go it alone and trying to build it. We recognize that there are certain technologies in that automation world that you -- it would take years to build. There's others that are complex to the point where you would never want to try to replicate or take on the natural language understanding, the speech-to-text engines. We can leverage solutions from the large companies that bring those to market and actually allow us to license those. So that's part of it. And we made two very strategic acquisitions, tuck-ins, both on the IVA solution that I described for the self-service. We looked and acquired a company called Inference that the -- arguably, the leader and #1 provider of IVAs. And also a company called Whendu, which does the workflow automation on the back end that I described while in the center that helping the agent doing the Agent Assist, we're certainly leveraging solutions from Google, Amazon, IBM and others.

Okay. No, I know. I want to come back and dig into AI more -- go ahead.

That's one piece, sorry. That was half the equation. The other half is the services side. Going in and technology is great, and a lot of us in the market, when you talk about differentiating versus Genesis and inContact, NICE inContact or NICE CXone, as they're referring to now, is being able to deliver on that. And we have a very high-touch model. We've invested in professional services to deliver the NPS scores that we achieved and to be able to deliver a successful outcome for our customer. And that's something that we believe is undervalued in some cases. People want to focus just on the technology and what customers tell us is each of these technologies could do what we need, need done, but you're the partner we want and we have the trust that you'll help us deliver. And that's what we're proving out and showing of what's making us truly different.

Yes. Okay. Barry, just maybe to pull you in here. As you think about the growth opportunities, moving upmarket, the success you're having there, I mean, how do you think about, a, growth rate opportunity not only this year, but over the next several years? I know you've given guidance this year. And how do you balance that with margin and cash flow expansion, particularly in the current environment, which is a high focus? I mean, fortunately, you're generating positive cash and margins already.

Thanks, Will. So as Dan mentioned, we've gone from a $100 million company to our guidance this year is in the high 700s. And by the way, all of that's organic. And it's driven in part because we're addressing such a huge, huge TAM. The basic TAM of just moving to the cloud from the premise, $24 billion. And then the labor arbitrage or what Dan was talking about, taking a $2,000 plus salary compensation for an agent and taking -- putting technology instead, AI technology he was describing, a huge saving to the company, a big motivation. And that arbitrage could be a further $34 billion. So a big market, barely penetrated. And we're clearly one of the leaders. Some of you or perhaps most of you are aware that last summer, Zoom tried to acquire us. It didn't work, thankfully, in some ways. But as part of that, we put out a proxy that had a 2026 projection of $2.4 billion in revenue in 2026. Also, by the way, all organic. And we feel pretty good about that. We endorsed it at our Financial Analyst Day last November. Rowan and Dan, both have been saying now for about 4-plus years that given the size of the market and our position in the market and the relatively benign market landscape, that we can grow our enterprise subscription revenue, which is -- if you include the associated professional services, about 70% of the total, in the 30s for many, many years to come. And to go from where we were in 2021 to 2026, $2.4 billion, requires a compound annual growth rate of 32%, which is something that we've consistently demonstrated we can do. The big levers, real quick, a dollar-based retention rate, going from the current 120s with some fluctuations, including in the near term, up to the high 120s. And secondly, international, which is the more seats outside of the United States than they are inside. We only have 9% of our revenue outside. We've put a tremendous amount of investment there, successful investment. I wish I had time to go into some of the specifics. I'll spare you the details for the moment, but it's evidenced by the fact that our LTM enterprise -- our LTM international growth has been consistently in the 40s, 46% this last time, and we're just getting started over there. And the other one, this is overall the success upmarket that Dan was talking about. That's the biggest single segment of our business. It's the -- it's growing very rapidly, faster than anything and has very high dollar-based retention rates. To finish on the last part, Will, about cash flow and the bottom line, that 2026 model has a 23% adjusted EBITDA margin. And this last quarter, we're making some additional investments, professional services for the global expansion, expanding our capacity to handle these bigger customers. It's transitory. We'll go from that 13% to 23% based upon gross margin expansion that we've demonstrated we can do in the past mainly through leveraging semi-fixed costs and through taking our professional services like many other B2B SaaS companies and making it profitable. Right now, it's a drag of about 5 to 6 percentage points on overall profitability. Also, our G&A, we're very successfully have been bringing that down every single quarter for the last 30 quarters. And now we got a little bit of a tailwind there as well. So we feel we can get there very comfortably and just completely -- to finish that thought also is cash flow. For years, we've -- we believed in the balanced growth. Dan talked about it in his opening comments. This leopard doesn't change its spot. We stuck to it through growth at all cost, no matter what, and we just kept on generating every single quarter, LTM operating cash flow every quarter, operating cash flow everything for 1 quarter. And free cash flow as well for the most part up until very recently when we made these investments, but we'll go back there as well. So balance is our middle name.

That's good to hear. Thanks. Barry, one of the comments you've made, and one of the principal questions we get kind of across unified communications space is worries about increased competition, probably more so in UCaaS, the phone side, where you don't play. But from even our own experience and visits, some of these recent conferences, it feels like there are more players potentially going after the contact center market, given the size of the opportunity with bigger players and smaller players. How do you kind of see the competitive landscape evolving here? I mean have you seen any change in the markets you're focused in? And where maybe are you seeing more competition if you are?

Yes. So we oftentimes get that question, and sometimes it's provided because of the perception within the UCaaS market, which we are not part of. And that's tending to see some commoditization from a pricing standpoint erosion there. Certainly not the case in the CCaaS world. And part of it is the mission criticality of what we deliver and the value of what we're bringing allows us to continue to not only maintain pricing, but actually increase the ARPU that we're getting from our customers because we're delivering more innovative solutions that have compelling ROIs attached to them. Kind of the opposite scenario, what's happening on UCaaS, which is we don't have a corporate phone system at our headquarters. I have five phones. I have a cellphone. I have one that comes with my Microsoft Teams. I have one that comes with my Zoom. I have one that comes with Slack. You can make voice calls from many, many different devices. So that's one scenario that's occurring on the UCaaS side that we don't see on the CCaaS side, much more strategic and mission-critical from what we're doing. On the competition side, it's very difficult to enter this space successfully. If I look back, I've been in the contact center space for 30 years, I've been here at Five9 for 12. And when I look at the competitive landscape, it's really the same players. You can go back 5 years, we were all a little smaller, but it was the same players. We've heard -- and you mentioned that there's messaging from a lot of new players that are saying, oh, we want to be part of this exciting growing market that's very underpenetrated. And it's just that, you hear a lot of folks that want to be part of it and that have messaged that they're going to be part of it. And oftentimes, they underestimate what it takes to really come in and build the platform that's resilient, always on with the redundancy. When you look at contact center, seconds of downtime means, in some cases, millions of dollars of lost revenue or impact to the customers. So it's -- there are natural barriers to entry that we don't have time to go into detail on, but most companies that do kind of say, hey, we're going to enter this space. You'll hear about them and then you look 2, 3 years later, they haven't entered the space because they've recognized the difficulty to do so. And so you still sit with us, even us and NICE and inContact, have been the two primary players in CCaaS. Genesis has been a traditional on-prem player. They acquired -- from Interactive Intelligence, also was at one time a leader in the contact center premises world, and they said 8 years ago, we're going to go build a contact center solution from scratch, a CCaaS solution in the cloud. And we're 8 years later, and it's just now getting to the point where they can fit it with small and midsized companies but certainly not the high end of the market yet. So it takes that many years and that kind of investment to really take on and be on par with what we're doing. And so we feel very strong about the future and the fact that there is interest, and it's shining a light on the space, but we're not worried about the messaging that's coming out about people entering the space. It takes years to make your way into it.

Okay. No, that's helpful. More questions I can ask there as well, but I want to delve into AI a little bit more. It feels like that's been a big focus for you all, more interest on the enterprise side. I think your competitors are also talking about more AI solutions. So where are you kind of differentiated there? And how do you continue to set yourself apart to make sure that you remain in a leadership position in enterprise?

And you're exactly right, everyone is messaging to the AI-infused contact center. And one of the most common use cases and I mentioned it, which is the Agent Assist, how we're going to fetch information listening to the conversation, apply NLU, bring back suggestions to the agent. The key there is not that message because we're all saying that message in our space. It's executing on that and finding positive results and customers that can show the ROI that they've been able to achieve. We mentioned on our last earnings call, one of our health care customers that had a group of about 300 -- a little over 300 agents, that they were able to deflect calls over to a full self-service solution in our IVA -- AI-driven IVA solution. And they were able to handle the same volume of calls with 37 fewer agents. And so that's a very compelling, to Barry's point earlier, when you add the $2,000 per human agent per month and you replace that with a $400 virtual agent per month, you've just given a tremendous ROI and savings to that company. And so the other example is the parcel delivery service is looking at using our IVA -- AI-driven IVAs and have indicated that the ROI, without getting too specific, is going to more than pay for the entire solution from Five9, and we're talking into the $30 million annual run rate with them. So that's something that they feel that they're going to more than pay for that annually. You had mentioned one thing about revenue and when those big deals will start to penetrate and bring revenue. There is that tail. It gives us visibility into future revenue that's coming because it also has done some margin compression on the professional services that Barry alluded to earlier because we've recognized those deals coming through. We've invested heavily in the professional services to make sure we have successful outcomes with the customer. And in doing so, that's before revenue comes from that -- offsetting revenue comes from that customer. So we're in process of bringing those customers online. And when they do, that parcel delivery service will be in the $30 million range annually, and the health care conglomerate will be north of $40 million in just in software ARR alone.

Yes, that sounds great. Maybe just in the last minute here. Barry, you haven't touched on inflation, potential impacts there. I'd be curious how that impacts the margin structure from the human capital side. I guess AI helps your customers on that front potentially. And then any comments kind of on the macro landscape, any impacts you're seeing at this point?

Yes. I'll be real brief. So I'll take the second one first. Macro, the way we think about it, two buckets. Our revenue growth each year is basically 50-50. Half from the net new logos. The other half from installed base. In terms of the new logos, we're seeing strength, especially in the upper end of the market for the factors that Dan talked about. On the installed base, it is -- it's growing. The -- and that's how the people will respond in terms of economic activity. If there is a recession, then we will not be immune from it, but currently, it looks fine. In terms of the inflation, we've got, just like any other company, our normal increases. We actually have lower-than-average increases. We've got very good retention and it seems to be perfectly manageable.

Okay. All right. Please join me in thanking Barry and Dan for all the comments up here.

Thank you, all. Thanks, all.

Presenting next in this room is Skechers USA.