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

Great to have you here. Thank you. Thanks for joining us.

Thank you.

And it's funny, I'm asking that question because like we kind of have the announcement on you already. But like how do you think -- now that you hand eventually the reins over, how do you think about the growth algorithm for Five9 going forward? Any message?

Perfect question. Look, I mean, we've been a growth story. Raimo, you and I go way back to the early days of Five9. And look, it's a wonderful opportunity ahead of us. We are so excited about the future. It's really a two-pronged strategy in terms of how we're -- we're building products and how we're going to market, but it's also a two-pronged growth opportunity. There are 2 big growth vectors ahead of us that remain. The AI for CX growth vector is significant. We all know that. Our AI business -- our AI growing 41% year-over-year. It's now 11% of our enterprise subscription revenue. So sizable and growing very rapidly. Our AI bookings in the quarter grew 80% year-over-year. So wonderful first vector of growth, if you want to call it that, they're the faster vector of growth. There's also a really solid, durable growth opportunity in our traditional CCaaS market. Gartner projects -- again, remember that there are 40% of the contact center agents are in the cloud today and 60% are on-premise, if you want to think about it that way. And look, it's going to be -- 40% is going to become 80% over the next several years. We all know that. Regardless of what impact AI has on the total global population of human agents, that growth in cloud migration or the, I should say, the penetration of cloud going from 40% to 80% will more than offset any issues relative to cannibalization of human agents. And I think that's what people need to start to realize. Our non-AI business is growing significantly, and it has been for a long, long time, and it will continue to grow at a very, very healthy durable rate. And then we've got the AI revenue growth on top of that. So I think of this as a layered revenue growth opportunity, meaning you've got the core traditional part of our market growing nicely over the next several years as we get to 80% in the cloud. And then we've got an AI opportunity that's growing much faster on top of that.

What do you see in terms of urgency because like that call centers being on-premise has been, as you said, been around for a long, long time as a discussion point. We've been talking about it for many, many years, and it never happened -- never really happened at the speed and scale that we kind of probably thought a few years ago. But now with AI, it's like how do you want to do AI if you're sitting on-premise in some old system? Like so how are your discussions kind of evolving there?

Yes. Look, AI is a huge tailwind for the migration to the cloud. But there's also been periods where it may not be that evident. But I also will remind you, you say it didn't happen as fast. It happened very rapidly during COVID. Look at our growth rates were in the 40s. And that was predominantly because of contact center agents in that period of time, scattering to their home offices, was the real only practical option for those at-home agents. So look, there's just -- AI is a wonderful catalyst. I think most of these brands are coming to the realization that in order to really get the benefits of AI, they've got to move to the cloud. And so I do think it's going to be a nice tailwind for the growth in terms of cloud migration. But there were also periods of time like about a year ago, and we're coming out of that period where it was just decision-making around anything non-AI was just like there was nothing else happening. Everybody was focused on just go figure out AI. Every CEO in the world was telling all their CIOs of every business unit, go figure out AI and don't do anything else. And those days are also -- it's changing. The -- I call it the AI fog is lifted, and that's a good thing.

And then the -- how are the conversations going with your customers around the AI side? Like how is adoption? The reason -- and I'll give you more context. The reason I'm asking is like there's a lot of like -- there was a lot of POC. Now POCs are turning into kind of projects, but they're kind of very well-defined smaller projects because everyone is still nervous that something is going wrong. Like what are you seeing in your market?

Yes. No, it's exactly how it's playing out. I mean, look, this is all brand new to every brand out there. We're helping them come up the learning curve. There are a lot of point solutions that are available from an AI perspective out there. And what we're seeing is more and more brands coming to the realization that while a lot of the point solutions demo great, they may even do very well in a proof of concept. But once it comes to rolling out in production across their entire enterprise and across their entire CX stack, it doesn't work unless it has connected to a platform like ours. And we've seen this in some of our customers. We gave one example on the last earnings call, the parcel delivery service company that's been a customer of ours and is a sizable customer of ours, was using a point-AI solution. And they realized in production that it wasn't delivering for them, and they've switched to our AI agent. And that was a $3.5 million ARR deal that we just did this last quarter, just for the AI portion. So again, it is so important to be -- the brands we are seeing that it's important to have one end-to-end platform that can orchestrate interactions, whether they're digital or voice across AI agents and human agents on the back end of those and we're able to do all of that.

Can you just like -- for those of us -- and I call my -- I include myself now because I didn't cover you for a while. If you think about your AI projects like offerings, how do they fit into that value chain that we have in a call center? Like what are the products in a way?

Sure, sure. Let's back up a little bit. Look, there are several categories of AI solutions that we offer. On the front end, you can think of this as self-service. Those are AI agents, both digital chat or other digital interactions handled by a bot, a chatbot, if you will, or a voice bot, IVA is what we used to call that. But we now call this set of digital or voice AI agents. So those are our AI agents. That's kind of at the front end of an interaction, sometimes fully contained within that self-service, sometimes used as a front end, just like the old IVRs were used where you start in an IVR and then eventually you escalate to another resource on the back end of that. But there are also Agent-Assist or copilot products that we provide, and there are several different SKUs within that category of Agent-Assist. It can be everything from interaction summarization to guidance cards, to -- there's a couple of other nuances in that, but I won't go into detail. And then there are products that are really for the business, the overall customer experience, customer service operators. To understand their interactions, we have an AI Insights product that we use it almost diagnostically. We'll come into accounts, whether they're our accounts or new accounts, and we can kind of turn it on and let it run. And it will basically cluster interactions by use case and by sentiment and by a number of factors. It gives them the insight to understand where to deploy AI first, second and third as they go forward. We're now coming out even with additional AI products. So we've got a portfolio of AI SKUs that are contributing to that 11% of enterprise subscription revenue.

Okay. Perfect. Yes, that's really good. And how does it -- like in the olden world, you had not -- it's not old, but in a minute, you know what I mean. In the olden world, you were doing the plumbing and then it was the Salesforce, the ServiceNow doing like maybe the UI kind of front end. They are kind of talking about AI and you're talking AI. Like has the overlap kind of changed? Or like how do we need to think about that?

I would think about it this way, Raimo. Look, CRM platforms -- forget AI for a second. We'll get into AI in a second. But look, to run a customer service organization, we're all customers, we're all consumers, we interact with brands. That brand has a customer service department. In order to operate a customer service organization, you must have, must have both a CCaaS solution or a contact center solution. Think of that as the routing engine to deliver interactions to the right resources with all the contextual data to have a great interaction. And then you have to have a CRM system, which is a system of record for every customer of the brand, what products they've got, et cetera. So we're always joined at the hip, integrated with a CRM solution, whether it's Salesforce, Dynamics, you name it. Their homegrown CRM is still about 50% of the market. So there's a lot of different -- EPIC in health care. We consider that a health care CRM. So we're always joined at the hip. But look, when it comes to the AI opportunity, every solution in this equation, including the CCaaS, CX platform as well as the CRM platform will have AI abilities. Some of them infused in our core functionality by the way, and others in these areas like I just talked about with self-service and Agent-Assist and all those things. And look, what we're seeing is more and more brands are coming to the realization that they want their AI from their CX platform vendor because we are the orchestration engine as opposed to the system of record for information. So -- and then we also -- because we're the orchestration platform, you have to have ability to orchestrate between AI and humans, for example. The second thing is data. We have the conversational data. All the data, the billions of conversations that have occurred with that brand and all of their consumers are in our system of record, not in the CRM, okay? And the only way AI can do its job is if it has access to that conversational data, and that's gold, and that's in our platform. And I think what -- that's part of the reason some of -- I think our customers and many customers are realizing that you want this end-to-end platform, it needs to be the CX platform. Now if you have point solutions that happen to take certain use cases, they'll want to integrate to our platform. And they do that, and we charge a toll.

Do you think that -- because I think from an investor perspective, that understanding of those data and being gold, I think that's still evolving. Is that the same on the customer side? And I would assume there are a few steps further than...

I think they're a little further along in the learning curve, but I think you're right on. I think there's -- we have to do a better job of helping investors understand that.

Yes, yes. Okay. And then -- moving on from the AI theme a little bit, like you had some very large deployments over the last few quarters. Can you speak to that, where we are on that journey there? And the thing I was hoping is like they give you referenceable kind of very large customers, which kind of usually then gets to the next one, the next one, and the next one?

And that's exactly what's happening, Raimo. I mean, look, we call them the mega deals or the whales that we've brought on to our platform over the last few years. And look, we've also said there are a few and far between. They're not going to happen every quarter and they're not, but they're -- the pipeline for additional megas is excellent. We continue to march up market as we call it. But we've got very referenceable situations with the ones we've been talking about like the parcel delivery service and the health care conglomerate and the Fortune 50 financial services company that we brought on. From a booking standpoint in '24, it started ramping in '25. They're doing quite well and ramping and subscription revenue started in '25, but that's a multiyear journey, but they're all doing extremely well and very referenceable and that is why we're able to continue to win large deals.

Yes. Okay. Makes sense. And then related a little bit to the point you made before with the system of record guys, there was a little bit of a discussion like recently with -- how is your relationship with Salesforce, ServiceNow evolving? One is like who's doing what? The other thing is like investments in certain other companies. Like what's your conversation with Salesforce like what ServiceNow like?

Yes, they're better than ever. I mean ServiceNow, Salesforce, Google, we talked about on the last earnings call, all 3 of them as partners. And look, we've got a lot of other partners as well. But look, the momentum with ServiceNow, our bookings -- ACV bookings in the quarter quadrupled year-over-year -- quadrupled. Our bookings with Salesforce, we have thousands of -- over 1,000 customers, I should say, with Salesforce. The ACV bookings with Salesforce grew 60%, 6-0 year-over-year. And with Google, who's a newer partner for us, but a wonderful partner and one that we believe is going to be very strategic for us as time goes on here. The pipeline of opportunities that we have with Google has tripled since Q1. So it's -- those partnerships are very, very healthy, doing really well in spite of -- I think there's a little bit of left hand, right hand in terms of corporate investments that happen, and that's just -- our relationships at both these -- all 3 of these companies are just very, very bullish on our partnership.

I mean there must also be a nice market share move towards you because like if I look at the numbers from those vendors, they're not quadrupling or growing at the rate that the Salesforce is. So within the relationship must be getting stronger for you guys?

Yes. I mean, look, within their base, right? I mean both those companies have huge installed base, right?

Yes, exactly. Yes.

So that's where we're getting growth into their base, so to speak.

Yes, yes. Okay. The other thing is, as we talked about AI and the AI products, how do we have to think about pricing there?

Yes. Look, we, like everybody else in this AI market have a consumption-based pricing model. So again, all of our AI SKUs are priced on a consumption or capacity basis. And that's just the wave of the future. That's the way customers want to purchase the software. And the good news is that with AI revenue growing 41%, you can -- rest assured that that's because our products are being used and consumed, if you will, by those brands that are driving that revenue growth. And it's also an interesting opportunity for us. As we do a lot of new contracts with customers, and they're trying to figure out this balance and equation between AI and humans, we're starting to do contracts that are revenue commits that essentially think of us as a software provider for interaction management. And those interactions can be handled by AI or handled by human agents. The more interactions there are, as interactions increase, regardless of the mix, we sell more software and those minimum commits from our customers go up. So we've done some very sizable contracts recently, and we'll continue to do revenue-based contracts as opposed to seat-based contracts.

Yes, yes. Okay. Makes sense. And then Bryan, I want to get you involved, and I apologize because it's going to be the tough question straight away. Like -- if you think about it, like when Mike and I talked in the past, growth rates were different, now the growth rates are kind of at a slightly different level. Like can you speak to the factors that impacted that? And how do you see that evolving from here?

Yes, absolutely. So I'm actually going to focus on subscription revenue because that makes up a large majority, 81% of total revenue today. So I think the key one that I want to focus on is if you look at subscription revenue year-over-year growth in Q2 was 16%, then it was 10% in Q3. So 5 of those 6 percentage point differential was actually driven by known tough compares that we've been talking about all year long. So in 2024, we had our largest customer who is finishing their multiyear ramp. So it was contributing significantly to revenue. And then we also had a seasonality that was much stronger in '24 versus minimal seasonality in Q3, and we're expecting that to continue in Q4 as well -- in Q3 and then expecting it to continue in Q4 as well. So those are known items. Now there was one unexpected item in Q3, which was our commercial business, which by design is not a growth vector for us. But typically, it declines in the single digits, but in Q3, it was in the teens, right? So that was a little bit higher than what we anticipated, mainly because we had underallocated demand gen spend toward commercial as well as we had a temporary gap in sales capacity as we promoted more commercial sales reps to enterprise. Both of those have been remediated. Now in terms of the revenue impact, we'll start to see the year-over-year trends go back to its historical levels in the next quarter or 2. But these factors will continue into Q4 as we transition out of this throughout 2025. But we lap those tough compares at the end of this year. And going into 2026, what gives us comfort is, first of all, the tough comparisons are no longer there. And it's really the backlog. And typically, when we start the new year, the backlog is comprised of new logo bookings that we already won. This time, we have new logo bookings and installed base bookings that we've won. And there's a new dynamic here in the sense that historically, our installed base bookings would be comprised of existing customers having deployed their platform already and just adding additional business on top of that. So you could turn that into revenue right away. The new dynamic here is that we've been very successful in upselling and cross-selling new software. So brand-new software that they don't have like AI, for instance, or brand-new business units within the existing customer that we discovered and brought on. So it's essentially like a new logo ramp. And so those are starting to convert -- both the new logo and the installed base bookings side are starting to convert into revenue in Q4 and more so in 2026, which is what's underlying the shape of the curve that we gave where we have an outlook of double-digit growth in the second half of the year and what gives us comfort for the annual number of $1.254 billion for consensus.

Yes, yes. Okay. Makes sense. And then the -- if you think about it, like talk a little bit about that commercial versus higher segment, how do you define that again? Because I get every vendor has like a different dynamic there.

Yes, I'll start. Bryan, feel free to chime in. So commercial, think of it as SMB, it's our smallest customers, right?

That's 50 seats...

50 seats or below. And it's -- again, it's not a growth vector for obvious reasons, right? And look, if you think about our enterprise business is 91% of our subscription mix, commercial being 9%. And it's -- again, it's not a growth opportunity for us. So again, it's just a different market. You've got small businesses that come and go, go out of business, et cetera. You've also got more competition down market. They don't necessarily need the full feature functionality of an enterprise-grade solution like Five9, and we don't sell a separate product down market. So there are other options from some of the UC players that are -- have lightweight contact center solutions that are just fine for some of those. So again, it's just a different market and the enterprise and upmarket is much, much more attractive to us.

And then the other thing I'm trying to kind of get an answer around confidence for next year, like it's obviously, it's easier comps, which kind of makes sense. What do you see also like in terms of like pipeline build, et cetera, around, like it's early-stage pipeline, probably like -- about pipeline build as you go into next year, like how do you feel about that change?

Yes. Our pipeline coverage is great. It's continuing to, I would say, perform very well. And again, part of this is RFP flow, right? This is kind of the leading, leading indicator of top of funnel activity. That continues to be at a high watermark ever since -- about 8 quarters ago. So we're very bullish on kind of the demand side of this business and the pipeline. We've gone through some really great changes in terms of our sales segmentation as we've talked about in the past few quarters. Those are kind of fully in place, and I feel really good about our sales execution against that we're seeing.

Yes, yes. Okay. And then the -- Bryan, more for you like that, the offset is on -- well, there's growth and then there's margins. On the margin side, significantly better profitability in the quarter. Like can you talk a little bit about like what's driving it and how sustainable is that?

Yes, absolutely. So as you know, we went through our operational review at the beginning of the year, and there are many different cost savings initiatives that we're working on, whether it's related to offshoring or delayering and the span of control, automation, but the list goes on. And so that's why if you look at our annual adjusted EBITDA margin, it was 19% in 2024. We have guided to 23% this year. And then we're guiding to at least 24%, which is a good step function into the beginning part of the range for our midterm target in 2027, which is 25% to 30%. So we continue to be very disciplined in our cost management. But one thing I do want to point out is that we also continue to make sure that we reinvest in key strategic areas like AI and go-to-market so that we support double-digit revenue growth, which is what's in our midterm target in '27 as we target to exceed the Rule of 40 on an adjusted EBITDA basis and approach it on a free cash flow basis.

Yes, yes. Okay. And then is there -- because the cash flow is the other question that comes up a lot between EBITDA, like how do you think about that EBITDA to cash flow conversion?

Yes. So I mean, historically speaking, it's been right around that 11% range. If you look at EBITDA margin and look at free cash flow margin, [ a big ] difference of the 2, right? And if you do the math, we actually gave our outlook of $175 million for 2026. And if you take that against the $1.254 billion revenue that we said we're comfortable with, that's actually a 14% margin against the 24% EBITDA margin that we had provided as an outlook. So that's a 10 percentage point differential. So we expect to continue to get more efficient from a working capital perspective and CapEx perspective and have the conversion improve over time.

And is it like -- is it really working capital and CapEx that's kind of the delta -- that explains the delta?

Yes. So the delta is mainly in the working capital area, which we expect to get better and better, especially around deferred revenue because we have -- typically, our business has been much more monthly invoicing, which now that we're moving up market is transitioning to a lot of annual prepayments. And we're making that standard across the board for a lot of other customers as well. So that -- we're going to get some efficiency there. And CapEx, there was a period when we were doing a lot more investments, but now we're getting much more efficient. We're going to be below 3% in 2025, and we'll continue to improve on that front as well.

Yes. Okay. Perfect. Last couple of minutes, I want to talk about like capital allocation a little bit. Like if you think where the shares are, like how do you think about buyback -- share buybacks?

Yes, absolutely. I mean this is something -- share buybacks is something that we've been evaluating very closely for the last couple of quarters, and we're excited to announce an inaugural program during our last earnings call, $150 million share repurchase program over 2 years with $50 million of it being accelerated through the first quarter of 2026. And we felt like it was the right time to do this given the valuation where it's been as well as if you look at our balance sheet, our cash balance is over $675 million. We're generating a lot more free cash flow, and we expect to continue to improve that going forward. So we're going to have a very balanced capital allocation strategy where we continue to invest organically and inorganically in the business, but also buy back shares to maximize shareholder value.

Okay. Yes. And then the other part of the capital allocation is obviously M&A as well, like how are you guys thinking about that?

Yes. I think the best way to think about that, Raimo, is look at our track record over the last 5, 6 years, 7 years. We've made a lot of tech tuck-in acquisitions -- not a lot, but a handful, and they've been very successful, including our AI acquisition about 5 years ago that we've obviously modernized and built on top of. But I would not be surprised -- you shouldn't be surprised if we do additional tech tuck-ins at this point. But again, we're not going to go overpay for an asset that doesn't really move the needle for us.

It's going to be difficult to get at the moment, yes.

Yes. Well, but -- exactly. It's difficult with our market value where it is. But I also think there are lots of opportunities out there. There are going to be more and more opportunities out there for, I call them, downstream opportunities that are valued properly.

Yes, yes. Okay. Perfect. And then maybe last thing is like if you think about the organization? Like how do you think about like your success? Like what's the requirement? What's on the list?

Yes. We've said this publicly. And again, the Board and I are conducting this search. We announced it back in August. Look, we're looking for someone that has a very successful track record of product innovation. This is a new world that is very -- it's evolving rapidly, and we want to make sure we've got someone that can lead that charge. Someone that has operational excellence at scale, someone with a growth mindset and someone that, frankly, can carry on the culture of Five9. I just talked to another investor a few minutes ago about this. Look, we're pretty unique, and we have a great reputation in the market with customers and partners in that we care so much about our customers and our partners, all of our stakeholders. And it shows through our customers -- and it's easy to say that. But when you go to an event like our CX Summit we had a couple of weeks ago in Nashville, you really feel it back. I mean they know that we care so much about their success on our platform. There's a reason our NPS scores are plus 85 in implementations because we truly care about their success. And I want to make sure that whoever leads this company going forward maintains that culture of just caring about our customers and putting our customers at the heart of everything we do.

Yes. Okay. Perfect. That's also a very good closing statement. Mike, good to see you again. Thank you.

Great to see you, Raimo.

Bryan, thank you.

Thank you.

Thank you.