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

Hi, everyone. Thank you for joining us here. This is my first fireside chat for our 26th Annual growth conference here at Needham. Today with us, we have Five9. We have the company's CEO, Mike Burkland, company CFO, Barry Zwarenstein. Thanks for joining us, gentlemen. I'm sure those that are on the call are quite familiar with Mike and Barry. But I guess, why don't we just kick off and get right to it.

Scott, if you don't mind, I should have mentioned this to you beforehand. We just want to [indiscernible]

I'm just going to say we're going to cut to Barry because he is going to say the safe harbor statement. I'm sure of it.

Yes. Well, very simply, we're going to be making forward-looking statements during the course of today's conversation about events and trends that may affect the company and the industry. The actual results could differ materially from what we say and we refer you to our filings with the Securities and Exchange Commission for factors, which could cause a change. Thanks, Scott.

Great. Now we've done this once or twice, Barry. I had a sneaking suspicion that was coming. I guess with that, for those that are less familiar with Five9, how about a brief overview of the company.

Yes. Sure, Scott, and welcome, everybody. We provide cloud software for enterprise brands to enhance their customer experience at the highest level. We call our platform, the intelligent CX platform. Most of our business today is in the contact center portion of CX. We have opportunities beyond that, obviously. But the contact center market is a very large market opportunity where we're replacing with our cloud platform, legacy on-premise solutions from companies like Avaya and Cisco, a massive, massive TAM that is in our estimation, less than 20% penetrated in terms of cloud penetration and one that we believe we've got several years of very attractive growth ahead of us. And it's an exciting time in our industry as a lot of these on-premise solutions are being end of life, which is pushing the large enterprises to the cloud and on to solutions like Five9 and where AI has become very strategic and very instrumental in pushing large enterprise brands to take advantage of that AI technology, which you pretty much have to be in the cloud to do. And so that's a tailwind for our business as well, and it's just an exciting time.

Great. Before we get started with the other questions, just from a housekeeping perspective, we will take some audience Q&A when we're finished here with my questions at least. There should be a Q&A box on the webinar screen that everyone's looking at the moment, feel free to input those questions into there or e-mail them directly to myself at sberg@needhamco.com, and I will moderate those once we get through. Mike, let's kind of start with the recap. You've been back with the company at least in the CEO spot for a little bit more than a year. How would you evaluate the company's execution and opportunities, I guess, over that time relative to your goals you envision when you step back into the CEO seat.

Yes. Thanks, Scott. As many of you know, I've been with Five9 for 16 years in total. 10 as CEO, 5 as Chairman and now one back in the CEO Chair. And it's -- the execution has been wonderful. I'm so proud of our team over the last year. We've made a lot of progress on our 3 growth drivers, which are namely our march up market, our platform expansion and our international expansion. And in each of those 3 areas, the march up market, if you recall on our last earnings call, we talked about over 50% of our revenue -- recurring revenue that is coming from $1 million plus AR, our customers. We've closed many, many large deals over the last year, including some megas as whales, as we've referred to them as Scott and -- but we've also closed a lot of what I call bread and butter deals in that $1 million to $5 million ARR category, the dolphins as we refer to them. This market is on the net new logo side of our business has never been better. The pipeline, as we've talked about, has reached record levels. We'll talk about that more in a few minutes. Our international expansion has been absolutely wonderful over the last year. That part of our business has grown faster than the rest of our business. We talked about on our last earnings call, 57% growth in EMEA bookings as one metric to 0.2. And it's just great to see the execution across, again, the march up market, the international as well as our platform. We've -- we continue to add new solutions, specifically in AI and automation. We did the acquisition of Aceyus, which is a data integration and analytics solution that expands our data lake and essentially gives us a very, very good data strategy, which is important for delivering AI. And I'll finish with culture, Scott, because you've heard me talk about it a lot. Culture has always been Five9's #1 competitive advantage. And I would say we've made very good progress in the last year on our culture. I'll call out kind of 2 areas that I think are top of mind for me when I think about our culture. It is a culture that is not about the individual. It's not about any individual, it's about the team. It's about team success. And I think we've made very good progress in that -- on that vector of culture. And I'd say the other avenue or other vector of culture that I really care about is our Five9, as I call them, this is not just a job. It's a passion. It's a passion for delivering customer success for our customers and their customers. And it's important, and it really shows through. We talk about the power of technology, but we also talk about the power of people. And a lot of these large enterprises are making decisions around which cloud vendor to go with based on our people, quite frankly. It's a big differentiator for us.

Interesting that you kind of bring that up and I always say that because if I looked at the wide swath of companies I've covered over the last 15-plus years, the ones that typically get rated highest for internal culture also tend to be the ones with the greatest long-term growth opportunity because customers naturally kind of driving to a little bit. So great. On the AI front, let's start with some product questions because I still get a zillion questions on the AI side, like I'm sure that you all do. I thought that the viewpoint on this might have been bad a little bit, but I've had several questions over the last maybe couple of months that would suggest it's not the case. But I guess to start, maybe could you recap a couple of the new AI functionalities that you've recently brought to market in maybe later calendar '23, mid-late calendar '23. And why does a contact center vendor like Five9 benefit the most from this trend relative to an independent vendor serving up these applications or maybe a WFO vendor that has these applications? Why does it sit really best in your particular platform in this ecosystem of the contact center?

Yes. We've talked a lot about this over the last year, Scott. And I think it's safe to say that in the CX category, Five9 has been leading the AI revolution ever since our acquisition of Inference about 3 years ago, and we've continued to innovate and add to that AI portfolio of products. It's an important opportunity for these large enterprises to take advantage of AI. If you think about at the highest level, AI and automation are allowing us to really -- it's a tailwind for our innovation and our products being delivered to the market, but it's also a TAM expansion. . Our average revenue per customer, if you will, the TAM, if you will, goes up pretty dramatically as we add these AI and automation products. We've talked about it in terms of the average revenue per seat for a live agent being $200 in recurring revenue per month and the average revenue for an automated capacity, if you will, at about $400 a month. And so that's a TAM expansion for us. We're benefiting because we think of us as providing software for enterprises to manage and orchestrate interaction capacity, whether that's with a live agent, with AI assisting a live agent or in true self-service, fully contained self-service, no matter which of those 3 flavors and by the way, our enterprise customers are using a blend of all of those types of interactions, we monetize all of those types of interactions. So think of us as really helping these large enterprises orchestrate their interaction capacity as interactions go up, our revenue goes up. So it's an exciting time. And when you talk about kind of platforms versus point solutions, the benefit of -- we call it the airplane, right? The -- we're delivering an aircraft or an airplane and experience to a flyer, if you will, we're leveraging the best and brightest and the latest and greatest engines to power that airplane. But at the end of the day, we, as the platform, we have visibility across all interaction types, that full customer journey end-to-end, which a point solution just is never going to have. So again, whether it's our solutions in our platform or even third parties that want to plug in and integrate to our platform, which we also monetize, we end up really the platform is the control point is the best way for me to say it.

Okay. I know you've given the statistics historically. I think in calendar '22, fiscal '22, roughly 10% of your net new bookings came from some of these AI capabilities and virtual agents. Not that you're going to talk about the '23 contribution here since you haven't reported the fourth quarter call. But is it safe to say that you've seen the adoption of these solutions increase even further in '23? Are customers maybe not there yet?

No, it's definitely accelerated, Scott. We talked about a couple of metrics on our last earnings call, 80% plus attach rate on $1 million-plus enterprise deals for AI and automation. So again, 80% attach rate for AI and automation, 250 active AI projects in the quarter in implementation phase as well as 150% year-over-year growth in our agent assist bookings. So again, it's happening, it's real. We're beyond the hype and our large enterprise customers are deploying our solutions at an accelerating pace.

Core component of why some are concerned about your opportunities with the AI advancements going forward is that it could drive less revenue to Five9, whether it's through lower seats and the monetization of that ends up being lower over time. I guess, to this point at least, have you seen any evidence that customers you sell into, whether it's the IDAs or other AI modules that they've actually driven less revenues to Five9 than without it.

No, just the opposite, Scott. As I said earlier, it's an ARPU increase, and that's what we've seen from our customers that are deploying our solutions and again, it's a new market in some ways, but it's, I guess, playing out very much the way we expected.

I guess lastly, on product, as you think about kind of your road map, obviously, I would expect some new AI capabilities to come into play here. But is there any particular functionality or capabilities that you're kind of most excited about that are coming down the pipeline that you're able to discuss here today at all?

Yes. I would talk about it more thematically, Scott, in terms of our AI road map, and I am really excited. The Aceyus acquisition that we did recently really opened up a whole new opportunity for us around data and conversational AI coming together. And data is really what allows for us to help our enterprise customers deliver that personalized customer experience. So we'll continue to innovate in our AI portfolio, mainly around those categories where we're leveraging contextual data and generative AI to deliver that personalized customer experience for our customers' customer. And that is what our customers want.

Mike, you mentioned the Aceyus acquisition. I guess, how is that integration progressing versus your expectations? And are you fully able to kind of leverage this today? Or is this really more about leveraging once the pieces are put together maybe some time here in '24?

Yes. It's made quite a dramatic impact already in terms of our pipeline of opportunities. As you may recall, Scott, the Aceyus customer base is mainly in the Fortune 500, very large enterprise accounts. They're opening doors for us, so to speak. In terms of what we've talked about in the past, the Aceyus platform delivers really a couple of things. It's a data integration and analytics platform that has hooks into a myriad of data sources, whether those are legacy ACDs, WEM, CRM or other back-end systems. So we just have access to more data and more back-end systems very easily in these large enterprise accounts. But it also -- and that really helps us not just with our core products, but also with our AI products in delivering that personalized experience. But the second element of this is migration off of legacy on-premise solutions like Avaya and Cisco and to the cloud with Five9 the fact that Aceyus has these hooks into these legacy systems and is able to kind of normalize reporting and dashboarding through the migration to the cloud. That is a huge differentiator for us and is helping us take these large enterprise brands off of these legacy solutions and into the cloud in a seamless fashion where they're -- essentially, they can continue to run their business during this migration without any hiccups, if you will.

I think that's good transition to talk about go-to-market a little bit. Large deals have been -- very large deals have been a more consistent component of your discussions over the last 2 years in particular. The company has announced several transactions that have an ARR amount of greater than $20 million, say. But why now? Why are these really large transactions coming up today? And why is the large enterprise contact center market kind of ripe for these replacements?

Yes, there are a few things, Scott. But let me first start off with some metrics because you're right. I mean the momentum in this market, the large enterprise adoption has never been better and the momentum is significant. A couple of data points are RFP flow we talked about it on our last earnings call, 66% year-over-year increase in RFPs for enterprise and strategic deals and 21% sequential growth Q2 to Q3. And those are good indicators for kind of the demand that we are seeing. And you're right, this is different. And it's happening for 3 reasons. Enterprises are being pushed to the cloud because of these end-of-life announcements by some of the large legacy providers, if you will. And secondly, CX has become very strategic for these large enterprises. They are committed to digital transformation, and they're committed to moving to the cloud to enhance their customer experience. And thirdly is the AI revolution that we're talking about. That is a huge catalyst for these large enterprises to move to the cloud. And I would just add a fourth element to this, which is there is a bit of a herd mentality that happens. As large enterprises see other large brands move the cloud and have success, such as some of the ones that we've closed and talked about, it really helps a lot of these other large enterprises feel comfortable to shift to the cloud.

No. I guess within that, the company has historically talked about your net revenue retention number in the upper 20% range. It's obviously dipped recently for all the macro items we know. But Barry, you certainly mentioned that's your expectations of that moving back up into that $120 range plus or minus. I guess with landing these large deals, does that take away or maybe enhance your ability to drive that incremental customer growth? Because you're landing just that much larger, maybe you can expand department. But on the flip side is maybe you have a chance to sell more modules. But does that change your long-term view on what your NRR could be like landing a large deal like some that you've mentioned?

Yes. Thanks, Scott. So the key really here is the mix shift to those bigger customers. As you're right, we do have more cross-sell opportunities upsell as we expand within these companies that have different divisions and so on. But the salient fact to take strongly in mind is that the dollar-based [indiscernible] rate on these $1 million-plus customers is meaningfully above the rate that we reported in the third quarter. And we expect that to be a key driver as it continues to become a bigger and bigger part of the overall picture, it's faster growing to help drive the dollar-based change rate up in the high 120s.

Now within all of the large signings that you've had the last 2 years, whether it's the delivery service, the health care conglomerate, you signed another large health care conglomerate. I think it was in the second quarter of '23. When we think of the implementations for those, have they been reasonably predictable because large means large scale, more where they can go wrong, more that can go right, obviously, but have they generally tracked in line with your expectations for deployment? Or as you moved into these large ones, have you found that there's maybe incremental steps or time buffers or something to account for maybe that you hadn't previously?

Yes. The good news is, Scott, they remain largely on track as we've talked about recently on earnings calls. And again, these are complex. They are multidivisional multiple business units that are rolling out. This gets back to the people thing I talked about earlier. We talked about the power of people and the power of technology. Our services team as well as our partners that are now part of project pull-through, and we're enabling more and more third parties to implement these large enterprise deals for us. But our people are the best in the business. They're helping these large brands deploy our solution and integrate with all the back-end systems. These are very complicated deployments. But thankfully, again, I think we've got the best team in the business and the best partners in the business. and that's helping these large brands stay very much on track with these large deployments.