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

Good afternoon, and welcome to Five9's Second Quarter 2026 Earnings Conference Call. I am tony Righetti, Senior Vice President of Investor Relations. With me today are Amit Mathradas, Chief Executive Officer; and Brian Lee, Chief Financial Officer. During today's conference call, certain statements will be made that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding our quarterly and full year 2026 guidance, expected improvements in operating and financial metrics industry trends, including with respect to AI, our strategy, priorities and execution, our product road map and technology investment, our markets, customer demand trends, our market position and opportunity our capital allocation strategy and other future events or results. Such statements are simply beliefs and predictions it should not be unduly relied upon by investors. Actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainty that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate, including the impact of adverse economic conditions lower growth rates within our installed base of customers, other to manage our technical operations infrastructure, unsuccessful development or market acceptance of our AI solutions failure to maintain and develop our contact center solutions and other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission. In addition, management will refer to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and a reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck that can be found in the Investor Relations section of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's view as of today and may no longer be accurate at the time of the replay. Lastly, a reminder Unless otherwise indicated, financial figures discussed are non-GAAP. And now I'd like to turn the call over to Five9's CEO. Please go ahead, Amit.

Thank you, Tony, and good afternoon, everyone. We delivered another solid quarter, and I am pleased to report that our Q2 revenue was $312 million, above the high end of our guidance and subscription revenue grew 14% year-on-year. marking a third consecutive quarter of acceleration. AI revenue grew 78% year-on-year, and we are increasing our full year AI growth outlook from more than 40% to at least 60% year-on-year. Together with the significant enterprise win, which I will discuss in more detail shortly, these results provide tangible evidence of the progress we are making against our priorities and are an indicator of what Five9 can look like with greater focus, speed and operating discipline. Last quarter, on my first earnings call as CEO, I laid out 4 priorities for Five9's building a performance-driven culture, optimizing operations, strengthening the core business and winning an AI-powered customer experience. This quarter, we made progress against each of those priorities, measured by the operating indicators we are focused on. The most important point is this, Five9 is sharpening its position around the opportunity we are built to lead. We are a voice like enterprise platform for customer experience. And when we say voice led, we do not mean voice limited to human agents. Voice is the most natural, highest context interface for most customer interactions. And increasingly, those voice interactions can be handled by AI agents, human agents or both working together. Our customers rely on us for complex high-value integrations where reliability, governance, AI, digital workflows, data integrations and human agents all need to work together in production. That is where our strategy is focused, and that is where Five9 has the clearest right to win. Let me start with updates on culture and operations. Last quarter, I said we needed to move with greater urgency, sharper discipline and higher accountability. That work is underway. Our review of the market, product portfolio and go-to-market priorities has reinforced where we should concentrate resources. Complex businesses, especially financial services, health care, insurance and other regulated industries where voice, compliance, integrations governance and human in the loop workflows are not just essential, but required. These are environments where Five9's platform depth is critical. The customer interactions are complex, the cost of failure is high and the buyer needs technology that works reliably in production, not just in a demo. We are aligning our resources behind this view and we are allocating resources towards the customers, verticals and use cases where Five9's opportunity is greatest, while being more disciplined in other areas. I want to acknowledge that transparency with the investor community remains a central obligation. That means less narrative, more evidence. I believe Q2 continues to demonstrate that. On operations, we announced a significant set of organizational changes during the second quarter. These changes reflect a deliberate effort to mature our organization and put leaders in place to execute on what lies ahead. Let me take you through each area. Starting with R&D. For the first time, we are bringing our product engineering, product management, AI, automation, architectural organizations together under a single leadership structure, creating cleaner ownership across the full product life cycle and faster delivery. To lead this unified organization, I'm pleased that Naranja and Vijay Raghavan joined Five9 as our new Chief Technology Officer to lead this unified organization. Turning to sales. Rob Hornish was appointed Chief Sales Officer to lead our global sales organization with a focus on strengthening go-to-market execution and driving disciplined revenue performance. As we accelerate our transformation, we have recognized the need for a dedicated function to connect our strategy to execution. Sven Linzmeier, joined as EVP Transformation and Strategy responsible for our highest priority transformation initiatives. Disciplined execution across the organization and corporate development, including M&A. Each of these hires brings experience building modern enterprise platforms across AI, automation, digital workflow and go-to-market execution. This is relevant because, in our opinion, the next phase of customer experience will require more than maintaining a traditional contact center. It will require bringing voice, digital AI data and human workflows together into one platform. On the core business, we continue to see healthy indicators. Subscription revenue was strong, growing 14% year-on-year in Q2, driven by AI revenue growth acceleration to 78% year-on-year. Our LTM subscription dollar-based retention rate remained steady at 107%. Customers with complex needs are looking for reliable cloud-native CX platform that delivers the best-of-breed technologies coupled with an open ecosystem, a CX platform that seamlessly connects with other critical systems offering large regulated enterprises, a trusted platform that can support customer experience at scale, not a sprawl appoint solutions. A powerful example is our recent win with a Fortune 100 financial services customer, representing approximately $100 million of total contract value. This was a competitive process against a select group of enterprise grade CX providers, and we earned it on the strength of our proof of concept and our delivery and execution capabilities. Working as one team with Google, and a leading global systems integrator. Notably, it is one of the first large deals transacted through the Google Cloud Marketplace and our joint go-to-market motion with Google was a key driver of this customer's decision. Five9 was selected as the core CX platform supporting the customer's broader cloud migration strategy. We expect the current 5-year agreement will ramp to approximately $25 million of ARR when fully deployed. Now let's turn to why we believe AI is strengthening our platform. Contact centers are going through a major transformation. Service is no longer viewed only as a cost center to contain. Increasingly, enterprises see customer experience as a lever for loyalty, retention and growth. They want to resolve more issues, respond faster, personalized more interactions and create better outcomes for customers at scale. AI is enabling that shift by automating routine work and improving the economics of service. In many customer conversations, the ROI is becoming clearer, better service, more capacity, faster response times and stronger customer outcomes. That makes the move to a modern cloud-based CX platform more urgent, not less, and is driving a reallocation of contact center spend away from labor and towards the type of mission-critical software that Five9 provides. Voice is central to that opportunity. It remains one of the most important channels in customer engagement. And as AI handles more interactions, delivers more insights and improves agent quality, the value of a voice platform increases. It is no longer just about routing calls to people. It is about orchestrating the handoff between people, AI voice agents, AI digital agents, data, compliance, security and governance inside one production environment. That is why voice is a starting point for our strategy. The question is not whether AI will penetrate the voice channel. It already has. The question is whether enterprises deploy voice AI as a disconnected point product or inside a trusted CX platform that already manages voice, routing, data, governance and human handoffs. We believe the enterprise answer favors Five9, that is why we believe AI can be a catalyst for CCaaS growth. It increases the importance of the platform as critical infrastructure that connects all these elements that enterprises require. To be clear, AI point solution companies will continue to bring useful features to market quickly, and some will solve real problems in the simplest CX environment. But in complex enterprise environments being early with the feature is not the same as being trusted as an operating platform. These customers need AI embedded into the platform they already depend on. That is why our focus is not AI in isolation. It is AI agents and human agents working together across voice and digital channels inside one trusted platform to deliver hematic CX. Over time, AI agents will handle a larger share of customer interactions, including many routine and multistep service requests. Human agents will remain essential for complexity, judgment, empathy, escalation and oversight. The value comes from orchestrating both together. So the customer experience is seamless and the platform learns from every interaction. This is where we believe the category is going and Five9 is built for that future. We are also delivering new products that directly support this strategy. In June, we advanced our AI powered CX initiative with the release of the NextGen 59 voice AI agents, a rearchitecture of our voice AI capabilities built from the ground up for the Humantic world, we believe, is upon us. Voice AI agents are designed to reason, act, resolve customer requests with seamless handoffs to human agents when needed. What sets us apart is that it is built natively into Five9's carrier-grade telephony where data, knowledge and orchestration are shared across the entire platform. Enterprise voice AI is not just about answering customer questions. It is about knowing when to act, when to escalate and how to bring in humans with context. It is also about operating inside government workflows where reliability, control and oversight are essential. Customer engagement is not an open-ended chatbot environment. It is rules-driven, operationally sensitive and tied to real workflows. These are the problems we can solve. We are seeing evidence of this strategy working in the quarter. Customers are adopting AI capabilities at an accelerating pace and we are seeing continued demand from enterprises that need trusted AI infrastructure as they modernize customer experience in the cloud. In closing, we have a strategy that is progressing and a sharper operating focus. The work is not complete, but the progress is real. We are concentrating our resources by Five9 has the strongest right to win. We believe AI strengthens the value of our core platform, expands our monetization opportunity and accelerates the need for a trusted cloud CX infrastructure. With that, I'll turn the call over to Bryan.

Thank you, Amit. Good afternoon, everyone. I'll take you through our Q2 financial results and then walk through our updated guidance. Q2 revenue was $312 million, up 10% year-over-year. Of the total for the quarter, contributions from subscription, telecom and professional services were approximately 83%, 11% and 6%, respectively. Our subscription revenue grew 14% year-over-year, made up of 2 components: first, our CCaaS revenue grew a stable 7% year-over-year as expected; and second, our AI revenue accelerated to 78% year-over-year growth. This acceleration in AI revenue was driven by several customers in our backlog ramping earlier than forecasted. Pulling forward the deployment time line rather than reflecting an increase in deal scope. As a result, AI revenue reached approximately $39 million in Q2, representing an annual run rate revenue of over $150 million. Additionally, AI revenue now makes up approximately 15% of total subscription revenue, up from approximately 9% a year ago. Also, I'd like to point out that our concurrency count grew in line with our CCaaS revenue growth. Looking ahead, we continue to expect CCaaS revenue growth to generally track the sequential progression of total revenue growth in our guidance for the remainder of the year. driven by the timing of backlog converting to revenue. For AI revenue, we now anticipate full year 2026 growth to be at least 60% year-over-year, up from our prior outlook of more than 40% and reflecting the earlier-than-forecasted ramps I mentioned a moment ago. LTM subscription dollar-based retention rate was 107% in Q2, in line with our expectations. We anticipate this key metric to increase in Q3 by approximately 1 percentage point, driven by existing backlog. Now turning to profitability. Adjusted gross margin in Q2 was 61% compared to 63% in Q2 25. Adjusted EBITDA in Q2 was $70 million or 22% of revenue compared to $68 million or 24% of revenue in Q2 '25. Both metrics were impacted by a temporary expansion of professional services capacity, enabling us to address customer demand to deploy their AI solutions earlier than anticipated. We expect adjusted gross margin to ramp through the second half of the year. Please note that the sequential comparison of Q2 '26 versus Q1 '26 for both adjusted gross margin and adjusted EBITDA margin was also affected by previously disclosed onetime vendor discount of slightly more than 1 percentage point of margin that benefited Q1 26 and did not recur in Q2 '26. In terms of cash flow, cash from operations was $42 million or 13% of revenue, and free cash flow was $15 million or 5% of revenue. Please note that in addition to Q2 cash flow, being seasonally the lowest quarter of each year. There are two nonrecurring items, including variability from our transition to annual customer payments and a pull forward of some capital expenditures from the second half of the year into Q2. We ended the quarter with approximately $654 million in cash, cash equivalents and short-term investments. We continue to be on track for purchase of PP&E to come in at approximately 3.5% of revenue for 2026. As a reminder, this is temporarily elevated at approximately 1 percentage point above last year's rate. in order to support our global data center refresh in 2026. On share repurchase, the $90 million ASR is well underway. We received an initial delivery of 3.1 million shares representing approximately 80% of the total shares expected to be purchased under the program. The remainder is expected before September 30. And the new $200 million board authorization we announced last quarter continues to be available, and we will deploy it opportunistically. Before moving to guidance, I would like to touch on the Fortune 100 financial services customer win that Amit highlighted. This is a 5-year contract with total contract value of approximately $100 million, comprised of both subscription and professional services and we expect this customer to reach approximately $25 million in subscription ARR was fully deployed. Currently, we're in the initial planning phase, and we expect the negligible subscription revenue contribution in 2026 and followed by a gradual ramp in 2027 and more meaningful increases thereafter, similar to ramp schedules of prior deals of comparable magnitude. Moving to our outlook. For total revenue in the third quarter, we're guiding to a midpoint of $319 million with a range of $316 million to $322 million. For the full year we're guiding total revenue to a midpoint of $1.266 billion with a range of $1.26 billion to $1.272 billion, which is up from our prior midpoint guidance of $1.26 billion. Consistent with what we said last quarter, conversion of backlog to revenue is the key driver of our revenue guidance for the remainder of the year with essentially no dependency on go-get of new business. For non-GAAP EPS in the third quarter, we're guiding to a midpoint of $0.79 per diluted share with a range of $0.77 to $0.81 per diluted share. Our guidance for 2026 non-GAAP EPS is unchanged in with a midpoint of $3.26 per diluted share and range of $3.22 to $3.30 per diluted share. We continue to anticipate annual adjusted EBITDA margin to exceed 24% and annual free cash flow to be approximately $175 million. Please keep in mind that our organizational design initiatives, including recent appointments to our leadership team, are expected to generate higher temporary expenses in 2026, but provide longer-term cost efficiencies, along with improved focus, speed and effectiveness. Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count and taxes as well as GAAP to non-GAAP reconciliations. Finally, I'm pleased to announce that we're finalizing the date of Investor Day in the fourth quarter of 2026, and we look forward to sharing additional details in the coming months. With that, I'd like to open the call for Q&A. Operator, please go ahead.

[Operator Instructions]. Our first question comes from DJ Hynes of Canaccord.

Congrats on a nice quarter and especially the large deal that's super exciting. I have a high-level AI question for you. So is AI agents increasingly operate across the contact center, CRM systems, back-office systems, which platform ultimately owns the orchestration layer? And what does Five9 need to control directly? Where do partnerships make more sense? Does it matter to your financial profile? Just walk me through your thinking there.

Yes. Thank you for the question, D.J., look, I think one of the things that I wanted to set out by just defining is our belief is that humans NAI are going to come together to really start delivering new economics in the contact center as well as improved experiences and new ways of doing business. I think we're starting to see that. I think to your question on AI agents. So the one thing that I would say we have that is very powerful is the fact that we built this business with the heritage of voice, we understand telephony, we own the routing. And I think that is a key differentiator when you think about point solutions or other players on how they service their customers. Let me give you an example. Today, DJ, you come in, you are a customer which has a very specific need around billing issue and you were infuriated because you've you're frustrated with the outcome. What would happen in -- as you talk to an AI agent, if you were a point solution or outside the routing engine, what happens is when the AI agent identifies you and says, hey, you have a problem, it will send you to the billing queue. What a company like Five9 can do is because we have run agent quality management and all your agents, I've already identified which agents are best of breed to handle that question, which agents have a high empathy score. And now with my agentic routing, I can send that call specifically to that one agent that has high empathy and high ability to answer that question. I think the way I think about it is Look, as a point solution, you want a hammer. You can come in and give a 50% containment rate. A company like Five9 that is built around voice is the entire toolbox right? And we can drive the next set of resolution and containment, every single point of resolution and containment that we can drive on top because of these capabilities is millions of dollars to the end user. So that's where I think about how AI and voice AI fits in, why I think companies that are built around voice, on the routing and other capabilities are best suited to service this customer across the stack.

Our next question comes from Siti Panigrahi, Mizuho.

Great. It's great to see the double-digit growth earlier than your second half plan. So I want to ask you about your conviction on the second half double-digit growth, especially as you see the momentum in the business. What gives you that kind of confidence? And any color on the large other large financial deal that you signed in terms of deployment.

Yes, absolutely. So I'll walk you through that city and please chime in on it if you have any additional points. But if you look at -- I'm going to start with our Q2 results. So as you said, total revenue growth guided to double digits, growing from 9% in Q1 to 10% in Q2. And that was primarily driven by our subscription revenue and you kind of break that down between CCaaS and AI. CCaaS revenue was stable at 7% year-over-year, which is exactly what we anticipated. Now AI revenue did accelerate to 78% from 68% the prior quarter, and that was primarily driven by several customers who are ready to deployed faster than what we forecasted. As we've always said, we have the PS resources to bottle up and down to meet whatever the customer demands are. Now even if you exclude those customers, by the way, our revenue growth still would have been in and around that 6% that we reported in Q1. Now fast forwarding to the second half. The shape of the curve there and the confidence that we get is all around the backlog. So every customer in that backlog has a unique schedule ramp that we have great visibility into and we'll continue to execute against that, and that's what's underlying it. And I just -- as a reminder, I want to let everyone know that we have no essentially no dependency on new logo goes to get to that guidance in the second half of the year. And then just from a ramp perspective, for the Fortune 100 financial services company that we just won, Amit mentioned during the call, it's $100 million approximately in TCV that has both subscription and PS. It's a 5-year contract on our new revenue model. And if you look at the ramp of it, it's going to be immaterial contributions in 2026 to subscription revenue and ramp more so than '27 and meaningfully bigger increases thereafter. [indiscernible] mirror a lot of the shape of the curve with ramps that other customers of this magnitude had in.

Our next question comes from Arjun Bhatia of William Blair.

Yes. Perfect. Thank you. Bryan, if I can just keep going on that sort of line of questioning. The large financial services customer, was there a change in that time line, I don't know why I thought maybe that was supposed to be a more meaningful contribution in 2026. I guess part of what I'm trying to get to is you had a great quarter it seems like AI revenues are accelerating. But I think the full year guide maybe kept to the back half outlook, the same despite the sort of the strong performance in Q2.

So great point. I want to clarify one thing. When I talk about the Fortune 100 financial services company, that's the new logo win that we had in Q2. I believe the financial services company you're referring to is the Fortune 50 services company that we won a couple of years ago and that started ramping in 2025. And it is in our backlog and that didn't ramping more so throughout 2026. And it will be a multiyear journey beyond that as well. Now to answer your point about keeping the second half guidance the way it was is because if you think about the AI revenue growth acceleration that I mentioned earlier, Essentially, what we did was their rents were supposed to happen in Q3, Q4, and they're ready to move faster with the deployment. So we essentially increased our PS capacity to bring that ramp forward into Q2. So essentially, Q3, Q4 remains the same and still very strong and that double-digit growth is what we're guiding to. But we pulled that forward to accelerate in Q2.

Our next question comes from Raimo Lenschow of Barclays.

Perfect. Thank you. I wanted to stay on that Fortune 100 customer. I wanted to make it slightly more bigger for the -- as an industry team to the idea of large customers moving to plant-based data center -- sorry, call centers have been like a theme for a while, but it was always like kind of can you handle as a cloud provider. Can you handle the size of the seats, et cetera, this is now like a second big kind of reference customer for you coming up. Kind of what does it do? What do you see in terms of industry and the industry realizing that if you want to do you need to be in the cloud and what it doesn't work? And what does it also tell us about customers being comfortable with you being able to handle these larger seat numbers.

Yes. Thank you for the question. I'll start, Bryan, feel free to chime in. Look, just as you said, this was a migration for this customer from their on-prem to cloud. And we are starting to see some of that shift happening. It's always been in the backlog, and there are a number of deals that sit there that are -- we're keeping an eye on as they progress. But the one thing I think you called out, which is real is look, when customers come to us and they deploy AI, particularly voice AI on-prem. The architecture of on-prem is not specifically built to go run Gentech voice at its best output. And so in some cases, that actually forces customers to start taking a look at migrating to cloud and moving in that direction. This is one of the -- I wouldn't say the only reason, but this is one of the reasons why this large customer started looking at, hey, how do we actually start making this jump, so we can start taking advantage of these new technologies that are available. [indiscernible], look, I think you just mentioned it. We have now proven over and over again, and this is really exciting that we have the right to go win these sorts of customers on our technology is reliable and useful and customers are going into it. Our delivery is another big capability. And so that is one big proof point that is great for us to see and great for the market to see as well. The other piece that I wanted to flag is this is also a major win for our partnership with Google. One of the reasons we won this deal is we went in with them and showcased the strength of our joint platform and integration and the ability for us to solve this large customers' needs across all different facets. And as called out in the script, this was the first full-size deal that we transacted through the Google marketplace. And so really excited about that and what comes next with that.

our next question comes from Scott Berg of Needham.

Amit, Bryan, nice quarter. I wanted to follow up on Raimo's question there on the large Fortune 1001 through the Google marketplaces, you just mentioned it's the first kind of full size deal that you won through that channel opportunity. I guess, how do you make that be repeatable? Because if you told me you had a new channel through the Google marketplace. I would have thought you're going to get a lot of these kind of dolphin deals of $1 million plus that the company has historically signed something that can ramp to $25 million seems like a much larger deal than I would have thought of out of that marketplace. So how do you make this repeatable, what type of resources may be helping us throw out this with you to get involved with more of these

Yes. Thank you, Scott, for the question. Look, when I look at the pipeline with them, there's a variety of deals. So it's not just one size fits all. So I just wanted to flag that. And obviously, we will keep working them. But in some of these cloud migrations, especially the ones from on-prem to cloud, they tend to be the larger customers, and this is one that came through first. Talking about the resources and working together with them. Look, we've always said this wasn't just a signature deal in terms of signing a joint agreement and selling. This was hands on keyboard. Putting the -- driving better integrations, driving the solution is one. And those are investments that have already been made from us, and we will continue to make them with Google as the needs evolve and we play in different parts of the ecosystem. So I'll leave it at that. I hope that answers your question.

Our next question comes from Elizabeth Porter from Morgan Stanley.

I wanted to follow up on the comment about the AI deals ramping faster than expected. But just curious what's driving that faster time to production? Is there any sort of improvements in Five9's ability to implement greater customer readiness, data maturity or just buyers becoming more comfortable. And really importantly, how approvable is that improvement across the broader pipeline?