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

You guys have to deal with everybody kind of slowly coming back from lunch. Sure people [indiscernible]. Okay, there you go. Well, first of all, my name is Tom Blakey. I cover infrastructure software here at Cantor, and we're extremely happy to have a very large team here from Five9. I can't name everybody because we're already over time. So we'll just kind of jump in. I think Barry has some words to say, not about retirement, but something about safe harbors.

Good afternoon, everybody. Before we start, I'd like to remind you that today's discussion will contain forward-looking statements, including those regarding future events, trends, expectations, projections and beliefs that may affect our industry or our company's product developments, AI and potential growth drivers. Such statements or predictions should not be unduly relied upon by investors. Actual events or results may differ materially, and Five9 undertakes no obligation to update the information in such statements. Please refer to our most recent Forms 10-K and 10-Q under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

With that, and we'll say congratulations to Andy as well for getting promoted to President and COO. So we'll jump in maybe with Andy and Bryan. The guidance we thought for '25 was strong. And looking at peers, we won't name names, but it seemed like you guys are seeing a little bit more momentum. Just walking us back not too far in terms of 2023 and '24. What changed in terms of the momentum there in '24? And what are you kind of seeing here as we head into '25 with regard to bookings and these trends that obviously have turned from what I'm seeing positive here.

Yes, good question. It's crazy. We're almost a quarter into 2025, right? So yes, so if you look at 2024, I mean, Q1, we started off strong, right? We had our largest bookings deal in company history in Q1. Q2 is where we started to kind of see what our CEO has been calling the AI fog, right, in terms of kind of peak customers really looking into depth on every transaction, every RFP, more layers of approvals. And so we also looked at from an execution perspective, making sure that we made changes ourselves, right? At the end of the day, customers were wanting to getting a mandate from their CEO to be able to make sure that what's your AI strategy going to be across your entire business. And so we had to kind of retool and change our sales structure to be able to make sure that we're hiring the right AI experts that we're showing up with our customers and explaining the real ROI of specific use cases. And so we made that change in Q2. Actually, in Q1, we made some major changes to -- the changes we made in Q2 were more on the new logo side. In Q1, we made some changes to how we focus on our installed base. And if you look at our Q4 results, we had the largest installed base bookings quarter we've had in 8 quarters. So kind of had almost like 3 quarters of a year of those changes in place. And then Q3 had a strong quarter and then certainly Q4, which we just talked about. And so it's kind of that was the navigation of 2024, which kind of has set us up for 2025.

Yes. And I can talk about the guidance piece of it, Tom. So if you think about '24, there are 2 key factors that sort of took place from a revenue perspective. So we had our largest customer who is ramping, and it's a multiyear journey. And the contribution to revenue is typically much larger on the back part of that ramp cycle versus the beginning. So that customer has significant growth throughout the year. That was one. Number two is, in Q4 specifically, our seasonal verticals, consumer and health care, actually grew much stronger than what we saw a year ago and stronger than what we anticipated. And so while those are positive tailwinds last year, now coming into 2025, that does create a tough comparison. By that, what I mean is, I'll talk about seasonality first. You're going to have a downtick in Q1 that's stronger than what we saw a year ago. And also looking further out in 2025, given all the uncertainty around macro, given the fact that data points like retail sales being at the lowest point in the last 2 years in January, we're assuming that the seasonal uptick is more muted in the second part of '25. So that's one thing. The second thing is on that point of the largest customer ramping last year, we do have a strong backlog of customers that we have great visibility into for 2025. And one of our largest customers will start ramping in 2025. However, it's that multiyear journey I talked about, the beginning part is always smaller, so you create a tough comparison. But having said all that, what I will emphasize is the fact that our guidance philosophy is prudent, and it's consistently been that way. But I also want to emphasize that in 2025, in this environment, we're not expecting big beats throughout the year.

Right. That's interesting. Can you just -- this consumer part that -- and we've been talking about credit card data, Barry, for a while. We have to take that over, Bryan. But walk us through in terms of like that second half guide that sounds like it's a little bit more conservative. I don't want to misspeak in terms of maybe -- because this is a -- going into the third year, right? This would be the third year in a row that the consumer was a headwind starting with the 4Q '23 that we started talking about this. How -- where in terms of the relative size of the business is this consumer part now?

So it's the third biggest vertical and -- it's important. It's more seasonal than most. The key thing for us is that data that you referred to from JPMorgan, it tracks our internal data very, very closely. And the data is clear. When you look at Q3, I'm going to give you by month, the nominal year-over-year growth. So [ 1, 1, 2 ] in July, August and September of this past year, and then [ 3, 4, 4 ]. So much stronger in the fourth quarter than we expected, and I think many expected. And the first real growth that we've had in that consumer discretionary spending since the beginning of 2023 when it was -- and get this January, February, March of 2023, those numbers were [ 12, 8, 5 ]. That's growth. That's when you see 20% overall corporate growth, but that's not what we had right now. And as Bryan said, and I just want to emphasize this, when we set the guidance for 2025, we were very cognizant as Bryan said, worst retail sales in almost 2 years, Walmart numbers. And in retrospect, as the weeks have unfolded, we're very happy we took the stance we did in terms of that guidance.

Interesting. Barry. We're lucky, you mentioned, Andy, AI and AI monetization. We have the head -- the CTO and the Head of AI, Jonathan Rosenberg here from Five9. Could you just maybe walk us through where you kind of see AI monetization, say, even leaving out a year, maybe even 2 years, because right now, Five9 was early with IVA, intelligent virtual assistant, and obviously was quick to capitalize. I think it was in the first half of '23 on GenAI services like Agent Assist and summaries. There's some really large opportunities that you laid out in the most recent call that are data-driven, like related to, I think, the voice streaming -- just walk us through where -- how this business is going to evolve for Five9 and how large it can become.

If you don't mind, before Jonathan jumps in and gives you the wonderful color around our AI story, I want to level set it. I know you want to talk about the future, but the future starts now, the just completed quarter. We are talking about considerable momentum. If you talk about revenue, so a little bit backward looking, we had revenue growth of 46% in our 10 AI SKUs, an acceleration from the 40% that we had in Q3. It is now taking -- there's no handwaving about this. 9% of our total enterprise subscription revenue comes from those 10 AI SKUs. Looking at bookings as a sort of precursor to what might happen down the road, we had 50% growth in our enterprise new logos. We had more than 20% of our enterprise bookings were from AI. We had a 100% attach rate on our $1 million-plus customers again. And if you look at the installed base, we had coincidently also a 50% increase year-over-year in terms of AI SKUs. So if that's an AI loser, I'd hate to see what an AI winner looks like.

There's a lot of name calling in 2023, Barry, but I guess he's taken some of the jelly out of your donut there, Jonathan. Maybe AI will be a higher percentage revenue.

I think it's important for Jonathan to talk about some of ROI. What are the ingredients of why are we winning and what's the future look like?

I think that's the main thing to think about is which segments are going to see the biggest growth and success in AI, right? And how are vendors like us positioned against hyperscalers, against point AI vendors, against CRMs in this emerging battlefield. And here's sort of the calculus that I think about how this adds up. No matter who does it, if you want a chatbot, you need 4 things. so let's start with the chatbot -- sorry, an AI agent that's over voice and digital. So if you want an AI agent, you need 4 things. You need 4 things to build one of this. Anyone needs all 4 of them, not just us, anyone, okay? You need a large language model, great. They're commodity, right? And I'll talk about that a little bit more in a moment. The second thing you need, and this is really important, but I think underappreciated in many communities, is you need the communication channel, the ability to send voice calls back and forth with the consumer for a voice bot. The ability to send them chat messages on the website for a web chat user. The ability to reach them on SMS on their mobile phone or if they're a WhatsApp user, to connect them over WhatsApp. In our industry, we call those the channels. You have to have that. Like if you don't have that, there's no customer in the customer service part of the equation. So like that is an essential ingredient in doing this. The third ingredient that you have to have is you have to have what we call contextual data. That's stuff like the customer's account balance if you want to build a chatbot to answer questions about their account, right? That stuff often will be spread over tons of systems in -- that are different databases and third-party SaaS products that have been built in enterprises over years and years. And then the fourth ingredient is the history of previous conversations between the customer and the consumer and the brand. And that's an essential ingredient for personalization, right? This is the reason why people hate these bots today as they don't remember that you were there like yesterday and you had a conversation with an agent about this, that or the other thing. People are really going to use these things, it has to know that stuff. You have to have those 4 things. And so when I look at those things, the CCaaS vendors and Five9 in particular, we own outright, 2 of them. Like we are the channel source. That's the gatekeeper -- our platform is a gatekeeper, in essence, of the communication in and out to consumers. So that means that we can integrate it directly for differentiated product value or we monetize it when third parties sit on top of our platform. And so we have products. You mentioned VoiceStream and TranscriptStream. Those are products that when customers choose third-party AI vendors for an AI agent, we monetize by selling those SKUs to the customer. And then we, ourselves, of course, build a powerful AI agent with the same tech. So we own the channel. We own the conversation history that literally, the core data here, the communication between the customer and the brand and all the past chats and voice transcripts, our platform is a system of record for that. So again, that gives us direct access to it that we can use it in our product or monetize third-party access. And then for integrating third-party data, that's what our platform has done for 20 years. And we're really good at that. We have a services team that Andy's team runs. We have great technology for it. And LLMs, they become commodity. And that's good because Five9 picked when I started here about 6 years ago, everyone was like, "Oh, you got to build your own speech recognition model from scratch. That's what the market wants. Go build it. That's the only differentiator." I'm like, "No, this stuff is going to get commoditized. The hyperscalers are going to build this thing out. It's a race to 0 on price. It's madness to build something when the race to 0 is on." Thank goodness, we made that decision 6 years ago, and we continue to make it when LLMs came out as it's been completely vindicated. You can't even build your own LLM. Only the massive hyperscalers can even do it. So what everyone is doing now is what we did all along, which is you plug into these things, or commodity as their price points decline, our prices go down and we get to do things we couldn't do before. So our engine-agnostic strategy, as we call it, has proven to be very prescient and has given us a step ahead in our ability to ride the economic wave to 0 on those models. So that's the calculus on this thing, and that's why I think we're in a pretty good position. And if you don't believe it, while he just gave you some pretty compelling numbers that show like it's working. That's my story.

And back maybe to the higher level way we look at this, there's been success with IVA and some GenAI solutions. Is there going to be a mix shift, maybe looking out a year or 2 to more of a consumption-based model related to that data -- the data streams that you control.

Yes, I can go ahead and take that one. So if you look at -- I think there's 2 things that are going to sort of accelerate our AI business is -- so we have IVA, right? We have 10 of these SKUs. I think what you're going to see is we have a solution like AI insights, which we can talk about. We obviously have our IVA, we have Agent Assist and you start to bring these together from a bundling perspective, package them in a way from a consumption perspective. And let's be clear, our 10 AI SKUs today are all either consumption or capacity based, right? Different than the seat-based model that we have, and we can talk about that as well. So I think you're going to see a lot of the bundling of these things come together and how they integrate. And back to the monetization point, we get about $40 to $50 per AI agent when you talk about the VoiceStream and the TranscriptStream. So it's still -- obviously, we want to land the CCaaS platform. And then ultimately, we're going to continue to win our fair share of our AI solutions. But certainly, the CRMs of the world, Salesforce, they announced Agent Force, they're going to have some success. And I think we can talk about that when we talk about partnerships. But I think that's where a lot of the future AI is going to come from is the coming together of these applications.

Yes. And also on this, too, like, if I can, like I'd also characterize this as like big misconception #2 about AI in the contact center is it's either you have a human agent or if you have AI, there's an AI agent, and that's your AI story. It's for making self-service AI agents. False. There is a -- we have 10 SKUs that do AI things associated with the contact center. Some of them apply when there's a human agent. Some of them don't. Like this thing he just mentioned, AI Insights. That's a product we just went generally available on. It's amazing. And by the way, it works whether or not there's a human agent or an AI agent in the story. It analyzes the conversations. Remember, I talked about our channel is the -- our platform is an egress point for all these communication channels. When you have that data, we use GenAI to analyze it. And as long as there's people talking to somebody, whether it's chat or voice or an AI or a human, it doesn't matter as long as there's stuff happening, we have value to add on that platform.

And then most importantly, if you look at any customer journey, you're going to go back and forth potentially from -- you might start with a chatbot and then escalate to a human. To be able to go back and forth between platforms, that's hard to do. It's hard to do that.

It's one of our strengths to do.

We've been talking about the medium of voice is not going away. We are talking right here. You mentioned partners, that's where incidentally I was going to go, Andy. So talk to -- and Jonathan mentioned system of record. That's a strong word in the software world. So what is Five9's relationship look like in terms of that term system of record when you go to market with ServiceNow and Salesforces of the world?

Yes. So you can add on, Jonathan. But one of the things I think Mike mentioned this, there's a system of record, right? And I think maybe the term we've been starting to say is system of interaction history, right? When you look at the conversations that happen within a contact center or a sales contact center, we have all of that history, right, from the voice to all the different channels that Jonathan talked about, that's what we are. If you look at the classic term of system of record, right? It's the knowledge of the customer information around them. The key is you need both of that data to be able to deliver strong AI, right? And so when you look at who's got the upper hand, I think in order to build any of these things, you have to have both sides of it. And so I think that will continue to be the case. Even when some of the CRMs start to have more success on some of the areas that we're at, you're still going to have to have that data.

And on the engineering side, we use the term system of record to just mean the platform that produces the data. If you produce the data, you own the data, right? It's that simple, right? And so the CRMs, they are the system of record for like your account number and your last product you purchase and how hot is your lead -- how much did you buy last year, right? Their systems produce that data. They collect and they produce it and they analyze it. There's other system like a billing system or provisioning system. That's a system of record for like what your cable modem is. Five9 is a system of record for the conversation data, the interaction history. And that is one of the critical ingredients for building one of these AI agents. And that's why our platform, the CCaaS platforms are in a really strong position.

And maybe just one more or maybe a couple more on the partners. We talked about, I think, on the call about maybe from using the partner channel as a channel for core CCaaS. Can you maybe illuminate us in terms of -- is that...

What our partnership strategy is kind of...

Yes. The partnership strategy, if they're retired, if they can retire quota of that and selling the actual core Five9 product because I think we've been over with Barry and Jonathan that these data-led AI solutions are going to be important going forward. Now we just try to double click exactly on what else the partners can bring to Five9.

Yes. Yes. So just maybe 1 minute on -- so our partner strategy, we have a strong leader named Jake Butterbaugh. We call it our balanced route-to-market strategy. And what that means is we're broken up into a few categories. Number one, we have the service providers. So I think the AT&T, BTs of the world. They bring us leads as well as they're also our service provider routes to market. Then we have the global GSIs. So the Deloittes of the world, they were our partner of the year. We partner with them in a lot of these large enterprise deals. They bring a lot of data into these conversations and they help walk us into opportunities. And then we have our ISVs. These are some of the AI point solutions like a Cresta. We have a lot of these partners that are calling us up every day and want to be part of our marketplace, right? And they would get access to the Five9 platform through VoiceStream and TranscriptStream. And then we have our very strategic partnerships, which are the CRM as an example. And so of the CCaaS partners out there, we're the only partner that's at Summit status with Salesforce, just means that we have more customers together than anyone else in terms of CCaaS and CRM together. We are also -- the history of Five9 has always been to really lean in, especially with the CRM players. Some of our competitors have kind of gone back and forth on this. But in the end, it's really a mutual partnership. When we walk into an opportunity with Salesforce, our sales teams and the Salesforce sales teams are in the same meeting, having the same level of conversations. And so it does retire their quota on the Salesforce side. Each of these partners, like let's take ServiceNow. ServiceNow called our partnership out on their earnings call, this last earnings call. And so we're getting really deep with them. They have more of a marketplace approach. But at the end of the day, all of them are leaning in very heavily with us in terms of wanting to bring us into the conversations. And then with all the APIs that the product teams are building, we believe we made it easier to integrate to us from a CRM to CCaaS perspective than our competitors. And so we're leaning in on the go-to-market side, making big investments with them and continue to lean in on the technology side.

Were there any specific changes made on the go-to-market side heading into calendar '25 post the recent sales kickoff?

Yes. So on the ServiceNow side, they opened up kind of some beta integrations. And so I think we were the first to market with ServiceNow and some of their focuses. On the Salesforce side, obviously, there was the Agent Force announcement, right, which created a lot of buzz. We're working on some specific things with them in terms of how we integrate to them. And then that -- probably Q3 this year, you'll see more announcements around our partnership with them.

Okay. Let me just pause here first a second. Are there any questions from the audience?

[indiscernible].

Yes. So first thing, back to the kind of that labor arbitrage ROI that everyone is looking at, right? "Hey, if I deploy AI, I can reduce humans." Look, there's a lot of sort of bare thesis out there that humans are going away. We're not seeing that in our customer base, both in terms of the actual metrics, and we track these things just kind of in real time. Customers deploy AI, we can kind of keep a track on their seats. We're seeing like maybe goals of like 5% to 7% is kind of what's playing out. And even in the areas where we do have a high ROI use case that deflects a lot of calls or takes calls out with self-service, they deploy those agents into other parts of the business where you need more human empathy. But then back to the other question around the actual proving out of the ROI and how do we monetize that. We mentioned earlier that all of our AI products are consumption-based. Most customers in the contact center world still kind of think of seat-based, right? And so usually, what they do is they do a little bit of math on the consumption and go, "Hey, where does this generally fit from a seat perspective?" But then as they deploy it, if the use case is there and we deliver for them with our services team, then ultimately, they're willing to continue to pay more money, right, for that consumption because the value is there, right? So it's kind of a -- it's a good blend. We still have seat-based products, and we have the consumption model. But at the end of the day, we have customers come to us, and we think a differentiator for us is our flexibility on price. And then the last thing I would say back to how we sell and position, one of the things that we really recognized in Q2 was customers really asking a lot more questions around the ROI. So we put some pretty high-powered teams together to put together just changing our motion of how we engage with our customers and bring them the use cases that we know that will deliver high ROI that we've proven it, we've invested in it. And then the last piece is our existing customers. A lot of times, existing customers, we need to help them build the ROI to go make these investments. So we've launched something called AI Blueprint, which what we do is we turn on VoiceStream, and we listen into our existing customers' conversations. And then what that does is we then open up AI insights, which is the new product that the team has built, and we can actually identify where are some of the highest, like, "Hey, 70% of our callers are calling because they're returning this particular product." Well, they can spot that in real time, and then we can go and update there and build a new self-service application. So it's kind of, in real time, continually tuning and training that. We do a lot of the heavy lifting on the front end, but the application the team has built has been pretty simple to allow customers to continue to change and tune and moderate that.

And that particular product, for example, is AI insights that you turn on to start listening has been -- that particular one has been self-serviced by the majority of the customers that have put that product in because GenAI has made this -- it's a new product category. It's not possible to do this product before GenAI, and it has made it possible to self-service. And we're seeing more of that.

[indiscernible].

So I can help answer that. So a couple of quarters ago, we gave a hypothetical example of if a customer were to achieve 15% automation, then it translates to 30% increase in ARR for us. Now we actually gave 3 concrete examples of just that, right, where not -- the customer actually implemented IVAs. And in those cases, they actually did not reduce their agent count. It was more of they slowed down the growth. And the ARR uplift for us, overall portfolio of that customer was somewhere in the range of 25% to 40% plus, right? So to your point, it's still -- AI is, as Barry mentioned earlier, 9% of enterprise subscription revenue, but that grew from 7% a year ago in Q4 '23. So we had acceleration in the growth rate of 40% going to 46% quarter-over-quarter. While we haven't quantified exactly what the future looks like, it's going to continue to be the fastest-growing part of our product portfolio. And while it makes up a smaller portion today, so it doesn't show up as dramatically, it will continue to be a very strong support for our subscription growth going forward.

We're a $1 billion company, it takes a while to move the needle on it.

Maybe as an extension to that, net retention has stabilized recently, Barry or Bryan. I agree as a percentage of total revenue, too, I mean, it's less than 9% in terms of AI, but it is growing so dynamically relative to the double-digit percentage top line growth. And as you anniversary, it seems like with the $1 million Dolphin wins and these are new customers taking on AI. So maybe it might take a little bit more time to the gentleman's question on lapping these deals from an NRR perspective. But I guess a multipart question, would you assume AI could be an expander for NRR sometime in the next 12 months? And if not, what are the other levers that you're seeing that could expand that?

So Tom, I'm happy to answer that, and I'll take it for 2025 and then beyond as well. So there are a couple of factors, tailwinds, headwinds. On the headwind side, we already talked about it related to the guidance, and that impacts the DBRR as well. On the tailwind side, exactly to your point, the AI momentum we expect to continue, and that's going to be -- while it's a smaller portion today, it's going to continue to contribute towards DBRR increase as well. And of course, we have our 1 million-plus ARR customers who represented 56% of subscription revenue in Q4, and they grew 26% year-over-year. And their DBRR compared to the 108% that we just reported is significantly higher. So when you net all of that out in 2025, we haven't given specifics around where it ends up, but DBRR at the total level will continue to fluctuate in small bands. But going forward, longer term, because of those 2 tailwinds that are going to continue and especially if macro becomes more healthy where our installed base is really poised to accelerate given all this very strong retention that we've had with our customers, we see there a big opportunity in terms of DBRR going higher in the long run.

Maybe one more check with the audience. Okay. I think we have time for maybe one more question, maybe two. Jonathan, you mentioned the $1 billion run rate here. That is a great achievement. Bryan or Barry, back to the financials. Just maybe remind us -- and again, timing would be very helpful in terms of what the levers are to expand gross margins, which are -- and you've been very open about this, that these are subscale. And just maybe kind of remind us about the timing and the levers there.

Yes. So I'll start with Q4 first. So we had 63.5% gross margin, adjusted gross margin. That was a nice expansion both sequentially and year-over-year. Really 3 key drivers there was revenue growing against fixed and semi-fixed costs. We had the full quarter benefit of the RIF and then just tighter management of expenses across the board. So those will continue into 2025. And what we've said is that on an annual basis, gross margin is expected to expand year-over-year in '25. But there are 2 other factors that I want to talk about. Both of them have to do with a mix shift in revenue. So our telecom usage revenue, typically about 1 to 3 percentage points of that mix shift towards subscription. The reason is by design because our larger customers tend to bring their own telephony and our largest partners offer their own telephony. And telecom usage gross margin today is in the 50s versus subscription in the low 70s. So that mix shift will naturally help total gross margin. And similarly, on the Professional Services side, by design, we're enabling our partners to take on more implementations. So the revenue on average should grow slower than subscription. And today, Professional Services gross margin is near breakeven, again, shifting toward the 70% plus for subscription. So that's why we're confident that the gross margin will continue to increase. And longer term, of course, those same factors and the fact that we have momentum in AI, which has great gross margins, those are all going to be helping us to continue expanding margins.

Is there an update on India there by chance in the margins, the gross margins in that region? I was just surprised...

Yes. No, absolutely. So we've stamped out many locations internationally, and we're not done yet, but we're aggressively expanding our infrastructure, India being one of them. We do expect to start gaining leverage in these locations. But it won't be -- it will be over the long run, right? And yes, that's absolutely going to be a gross margin expander going forward.

I won't try to squeeze one in the next 30 seconds. Thank you guys very much for your time. It's great to hear the story.

All right. Thank you.