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

Hi, everyone. Welcome and good afternoon. Welcome to our 25th Annual Growth Conference here at Needham. Certainly, thanks for joining us today. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here for the firm for the, I guess, 1 or 2 people on the call that might not know who I am. Today with us, we have Five9, who coincidentally is my topic this year, so I'm looking forward to the conversations. We have with us today the company's relatively new again, CEO, Mike Burkland; company's President, Dan Burkland; and the company's CFO, Barry Zwarenstein. Thanks, everyone, for joining us today. Before we get started, I know Barry wants to go over the safe harbor statement, so I will turn it over to you, Barry, to start.

Thanks, Scott. I want to remind everyone that our discussion today will include forward-looking statements about events and trends that affect our industry and our company and its operations. Actual results may be materially different from what we discuss, including risks related to various things, look at our 10-K and 10-Q under the caption of Risk Factors to get detailed information on that, that could cause our results to be materially different.

Well, great. I guess to start, how about giving a brief overview of who Five9 is to anyone on the call that might not be familiar with the company.

Yes, happy to do that, Scott. So Five9 is a leading provider of Cloud Contact Center software. We help large enterprises and large brands reimagine their customer experience. So we refer to our space as a contact center in the cloud, CCaaS as well as CX. So you'll hear people talk about the CX platform space, that's us. And again, we're enabling our enterprise customers to reimagine that customer experience. We replace legacy solutions, on-premise solutions that have been around for decades like Avaya, Cisco and Genesys in the contact center. Interestingly enough, CX has become more and more strategic to these large brands and large enterprises as they use it to differentiate. We've all experienced poor customer experiences when reaching into call centers and contact centers. So many of these brands have come to the realization that they've got to get better at that. They use it to differentiate, but they also are very aware of it. Consumers today demand more. And quite frankly, their loyalty to these brands is dependent on a great customer experience. So we're helping them change that game and change that experience into a very good one. It's a large, large TAM where if you look at cloud penetration, it's still early innings. We estimate 10% to 20% cloud penetration into this massive on-premise legacy market. So we're still in the early innings of a massive opportunity. And Five9 is becoming a recognized leader in terms of our 100% native cloud offering from day 1. Our scalability, we're winning because of scalability and our ability to handle large agent populations. It's why we've won some of these recent mega deals. And our AI and automation portfolio that we've added over the last couple of years is truly putting us ahead of the market, and it's an exciting time in the Contact Center Cloud software space.

I wanted to start out by focusing on Mike for a second because, Mike, you had been out of the CEO role for about 5 years. For those that don't know, Mike was a long-time CEO of Five9. Took them public in 2014. So very familiar with the space. But during that 5 years, how has the space evolved relative to 2017 versus what we're seeing today? Is it the same? Or is there something different that you're noticing in the environment?

Yes, a lot has changed, Scott. And it's not just the environment. A lot has changed with Five9. So I'll first give you kind of what's changed at Five9 and we'll talk about what's changed in the market and in the industry. We, as a company, have reached new heights in terms of our platform, in terms of scalability and reliability. It's why we're winning today. We made an acquisition a couple of years ago of Inference, which allowed us to have an AI and automation portfolio that drives self-service capabilities into these contact centers, and we've innovated on top of that acquired solution. It's a true differentiator for us. So those are the types of things that have changed within the company. And if you think about what's changed outside of the company in terms of the market, large enterprises are finally adopting cloud. It's become mainstream for the very, very large enterprises to shift to the cloud. A lot of the drivers of that have been our improvement in maturing our platform, for example, for scalability requirements that they have. But also the importance of CX, as I mentioned earlier, the strategic nature of it and the only way to deliver that great customer experience is by moving to the cloud. The legacy providers that we replaced are not innovating. In fact, they're end-of-lifing. There's on-premise solutions in some cases, as we've all seen. So it's a very different market, especially up into the large enterprise. We've marched upmarket. Large enterprise $1 million-plus ARR customers now make up over half of our revenue, and it's an exciting time to be in our market. As I said, early days still in terms of penetration. So that hasn't changed. I mean we -- as an industry, we penetrated the market more, but it's still relatively early days where we're 10% to 20% cloud across the entire market.

I think probably the #1 question I've had in the last 2 months, Mike, with you coming back into the CEO position is trying to understand how the company may or may not act differently. If you look at the company in its recent execution, do you have the view that you need to make any wholesale changes; I don't know, product sales execution, whatever it may be? Or are you coming in and really more enabling what the company has already had success with?

Yes. Good question, Scott. So absolutely no wholesale changes. The strategy stays the same. As Chairman of the Board the last 5 years, I've been very involved in setting that strategy. We are going to continue on the trajectory we're on. This is more of the same, so to speak. But it's also going to evolve. We'll obviously continue to keep a leadership position in this market. And we're going to continue, though, with the strategic growth priorities that we have had for the last couple of years, marching upmarket, going to the large enterprise more and more, which is where, as I just said, we get 50% of our revenue and it's growing rapidly. We are going to continue to expand internationally. We had 78% growth in bookings in Q3 internationally. And we're going to continue to invest in the platform, especially around the AI and automation solutions that we're delivering to these enterprises because we're delivering a hard ROI in those cases where they can actually make a labor arbitrage move which replaces live agents, if you will, with virtual agents or we allow them to hire less live agents and put in place virtual agents as they grow.

All right. Let's move to product from the industry a little bit. I've dedicated a lot of time to automation in the contact center over the last couple of years, partially because it's a new technology. It's interesting, it's exciting. There's a big vision there and you all had success with different products there. But overall, automation is generally, I think, well understood by the investors in Five9 and other companies in the space today. I guess the question is where do you take automation from its current product set? You have 2 primary products there that you seem to be selling well. Have we reached the end? Or what does maybe that next phase of automation potentially look like?

Yes, Scott, we are just at the beginning. So first of all, that is the most important part to understand here in terms of an industry, leveraging AI and automation to provide things like self-service or virtual agents on the front end of an interaction. Things like agent assist during an interaction where you've got a live agent and someone on the phone or someone in a digital channel where we're using artificial intelligence to help assist the agent to know how to respond to an inquiry, for example. And then post call or post interaction, we're using workflow automation to follow up with things like SMS messages for appointments and so forth. So these are still pretty early days in terms of the capabilities and the potential for AI to do more in the contact center. Let me give you an example. We will be delivering a product that we call AI Insights, which allows our large enterprise customers to use artificial intelligence to evaluate and analyze all of their customer interactions, whether they're digital or voice through transcribed phone calls, to understand where different types of transactions are occurring or how many of the transactions might be of a flavor that can be automated with a virtual agent, for example. So if you've got 10% of your customer interactions that are looking to track a package in its location, it's a very simple repeatable automatable, if you will, interaction. And so you can think about AI as not just helping pre, during and post interaction, but helping these enterprises strategically decide which interactions are great candidates for automation and self-service. So that's just an example of where things are headed. And then on top of that, you've got core technologies like GPT-3 that are allowing these large language models that are actually -- and we're using those in our future products where they're in the R&D part of our business right now or they're in development. We're using those core technologies to deliver even more powerful automation solutions in the future. So -- and these are -- things like GPT-3, you're going to see over the next few years more and more progress obviously in this area of AI. So just buckle up, it's going to get really interesting and it's going to be an interesting 5-plus years.

I think one of the kind of key things is how AI is taking over the contact center. At least it was a key theme at Enterprise Connect this last month -- this last March. I guess kind of 2 questions along those lines are has the early hype paid off where customers were getting the ROI that these technologies were promising? And then second, if the value really is that high, has the introduction of these technologies changed the demand curve for contact -- for cloud contact center deployments at all?

Yes. I think it's safe to say that it has, Scott. I mean, the ROI such -- if you think about what -- the example I just gave around IVA, right, the virtual agent taking, call it, even 5% of large enterprises contact center traffic and deflecting it to self-service, that ROI where an enterprise might pay $4,000 for a live agent today, our virtual agent is $400 a month. So $4,000 a month for a live person in terms of compensation expense, $400 a month for our virtual agent. That's a pretty hard ROI. If you think about that 10:1 ratio in terms of cost to get those transactions handled. It's a very interesting catalyst for a lot of these large enterprises to move to the cloud because they're not able to get this type of feature functionality and automation from the premise solution. So it's a nice catalyst and a nice tailwind for us. And I think it will be there for, again, for a long, long time in terms of creating a durable growth opportunity for us for many years.

You touched on customer engagement earlier. Customer experience and contact or customer engagement have been hot themes for a couple of years now. Is this increased focus driving any specific product change within your product suite outside of what we're seeing with automation?

Yes. So I'll take that, Scott. Thank you. You're absolutely right. Customer experience, customer engagement have been hot. And it absolutely has been driving our road map for product introduction. And that's reflective of what we've done even over the last several years. The introduction, like we just said, and as Mike just alluded to, we acquired Inference so that we could deliver a better experience and deliver choices to the customers. So our customers could deliver an opportunity for their customers to either self-serve or speak to a live agent, whatever their preference might be. It also drove us to deliver things like Agent Assist, where we're delivering AI-driven actions based on what's being said in the conversation in real time, fetching information from various data sources and then feeding the agent with kind of a cheat sheet so they can be more effective and more efficient as they have their live conversation with the consumer. And then Workflow Automation. We acquired a company called Whendu to give us workflow automation. So we can then close the loop and improve that experience by not having to use manual labor to call back and ask if they received their whatever it is, their package and have they installed it and is it successful and will you take a survey. We can now automate all of that as well. So the introduction of that automation has been driven by really the requirement that enterprises have to differentiate and deliver the best customer experience they can. That's become more and more strategic, and it continues to be more strategic. Mike alluded to one factor, which is the AI Insights. Now by being able to use AI as a prescriptive tool, we can now guess what's the most common questions being asked in the contact center. We can actually pull the summary data from those calls and say, Aha, 22% of your calls are asking this specific question. That's a candidate for potential automation. So lots of things are being introduced. It's driving the product road map, and it's all about what you just said, which is the customer experience and customer engagement and how we can improve it. And like we said, we're just getting started. There's a lot of not only the automation increasing, but the use of that is getting more and more comfortable by consumers.

So improving that customer engagement or customer experience, I think it's kind of -- it's an interesting concept in this space at least. I think the product area that we're seeing in terms of demand from some customers is around having a truly combined platform to service all customer channels, whether it be voice, chat, mobile, social, et cetera. Five9's made a, I would say, maybe a subtle but important or a big push to add more best-of-breed, say, chat functionality, for instance, over the last couple of years. I guess where does the Five9 platform sit in this utopian [ field ] combining all these channels? Can you ultimately get there, do you think, over a period of time? Or does the customer support or engagement requirements still sit at some sort of a, I don't know, fragmented technology environment?

Yes. And then that is a wonderful question because -- and that's been one of the barriers to entry in our space. But when you look at -- in the small and midsized enterprises, as we've grown up as a company and sold into those markets, we had to build a solution that was truly end-to-end and had the full comprehensive solution, like you said, with all the different channels, inbound, outbound, chat, e-mail, social, you name it. You've got to have a complete solution that the business buyer cannot have to develop or integrate into anything else. So that's very, very important for the business buyer to have that end-to-end. However, as we move further and further upmarket, you also need to make sure that your platform can be inserted into an enterprise where they may have already invested in point solutions for those things. Whether it's from their CRM vendor where they may have put chat or e-mail in or have a knowledge management database where they're getting their data from. The key there is being able to have an open system that has the APIs and built on micro services so that you can insert into an enterprise without having to say, Oh, I'm going to put this in, but you've got to use ours. You got to use our chat or our e-mail. You want to be able to integrate the best-of-breed that they may have already invested in. So you kind of have -- that's one flavor all in one, and we have that. We check all the boxes with all the capabilities. Second is, but they're not required, you can use your best-of-breed, ones you already invested in. And then third is really being able to have a platform that they can develop on top of if they want to build their own customizations in addition to that. So you kind of have to feed all 3 of those different types of buyers.

One bit of housekeeping. I did forget to mention that we will take audience Q&A when we're done here. If you want to ask a question, there's a Q&A box on the presentation window, either enter your questions there or e-mail them directly to me at sberg@needhamco.com, and we'll take them in about probably 11 or 12 minutes. Lastly, on products. I've seen the company deliberately add the functionality and complexity to walk upmarket along the customers at what's been a very predictable pace. Mike, you mentioned some of the large contracts that you signed last year, some of these really made good deals, which kind of proves out your product strategy there. But is Five9 missing any functionality to serve the largest contact centers, maybe even the outsourced BPOs as they think about migrating something from their -- outside of their current perpetual implementations?

Yes, not at all. When you ask the question, are we missing something? Validating and demonstrating that we can serve the largest, most complex contact centers globally in any geography is something that we take great pride in being able to do that. So we're not missing anything. However, there are solutions that are extensions of our platform that we may choose not to build. And so we have a great ISV partnership program that allows companies where we may have a particular customer, especially at the high end of the enterprise, that may be one of a very few that would ever add a capability, but they need it. So it's important for us to have not only the open platform but also create partnerships to be able to leverage their solution. An example of that is in analytics and reporting. We have a very robust analytics and reporting engine, but we also have customers that say they want to use what they've had and what they've been introduced to. And so for their -- the ability there is we can either OEM in some cases and sell that to our customer or integrate to it if they've already got it in place. So it's important to note that we want to have the full portfolio. Most of it is provided by us, some of it is leveraged by third parties.

Lastly on the industry -- contact center industry, I think competitively, in my own kind of work in the space, I've seen Genesys and Talkdesk have more success selling their respective cloud solutions than 3 or 4 years ago. I know the company, you all like to talk about your high win rates, which have been extremely consistent over the last 6, 7, 8 years. Is that competitive dynamic changing at all from the way that you see it? Or is this market just really big at the end of the day and multiple vendors have a chance to win.

Yes, Scott, I'll take that one. The win rates -- our win rates against our 2 key competitors remain above 75%. This is a massive market, and there is room for a lot of players, but there are really only 3 of scale, of significance that are competing day in and day out for these replacements of legacy Avaya, Genesys and Cisco. So it remains a 3-horse race. Our competitive win rates remain above -- as I said, above 75%. And again, this is a high barrier-to-entry market. There's a reason that there are only 3 of us. And there have only been 3 of us for quite a long time. Now there are some noise -- there is a little noise around the fringes, but these are companies that want to associate themselves with the contact center space from a CX perspective, but what they will realize, if they haven't already, is the barrier-to-entry is significant. And that's why, again, it took some of our competition amongst the 3 of us a long, long time to get into this space.