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

All right. Good morning, everybody. Thanks for sticking around for one of our last sessions, but certainly not the least, we have Amit Mathradas, CEO of Five9 and Bryan Lee, CFO. Thank you guys for joining us this morning.

Thank you.

Amit, let's start with you. So Five9 describes itself as a voice-led enterprise platform for customer experience. For those newer to the story, how does the platform fit into the contact center today? And where do you see the company's strongest right to win as the market evolves?

Yes, really good question. So look, Five9 has been around for over 2 decades. Building a cloud-native voice-first platform that focused on the contact center. Over the years, we've evolved that to plug into digital to AI and now actually bringing all facets of that together and serving that up with visibility tools like workforce engagement, analytics and other things that are required to monitor watch and grow your contact center. The other big piece of it is we deliver this through an open ecosystem, plugging into integrated systems, plugging into complex systems of record where you drive the outcomes. And to your question, like where do we right to win? I think in today's world, when you were looking at a deployment where humans, agents and tools need to come together to drive complex use cases, particularly in regulated industries, I think, is where we do really well.

Okay. Great. It's a great level set. Let's talk about just sort of the market bifurcation on-prem and cloud. Roughly 60% of the contact center market is still on legacy on-premise systems. How is AI changing the urgency around cloud migration? And are customers increasingly looking to modernize their contact center and deploy AI as part of that same decision?

Yes. Look, as you said, 60% of our space, 50%, 60% of the space is still on-prem. And I always joke that if you haven't gone to the cloud until now, you really not wanted to go, but that has been shifting with AI. And as AI is becoming more pervasive in the contact center, particularly voice AI. I think what customers are starting to realize is that the architecture for on-prem really does not support the best outcomes for things like the new generation of voice AI and other capabilities. And that is -- and a lot of it is forcing customers to lift their heads and say, "Is it time for us to move? Is it time to consider moving to cloud." In a number of cases, they come to us and test our AI capabilities first followed with the CCaaS component and the connection points that come beyond it. But we are starting to see that driven with the shift in AI.

Okay. Great. Maybe a bigger picture one. One concern around AI is greater automation will reduce the number of human agent seats and pressure traditional CCaaS spending. You've described the future as humantic CX. What role do you expect human agents to play as AI handles more interactions? And how does that combination expand the value Five9 can deliver?

Thank you for that question. And I think it's core to how we see the world and where we're going. Look, I always start with -- think about this massive conundrum of companies, including ours, spend millions of millions of dollars of marketing money and others to attract prospects to become customers. When they become customers, we tend to then spend as little as we can engaging with them because it moves to an OpEx center. What you're seeing what's happening with AI is it is changing the economics of the contact center, right? . A lot of the base use cases, the repeatable motions are now going to AI, voice AI, other toolkits. And what that does is it's leaving humans to go drive and deliver more of the complex use cases, right? The ones that, in some cases, in regulated industries, it's mandated that you have to still engage with humans. And so for us and where we see our role in that, what we're seeing with customers is -- in a number of cases, they're using this economic shift in the contact center, not to remove dollars, but to start reaching Tier 2, Tier 3 customers that they could have never afforded to engage with before. So interactions are dramatically going up. And this symbiotic relationship between AI and humans is where we see the world and that's what we're -- that's how we see it, which is it's not humans, it's not agentic, it's humantic and you're not going to see a world where it's binary. AI is going to flow to humans back to AI and that cycle will continue. And so that's the evolution we're seeing in our space. And I think the data that humans produce and the data that AI produces is going to make each of these pieces better. So that's the way the world is going.

And Bryan, how do you think about that in terms of sort of the future growth outlook because arguably, if interactions are going up, but agents are handling more of the initial call volume, maybe you're routing to fewer state. So just talk us through how you think about that vision from more of a Nuance.

Yes. So today, our human agency count continues to grow at a healthy rate. So if you look at our second quarter results, our CCaaS subscription revenue grew 7% year-over-year, and the human agency count was right in line with that. But for our customers, if they look ahead 3, 4, 5 years, they too actually don't know exactly what the optimal mix will be between human agents and AI agents, which is why we actually introduced this revenue commit model because it basically gives them the flexibility to kind of shift the mix between the 2 buckets within bounds. And so it gives them that flexibility, gives them the visibility and it gives us the predictability for revenue as well. So it's really a win-win situation. And this has been resonating really well with customers. And perfect examples during the second quarter was we had a $100 million TCV win that was on this 5-year revenue commit contract and we actually have one of our largest renewals ever, where an existing customer went from a month-to-month contract to a 5-year revenue contract with expansion.

And how does the actual contract work? I mean are you licensed for a certain number of seats and then you have a capacity commitment on top? .

So there is a commitment level in terms of -- you start out with a certain level of AI agents, but there are certain bands within which they can actually flex and still just commit to the certain level of spend with us.

Okay. Got it. Amit, Back to you, Five9, and you mentioned this just in terms of regulated industries, you've been contriving resources on complex enterprises, particularly in regulated industries, financial services, health care. What makes those environments especially attractive? And which elements of the Five9 platform matter most when customers deploy AI at scale.

Yes. Look, when you think about regulated industries, the way we talk about it is a lot of them are dealing with the valuable and the vulnerable. And what that really implies is that human in the loop is a critical component for them. Two, these industries have a very high bar for regulatory needs, governance, security, and we've been building alongside them for 20-plus years, delivering all those capabilities. And when you do that and you build along these customers for 20 years, you also start understanding their use cases. What are they using their orchestration for? What are the workflows that they're building? What are the partnerships and capabilities and connection points that you need to have to build into your product? . And so when we are looking at that, these are things that we do really well. And for us, it's really about how do we help these sorts of customers with the complexity on the human side, on the agent side? And what brings this all to life, and I think the second part of your question was what part of your offerings help with that. It's all of this. It is bringing together these products that are driven by governance security, regulations, understanding their workflows and one that connects humans, digital and agents altogether serving that up.

Okay. Great. Bryan, let's jump back to you. AI revenue is now growing much faster than the core CCaaS business and represents a growing portion of subscription revenue. As the mix shifts towards assumption-based AI, how should we think about the implications for revenue durability, customer expansion and really just the overall economics of the model? .

Yes, absolutely. So just to level set, in the second quarter, our revenue generated more than $150 million in terms of annualized run rate revenue, grew 78% year-over-year, thus acceleration from 68% that we reported in the first quarter. Now it makes up 15% of subscription revenue versus 9% a year ago. So a lot of strong momentum across the board. And this is with new logos as well as existing customers, our MIM plus new logo wins virtually all of them have AI attached and that trend has been continuing for many quarters now. And on the existing customer side, we've instituted what we call an AI Blueprint program. And what we do there is essentially, we go into a customer environment, we turned on AI Insights, which is our product that goes in clusters and analyzes every interaction that's happening in the contact center and identifies areas of inefficiency and we can go in and recommend other ad products that we have to help solve those issues and to increase ROI. So that's been resonating really well with our existing customers in terms of driving adoption of our AI products. And from a pricing model perspective, AI is all consumption-based, all of our AI products. And it's usually done in a block of minimum committed minutes or whatever the units may be with any kind of overage charge at a higher rate. Of course, when they do go over, typically, they'll come back to us and increase the minimum commit with us very quickly. But as I mentioned earlier, the revenue commit model is what we're actually standardizing towards now. So that will give us even more durability and visibility into revenue going forward.

Perfect. Amit, let's talk about competition. AI-native lease vendors are moving quickly and in some cases, delivering pretty compelling results. So as enterprises evaluate those offerings alongside broader CX platforms, which parts of the market do you see as most vulnerable to point solutions? And where can Five9 to sustain a differentiated role?

Yes. Look, I think one thing about point solutions in any technology shift, right? Point solutions always first to market. They will bring out the new capabilities fastest. I think what we are starting to see is, particularly in the industries that we serve, and the customers we serve. If you believe that you are going to have humans in your contact center solving complex problems, they are coming to us and saying, "I need your AI to work alongside and for any -- if you think about the contact center and a customer or a patient is calling in, the first thing you're doing is you're calling on your phone line." So the baseline, even on what AI runs has to be great telephony, great routing. The infrastructure has to be solid before even for your AI to work. So that's one capability that we bring to market in droves. Two, the ownership of routing. And I'll give you a very small example, becomes critical. So think about the fact that you have called in and you have a very complex billing situation. And you've called the company maybe 2 times, you've been on the website and your irate. When you call in and you talk to a third-party AI solution, what it recognizes is complex billing situation, customer maybe I rate, let's send them to the billing queue. When you call into a platform like Five9, which has are a genetic routing, coupled with agented quality management. And what that means is I have gone and looked at all your human agents and scored them. Human and AI agents, scored them, who scores high on empathy, who scores high on billing situations. At that point, our agent, because it is connected on the same platform can say, "I am routing this specific question or the specific customer to this specific agent that scores high on empathy and does really well on billing situations. Not just to a billing queue. That's the differential. And so when I think about point solutions, the way I describe it is they've already come out and shown companies that you can get to 30%, 40% containment. They are like the hammer, right? We're like the entire toolbox. How do you get to 32%? How do you get to 42%, like the next tranche of containment of resolution, that's where platform shine, that's where architecture shines. That's why owning routing, telco, all these pieces really matter.

Okay. Very clear. I want to talk about this $100 million landmark agreement with the Fortune 100 financial services company that you landed. I think that was in -- you worked closely with Google in this. So what did Five9 prove to that process? And what needs to happen for that joint go-to-market motion with Google to become a repeatable source of large enterprise wins?

Yes. I think what it's proven is we've done this before. And what it's proven is we -- this is the second or third very large Fortune 100 customer that we continue to win within these industries. So it just -- to me, it's proven that we have the right to win. We have the best of be products. Customers of this size are choosing us for the end-to-end solution. That's one. Two, I think, in partnership with Google, look, this was not just a, "Hey, let's sign a piece of paper and do a partnership and go in." This was like hands on keyboard integrating, building, delivering. And so from an ongoing basis, from a go-to-market perspective, what we are working with Google on is how do we continue to get closer on the integration, how do we continue to present as one customer, not a one partner, not two and feedback from this customer to me was, hey, one of the reasons we went with you is because you all presented as one solution. And we obviously have trusted you. We have trust in Google, and this really made sense based on where we wanted to go. And by the way, this was one of those on-prem to cloud migrations that we were talking about, where it was finally kind of being unshackled for the reasons we spoke about.