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

Okay. Perfect. Well, for everyone tuning in we're ending the day with Five9. So I appreciate everyone for joining. And Mike and Bryan, thank you so much for being here.

Thank you, Taylor. It's great to be here.

Perfect. And for everyone listening and we have Mike who's the CEO of Five9. And we also have Bryan, who's the CFO. So maybe to start, and just to dive it in, Mike it would be great if you could just give a state of the union in terms of what's going on with AI and what's the latest trends that you're having with your customers? Are we at the point where this is a transition? Are you seeing any disruption right from AI, as people just evaluate what the future of contact centers look like? Maybe you could just give an overall update on what you're hearing in conversations.

Yes, happy to, Taylor. Look, what we're seeing is our platform advantage come through. A lot of customers are making their decisions around AI, knowing that they want an end-to-end platform that can orchestrate interactions, whether they're handled by an AI agent on the back end or a human agent on the back end. And that's what Five9 does. That's what we've been doing for quite a while. And I think there's been a lot of hype around AI point solutions. But if they're not connected, if they're not part of an end-to-end platform like Five9 they don't have 2 things: contextual data, conversational data, historical and real-time and also orchestration capabilities being able to go from an interaction that's AI powered to a human agent, for example. And that happens from time to time. And you need that connectivity, that orchestration capability. And those platform advantages have been playing out in our wins that we're seeing, but also even in our customer base. We've had a couple of them -- actually more than a couple, but a couple of large ones replace point solutions with our AI, because they demo really well. They do well in proof of concept, but when it comes to large-scale production deployments, they kind of have a hard time because they don't have the data and they don't have that orchestration capability. So it's playing out quite nicely.

Perfect. And then just in terms of the sizing, when we run through the disclosures that you guys have given, we get that AI could be close to an $85 million in revenue business for Five9 today on a run rate basis. So about 7% of total revenue. So I guess, one, is that roughly a fair math? And then two, could you talk about just when you think about all of the different AI offerings you guys have, whether that's AI agents, Agent Assist, GenAI Studio. What does the breakup look like today? And then as the last third part of the question, it's been growing 40% plus the last like couple of quarters. Do you feel like there's still a lot of momentum to sustain that level of growth.

Bryan, why don't you start?

The first part yes. So that is a decent estimate that you said $85 million and 7% of total revenue. Now the 3 biggest products that make up our AI portfolio are AI agents and Agent Assist or copilot and then Workflow Automation. And then we have a number of other AI products that are much smaller but growing quickly as well.

And in terms of 40% growth in AI revenue. Is that sustainable? Look, it's been in and around that ballpark for the last few quarters. AI revenue makes up 11% of our enterprise subscription revenue mix. So it's becoming sizable. It's growing fast. I guess one more data point is 80% plus ACV bookings -- AI bookings growth in the quarter. And the way I look at our business and been doing this a long time. Bookings growth is a leading indicator for revenue growth. Now that -- look, that's 1 quarter. So we've got to continue to string quarters like that together. But if we do, AI revenue should definitely continue to grow at 40% or more.

Perfect. And let's talk about the competitive landscape a little bit. So there's a number of companies from different parts of the software landscape that are offering solutions in the space, whether that be the CRM players you -- there's talk of potentially the LLM providers, right, getting into the space. You have an OpenAI that's partnering with Twilio. So there's lots of different companies coming in all different angles. But in terms who Five9 frequently goes head to head with today. What does that look like? And maybe you could just talk about when Five9 does win, why is that? And are there other situations where an alternative solution might make more sense?

Yes. Look, that's a great question, Taylor. Look, we do win the end-to-end platform as I discussed earlier, that's a big part of why we win because we're providing that end-to-end platform. But look, our North Star is really what's best for the customer. And sometimes we have, for example, a large health care customer that in 1 business unit in 1 use case was a Medicaid application where a third-party point AI solution, they built a vertical solution, and it was the best thing for the customer. And so the customer wanted to connect that into our end-to-end platform, use our voice stream and transcript stream to get the data to that AI agent for the Medicaid application. And look, we're absolutely fine with this being a team sport as long as we're taking care of the customer. We win the platform. We monetize our AI and our platform, and we monetize the connectivity between the third-party AI and our platform. And it's a requirement for the AI to do its job. So look, that's a long-winded answer, but we definitely see point solutions. But in the end of the day, I think, a lot of customers are seeing the value of the end-to-end platform.

Yes. And Mike, maybe you could elaborate a little bit further. You talked about monetizing the connection right points. I know Five9 has talked in the past about being able to charge for orchestration, data streams, integrations, even when it's not Five9 agents that are being deployed. So could you talk a little bit about how that's going? If you have any customer examples that you'd be willing to share and how you just sort of overall thinking about your monetization strategy going forward?

Yes. In terms of third-party AI connecting to our platform and being -- contributing revenue to Five9 through voice stream and transcript stream and AI connectors. It's early days, quite frankly. It's very similar to the use case that I just talked about with that Medicaid application. It's not the norm. The norm really is our customers want their AI from us. They want it, again, to be part of the platform, and it's becoming more and more of the pattern that we're seeing.

Perfect. And then let's talk about the recent event that you guys just hosted so your CX Summit in Nashville. There was a number of AI-powered capabilities that were announced, whether that be Agentic quality management, Genius Routing and more. So could you just give a little bit of a recap of the product announcement?

Absolutely. It was a great event in Nashville. We had a lot of customers and prospects and partners there, and Yes, we had some exciting announcement, AQM, Agentic Quality Monitoring and quality management is a game changer. That is allowing something that's been done in the legacy world of contact center for so long. And we've all been offering WEM solutions that incorporate QM. This is a completely different approach of letting AI score those interactions based on whatever unstructured criteria, quite frankly, the brand wants that AI to evaluate that interaction on. Think about the power of that. And it's no longer a situation where you can only practically monitor and manage 20% of your interactions through call recordings and analytics. Now it's 100% of the interactions and they're done by AI instantly. And by the way, we're also applying that to not just human agent interactions, but also AI agent interactions. So it's a new world and AQM is going to be really, really big. Genius Routing is the second big announcement we made, which is essentially taking something that our industry has been known for, for decades, which is routing interactions to the right resource with the right contextual data, whether that's an AI agent or a human agent, via digital or voice or other capabilities. And being able to instead of just having skills-based routing or attribute-based routing, which is a little bit more fixed in nature and formulaic. AI-based routing essentially takes the power of AI and applies it to that routing decision. So it's also a game changer for us.

Awesome, perfect, yes I am excited to see how a lot of those solutions evolve. So Bryan, over to you to pivot to the financials. So on the 3Q 2025 earnings call, we saw a bit of a deceleration in growth, which I think caught some investors off-guard just because it -- growth landed at the high end of the guide. So in terms of -- now you've been in the CFO seat for a little while now. So anything, I guess, one, to flag in terms of how you think about guidance philosophy, how that might be baked into your assumptions for the remainder of this year. And then also, two, could you just unpack the deceleration a little bit? Because part of it sounded like there was one component that was expected. You had a big customer that was going through a multiyear ramp. Now you're starting to lap some of that, and that's been a tougher compare. But I guess were there any parts of the deceleration that you didn't expect that were a surprise? And how are you baking that into your go-forward assumptions?

Yes, absolutely. So I'll talk about subscription revenue since that's a large majority of our revenue today, 81% of total revenue. And if you look at the subscription revenue growth, it was 16% in Q2 and then 10% in Q3. And of that 6 percentage point differential, 5 points of that can be explained by expected tough year-over-year comparisons that we've talked about all year long. And to your point, the largest customer that was finishing its multiyear ramp throughout 2024, contributing significantly to revenue throughout last year. That was one tough comparison. The other was the seasonal uptick in 2024 in the back half was very strong versus we were expecting minimal seasonality, which is what it turned out to be in Q3 as well. So those were known. The unanticipated piece was the commercial side. So commercial revenue, it's not a growth vector for us by design, but it's been declining in the single digits consistently over time, but then you'll see that in Q3, it actually declined in the teens. So that was a little bit bigger than what we anticipated. And there were really 2 key drivers there. One was an underallocation of demand gen spend toward commercial. And the other was a temporary gap in the sales capacity as we promoted more commercial reps to enterprise. But we've remediated both of those. It will take a quarter or 2 for the revenue to normalize back to the year-over-year trends that we've seen on the commercial side in the past. But those are all factored into the Q4 guide as well because the tough comparisons that I talked about, those will last throughout 2025. And one last thing I want to point out is that in this growth environment that we're transitioning through in 2025, including Q4, we're not expecting big beats.

Perfect. And then when we break down that a bit further, and I think this gets into the lapping of the tougher compare and some of the things that you're saying around the commercial business. But by our math, it looked like growth for the non AI piece within subscription revenue. Potentially decelerated from low to mid-teens a couple of quarters ago, maybe to around 7%. And then when we look at the guide ahead and the trajectory that you've laid out for 2026 so far, it seems that we have to have growth stabilize, maybe around 7% of those levels. So one, I guess, is that logically fair assumption. Are we thinking about that the right way? And then as a second part to that question, maybe you could just talk about the puts and takes that give you comfort with being able to maintain like growth at these levels. You mentioned that there was some parts of the commercial business that you've remediated, but any other additional color you could give, I think, would be really helpful.

Yes, absolutely. So those headwinds and the commercial portion that I just talked about, vast majority of that impacted non-AI subscription revenue, which is why your estimates are relatively in line. But what gives us comfort going into 2026 is that, first of all, those 2 tough compares, we're lapping those by the end of this year. Commercial, as I said, we expect to normalize back to historical trends in the next quarter or two. And then we're going into a new year with a backlog of not just new logo bookings, but installed base bookings as well. So there's a new dynamic there in the sense that historically, we talked about installed base bookings turning to revenue right away if an existing customer adds a seat to an existing deployment then it turns to revenue right away. These days, we've been very successful in upselling and cross-selling software, including AI and discovering new business unit opportunities within our existing customer base. But what happens with those is that those are essentially like new logo bookings and it takes time to ramp into revenue. And that's what's reflected in Q4 as well as going into 2026. And that's what gives us the comfort. And that's not just AI, that's non-AI as well as AI. So it's core CCaaS as well as AI, both contributing to growth in 2026, which is what gives us that comfort.

Got it. And that was going to be my next question that you answered. But just in terms of the second half implied acceleration in the 2026 outlook, I think, back into the low teens roughly. So it sounds like that's really a function of the backlog, and it's not just AI, but it's a mix between those 2. Is that fair? Yes.

It is. It is. And we have a number of new logos. One of them is the Fortune 50 financial services companies that already started ramping in 2025, but it's a multi multiyear journey. So it's a very small portion of contributions this year, and they'll continue to ramp in 2026 and beyond. But it's that plus other new logos plus installed base bookings both in core CCaaS and AI that have different schedules of ramping, which is why the shape of the curve for the back half has double-digit growth. It reflects the different timings of the customers that we're ramping from our backlog.

Yes. That's really helpful. So I appreciate all the color. Mike, maybe one for you on the non-AI growth. I think one question that we're getting from investors across the software landscape and particularly within application software. It's just where are we on the maturity curve, right? So based on your conversations with customers and what you can see in terms of bookings and backlog, what inning do you think we're in? And how much runway remains for on-prem to cloud migration?

Yes. Great question, Taylor. And I think it's something that gets lost in the shuffle sometimes in our market these days with all the AI discussion. Look, we're around 40% cloud penetration, and that leaves 60% of this TAM in core contact center still on-premise. And those contact centers have to move to the cloud over time. Gartner projects that cloud migrations will actually way more than offset any degradation in the human agent count that may or may not occur over time with AI. To the extent that core traditional kind of human seat-based CCaaS is expected to grow at a 9% CAGR over the next several years, according to Gartner. So I think that's a really good data point in that, look, we view this as a layered growth opportunity. That -- if you really want to break this into 2, it's all 1 platform and all one market these days. But if you really want to think about it as the AI opportunity and the traditional CCaaS opportunity. That traditional CCaaS opportunity is very attractive and will continue to be a growth vector for us. It has been and it will continue to be. And the AI revenue opportunity is a layered -- faster-growing layered growth opportunity on top of that. And I think as investors start to figure that out and realize that both of these components of the business are growing significantly. That's when I think things will change.

Yes. And then what are you guys hearing on seat expansions within your customer base? There's been a number of notable reps recently across the tech landscape and also more broadly as well, too. So I think it's making some wonder how much of this could be AI-driven, right, versus just normal macro and budget pressures. So what are you hearing amongst your customers? And Bryan, then maybe one for you here as well, too, which is I think you typically see within Five9's business, a seasonal uptick in seed activity in 4Q. So any assumptions you have going on there.

Yes, I'll start and then feel free to chime in, Bryan. Look, what our customers are telling us is this is mostly macro in terms of the lack of seasonal seat adds, for example, right, or the -- yes, just the muted seasonality of human seat adds. And again, it's more around macro uncertainty and budget constraints. I mean every company out there and across every industry is trying to drive more profitability in their business. And so I think it's a combination of macro/uncertainty with budget constraints. And look, there -- a lot of our customers are deploying AI with us, and you can see it in our revenue. But at the same time, it's not really impacting our kind of traditional CCaaS business either.

Yes. And from a seasonality perspective, we saw some interesting dynamics in Q3 in the sense that in July, we typically go to our top seasonal customers and survey them for their estimates of what they're expecting in seasonality in the back half -- in the second half of the year. And they all came back saying they're expecting no seasonality. And we saw that on the subscription side in Q3. But on the telecom usage side, we did see a slight uptick. So we went back to the customers in the consumer vertical. They said they saw the same in terms of volume of interactions coming into the contact center, but they are still expecting -- monitoring closely, but expecting minimal seasonality in Q4 as well, which is what's baked into our guidance. Now of course, in the back part of Q4, if there is a stronger uptick than anticipated, then that is potential upside, right? But typically, what would happen? You saw this in Q4 of last year is that -- you see it on the telecom usage side. And then to the extent they can, the customers will expand their seasonal business on the subscription side, but it will be a little bit of a lagging factor there.

Perfect. That's really helpful. Maybe let's shift gears to a big bright spot of the story, which has been the margin expansion. So Bryan, for you, this past year, we saw, I think, close to 500 basis points of adjusted EBITDA margin expansion. You guided to at least 100 basis points for 2026. So could you just speak to why 100 basis points is like the initial starting point, what are the assumptions to get there? Are there opportunities for potentially more leverage? Maybe you could just walk us through the scenarios.

Absolutely. So we did an operational review across the board in the first part of this year. And there are many different types of cost savings initiatives that we're continuing to execute on, whether it's increasing the mix of offshore, expanding span of control and also automation to increase efficiency and improving processes and also negotiating third-party spend, right? So there's so many different -- the list goes on. So there's so many different areas that we're focused on to expand margins. And so as you said, we gave an outlook of an estimate of 23% EBITDA margin in 2025 and then stepping up to 24%, which we felt was a good step function into our midterm target in 2027 of the beginning part of that range, which is 25% to 30%.

Perfect. And then maybe on the cash flow side. So you guided to 2026 cash flow of $175 million, which came in above the Street. So what's driving the improvements in working capital and also cash conversion as well, too?

Yes, absolutely. So in terms of working capital, we're working on a lot of different areas to gain efficiency. But one area as we move upmarket is that more customers, larger customers are on annual invoicing, annual prepayments. And we're actually proactively making that a standard across a broader base of customers as well. So that's one area. Another area is CapEx. You'll see that historically, it's been about 6% of revenue, and that's been stepping down every year. In 2025, we expect that to be below 3%, and we'll continue to make improvements there as well. So that's why we're comfortable giving that $175 million target for next year and expecting cash conversion rates to improve.

Perfect. And Mike, maybe on partnerships. So you have over 1,000 joint customers with Salesforce. You have partnerships with ServiceNow, Google and lots of others. So could you maybe talk about how those partnerships are trending thus far? Are any of those starting to become more needle moving to top of funnel or revenue? And just which of those are you most excited about when you look ahead?

Yes. Well, we did mention those 3, Taylor, for a reason on the earnings call, right? Those are 3 of our most important partners. And look, we also disclosed some metrics that I think show the momentum in those partnerships, ServiceNow, our ACV bookings in the quarter with ServiceNow quadrupled year-over-year. Our Salesforce -- we've been a partner of Salesforce for a long, long time. And those ACV bookings were 60% year-over-year. And when it comes to Google, which is a relatively newer partnership, we got onto the marketplace back in Q1, our pipeline with Google has tripled since then, and we expect a lot of great things out of the Google partnership. It's a 2-way relationship, and we're really, really excited about that.

Perfect. And a question for both of you to close that, Mike, we're very sad to see you go. It's been a pleasure working with you. But maybe you can just talk about as you're looking for a successor, any characteristics that you're very keen on. And then Bryan, one for you. I know you're not new to Five9, you've been at Five9 for a while. But just as you've been in the CFO seat for the last several months, any shift in terms of your priorities? Or how are you thinking about the business going forward in terms of your focus?

Yes. Well, thank you, Taylor. Yes, it's been 18 years, and it's been quite a journey. I expect to be involved at Five9 for quite some time as a Board member. But look, I'm excited about this next chapter for the company. I think we're set up. A lot of the things we've been doing over the last several quarters is really from my perspective, personally, has been to set this company up for the next 10 years. And part of that is also selecting with the Board and myself the next CEO of the company. And we're very focused on bringing someone in, quite frankly, with a proven track record of innovation. Obviously, AI chops is going to be important for this -- in this market going forward. Someone with a growth mindset that's scaled and proven that they can lead significant growth in companies. And then someone that's just got an operational excellence at their core. As Bryan already articulated, and you asked great questions about this. Look, as we continue to drive efficiency in the business. I think it's important to have someone that's operationally excellent and able to drive that. So those are some of the most important elements of what we're looking for, but a culture carrier is the other one. I mean Five9 culture is pretty unique. And I think how our customers view us that CX Summit was a perfect example. Our customers absolutely love that event because they know we care about them. We listen to them. We care about their success on our platform. And I think it's also important to make sure our next CEO is someone that carries on the culture at Five9. Bryan?

Okay. And the key areas of focus for me. One is around balanced capital allocation strategy. So we've been evaluating share repurchases for a number of quarters now. We just announced our $150 million inaugural share repurchase program. We're accelerating the initial $50 million of that through the first quarter of next year. And so it's the right time now because we have, number one, a strong cash balance of over $675 million. We're generating a lot more free cash flow and expect that to continue to increase. So we want to make sure that we have a balanced strategy where we're investing organically and inorganically, but also buying back shares to maximize shareholder value. So that's one area. The other area is around the midterm target. I talked about the cost savings initiatives earlier. But we're also making sure that we reinvest in key areas like AI and go to market. to drive both top line and bottom line growth. So we are fully committed to returning to that double-digit total revenue growth range that we have in the 2027 target as well as expanding margins so that we're targeting to see the Rule of 40 on an EBITDA basis and approach it on a free cash flow basis.

Perfect. Well, with that, we're all out of time. So Mike and Bryan, thank you so much for attending the conference. And thanks for everyone tuning in. Let's give them a round of applause.

Thanks, everyone. Thanks, Taylor.

Thank you.

Awesome, yes, perfect, thank you guys.