Thank you for joining us today. On the call are Rowan Trollope, CEO, Dan Burkland, President, and Barry Zwarenstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives, and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements or simply predictions 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 uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate, including the impact of the COVID-19 pandemic and the 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 make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon, as well as in the appendix of our investor deck and available in the Investor Relations section of Five9's website at investors.five9.com. Now I'd like to turn the call over to Five9 CEO, Rowan Trollope. Please go ahead.
Thanks, Lauren, and thanks to all of you for joining our call this afternoon. I am very excited to be here today, and I'm pleased to report strong results for the third quarter. As you'll see, our teams haven't skipped a beat on execution. Following the decision to terminate the proposed acquisition by Zoom, our leadership team and the entire company are excited to continue the momentum we've built in driving industry-leading growth and transforming customer engagement. We were executing a great business strategy against a massive market opportunity when Zoom approached us, and we are excited to continue to execute on that strategy going forward. Onto the numbers. I'm pleased to report third quarter revenue grew 38% year-over-year to a record $154.3 million.
Revenue growth continues to be driven by our enterprise business, as demonstrated by LTM enterprise subscription revenue, which grew 51% year-over-year. Now, Dan's gonna highlight the tremendous booking success we're enjoying, both in new logos and in expansion deals later in the call. At the same time, our commercial business saw more than 30% growth this quarter, benefiting from us targeting commercial buyers who are more focused on enhancing their customer experience as well as leverage from our channel expansion. Now as these results illustrate, Five9's fundamentals remain strong and are driven by market momentum, continued product innovation, and our go-to-market machine. I'm gonna discuss each of these in turn, starting with the momentum we're seeing in the market.
The contact center market continues to be driven by digital transformation enabled by the shift from on-premises to cloud and by a growing demand for AI and automation. We don't expect these immutable trends to abate for the foreseeable future. With the increasing shift towards digital and the increasing scale in customer interactions, the necessity for businesses to drive efficiency is paramount. We're helping customers do that with technologies like digital channels, which are easier to automate, self-service, and most recently, by deploying digital agents with our AI-powered intelligent virtual agents. The strength of the CCaaS market and demand for our solutions was on full display at our annual CX Summit in September. This year's CX Summit was our largest to date with over 3,000 customers, partners, and prospects. AI and automation were central themes.
We also highlighted delivery of over 200 new features across our products, including WFO, digital channels, self-service, Five9 VoiceStream, hyperscale architecture, and most recently, enhancements to our IVA platform with the launch of Studio 7. Which leads into the next growth driver, our continued focus on product innovation. We've taken the lead in providing AI-powered solutions across live and digital agents with our Agent Assist and IVA technologies. These, coupled with our focus on embedded automation with Workflow Automation, are making it easier to drive efficiencies than ever before. Evidence of this is shown through the tremendous growth in adoption and usage of our intelligent virtual agents. Now, as you're aware, last November, we acquired Inference Solutions, a leader in the IVA segment.
Since the acquisition, usage of IVAs amongst Five9 customers has increased 180%, and we've processed more than 82 million calls on the Five9 Inference Studio platform. Penetration and adoption of these solutions have exceeded expectations, and our IVAs now enable more than 750 customers to automate routine interactions over the phone, web chat, mobile messaging, and SMS. We believe automation is the key to managing digital and human capital, and this is even more amplified right now with the tight labor market that we're seeing around the world. Now, as mentioned earlier, in July, we announced Five9 Inference Studio 7 as the latest release of our low-code IVA development environment. We redesigned and rearchitected the platform to make it more powerful and optimize performance to better support enterprise-grade deployments.
The platform is tightly integrated with the Five9 Intelligent Cloud Contact Center, allowing the seamless transfer of contacts between IVAs and live agents in omni-channel use cases, thus supporting the practical AI use case that we've been talking about. Five9 is a leader in IVA, earning numerous industry and analyst awards, including Best Application of AI award at the recent industry event, Enterprise Connect. We look forward to continuing to help businesses deploy an AI-powered digital workforce that can provide a more efficient and engaging customer experience alongside live contact center agents. Finally, I'd like to highlight the ongoing success of our go-to-market machine. We've continued to invest in our go-to-market strategy with additional focus upmarket into larger global enterprises, expansion of our channels-driven business, and acceleration of our international presence.
First, we continue to see larger and larger enterprises not only embracing cloud as part of their digital transformation, but also adopting automation solutions at record pace. Now more than 80% of new strategic enterprise customers are purchasing IVAs as part of their initial deployment. Second, our channel partners are leading with cloud solutions from Five9, as well as taking on more implementation and services business. Our channel bookings are starting to include some large million-dollar-plus ACV deals. Third, we continue to expand our global presence, and our international momentum is increasing. To help our customers grow internationally, we've made significant investments. First, we stepped up hiring, especially in EMEA, where our head count has more than quadrupled over the last two years. Next, we set up a team headquartered in London to lead global telco operations.
We've also expanded and will continue to expand our international public cloud instances. Next, we invested in additional digital and outbound programs to increase awareness in key countries and grow our contact database so that we're able to better connect with the right people within target accounts. Finally, we've signed on additional regionally focused partners in our various local markets. As a result of this focus on investment, international revenue from companies headquartered outside the U.S. in the third quarter grew 49% year-over-year and marked the fourth quarter out of the last five where the growth rate exceeded 40%. Clearly, our decision to increase our international investment is paying dividends. Before I wrap up, I'd like to crystallize our views of the market opportunity and landscape.
We continue to see AR growth led by enterprises, and these larger enterprises are embracing digital transformation enabled by the transition from on-premises to cloud, and they can afford to invest in automation technology to efficiently scale their contact centers. In this higher end of the market, the purchasing decision is made by the line of business leader who represent almost 90% of our buyers. In conclusion, our performance for the quarter underscores the strength of our platform and the value we deliver to customers seeking to modernize and transform their contact centers. We've differentiated our platform by building a leadership position in practical AI and automation-driven customer experience. The combination of market momentum around digital transformation initiatives, our product innovation strategy, and strong go-to-market execution gives us confidence in the durability of our growth and the ability to continue to grow LTM enterprise subscription revenue in the 30s.
We look forward to sharing additional information on our plans to deliver continued industry outperformance and profitable growth at our upcoming virtual financial analyst day on November 18. With that, I'd now like to turn it over to our President, Dan Burkland, to share some specific customer wins. Before doing so, I'd like to give a huge thanks to all of our employees and partners. Our progress and where we stand today is the result of their hard work and dedication, and I thank each and every one of them. Dan, over to you.
Thank you, Rowan. As mentioned, we continue our strong momentum, executing successfully upmarket in larger and larger enterprises, positioning our superior automation solutions and expanding our international presence, while also leveraging our channels and partner ecosystem, who once again influenced over two-thirds of our deals. This is reflected since our last earnings call by having two consecutive record bookings quarters, Q2 being the largest of any quarter in our history, and then backed up with Q3 setting that record even higher. Our pipeline continues to grow to record levels, both in size of deals and in quantity of opportunities. Now I'd like to share some key wins from new logos, as well as some significant expansions from existing Five9 customers. The first new logo is from a health insurance provider in the southeast who was using Avaya with no self-service offerings.
We partnered with a reseller who had previously maintained their Avaya systems and helped position Five9 to modernize and automate the customer experience. They now have our full IVA for self-service, a full omni-channel solution, along with our complete WFO suite powered by Verint. They opted for our 24/7 hypercare service, bringing help desk type services to all of their users. We anticipate this initial order to result in over $3.8 million in ARR to Five9. The second new logo example I'd like to share is a medical logistics and transport which lacked the innovation and automation requirements that they wanted to offer to the more than 5 million Medicaid-enrolled recipients within the state. They chose Five9 and have ordered nearly our entire portfolio of solutions. This includes platinum IVA to deliver self-service, intelligent call steering, and voice biometrics to authenticate caller's ID.
They also have the full omni-channel solution, including chat, email, SMS, visual IVR, and the full suite of Five9 WFO, as well as Agent Assist to help their agents gain valuable and timely information to reduce call handle times, as well as our Workflow Automation from Whendu to trigger appointment reminders, schedule changes, and provide status updates. We anticipate this initial order to result in over $2.2 million of ARR to Five9. The third new logo win I'd like to share is a great example of a company reimagining the customer experience. This global brand manufactures and distributes automobiles through over 800 dealerships nationwide. They were using an older premises-based Cisco and Avaya systems. With Five9, they'll be using the multilingual IVAs, AI to transcribe conversations and insert them into their CRM, reducing the call handle time and wrap-up times significantly.
Performance dashboards, voice biometrics, and the full omni-channel suite of applications, as well as our WFO solutions, including workforce management, QM, and speech analytics. We anticipate this initial order to result in over $1.4 million in ARR to Five9. Now, as we normally do, I'd like to share some recent examples of existing customers that significantly expanded their business with Five9. You'll recall the global parcel delivery service company who placed an initial order of over $14 million in ARR to Five9 in Q1 of this year. They've now placed subsequent orders with us to bring their anticipated total ARR so far with Five9 to over $23 million.
Also, you'll recall the large SI who spun off their outsourcing helpdesk function and placed an initial order with us of over $6 million in ARR in Q1 of this year, who have now placed additional expansion orders with Five9, which are anticipated to bring their total ARR with Five9 to over $12 million. We also have a medical device manufacturer who became a customer two years ago, that was generating approximately $2 million in ARR and now has expanded for all of their other divisions globally and added IVAs, which will bring their anticipated total ARR with Five9 to over $8.2 million. As you can see, these three customers combined now represent over $43 million in anticipated ARR to Five9.
As you can see, we continue to develop, execute, and deliver solutions which are at the forefront of businesses' goals to provide a reimagined and innovative experience to their customers. We're seeing the adoption of these technologies continue to gather momentum. With that, I'll hand it over to Barry. Barry?
Thank you, Dan. Before going into specifics, a reminder that unless otherwise indicated, financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. As Rowan mentioned earlier, we had a strong quarter with revenue growing 38% year-over-year, driven primarily by our enterprise business, where our LTM subscription revenue increased 51% year-over-year. I'm also pleased to report 7% sequential revenue growth, reflecting the ongoing revenue durability of the underlying business. Let me amplify on this a bit. Now that we have multiple quarters of trended data, we estimate that the previously disclosed mid-single digit one-time COVID benefit that we experienced in the second half of 2020 actually extended through Q1 2021.
However, whereas before we thought we would only retain low single digits of the one-time COVID benefit, it turns out that we have been able to retain virtually all of the pandemic benefit. This is evidenced by our strong sequential growth rates of 4% in the second quarter, and the just mentioned 7% in the third quarter, both of which came in at the high end of pre-pandemic levels. Given that we do not have another one-time benefit like COVID, year-over-year growth rates will naturally be lower through Q1 of next year due to the tough comparison. However, the true health of our business will continue to be reflected in the strength of our sequential growth rates compared to pre-pandemic levels. In terms of revenue composition, enterprise made up 84% of LTM revenue, and our commercial business represented the remaining 16%.
Recurring revenue accounted for 92% of our revenue in the third quarter, and the other 8% was comprised of professional services. Our LTM dollar-based retention rate remained at 123%. As a reminder, our continued success in winning larger and larger enterprise customers is expected to cause fluctuations in our dollar-based retention rate as they come onto the platform at different times and ramp at different rates. Over time, despite the inevitable quarterly fluctuations, we expect DBRR to trend upwards due to a higher mix of enterprise customers, especially larger ones, and higher ARPU from our automation and other offerings.
Third quarter adjusted gross margins were 64.1%, a decrease of approximately 130 basis points year-over-year, primarily driven by our ongoing investments in professional services to support the momentum of our enterprise business and investments in public cloud to more efficiently expand our global footprint. Third quarter adjusted EBITDA was $27.4 million, representing a 17.8% margin, a decrease of approximately 370 basis points year-over-year, driven by both the somewhat lower gross margins and the increased investments in go-to-market and R&D strategic initiatives. Third quarter non-GAAP net income was $20 million, or 28 cents per diluted share, a year-over-year increase of $1.5 million or 1 cent per diluted share. Our DSO performance continued strong, coming in at 30 days.
Our Q3 operating cash outflow was $4.8 million, driven in part by $6.1 million of transaction related cash payments during the quarter. We expect our LTM operating cash flow margin, currently at 7%, to increase meaningfully in the longer term, given our ability to expand gross margins, increase operating leverage, our substantial NOLs and our low DSOs. Before I share our outlook for the remainder of the year and provide initial comments on 2022, I would like to highlight a few points about the financial model in the merger proxy. First of all, I would like to affirm that we are setting our new long-term targets in line with the 2026 model in the proxy at $2.4 billion in revenue and 23% EBITDA margin.
During our financial analyst day on November eighteenth, we will provide additional details regarding the considerable market opportunities we see, our investment strategy, and our demonstrated ability to execute, all of which will drive us towards these new goals. Also, with respect to the proxy numbers, please keep in mind that they were based on an extrapolated long-term top-down model with consistent linearity, whereas in reality there will inevitably be quarterly and annual fluctuations, including in the near term. Lastly, before sharing our guidance, I would like to make a clear distinction between our view on the attainability of the new long-term model versus the attainability of our quarterly and annual guidance. The extrapolated long-term model was a down the fairway model.
For ease of communication, consider the proxy model as a 50/50 model, meaning that we have a 50% chance of making it, but also a 50% chance of failing to do so. On the other hand, the prudent annual and quarterly guidance philosophy that we have successfully followed for many years will definitely not change. With that, I'd like to finish today's prepared remarks with a discussion of our guidance for the fourth quarter and the full year 2021, as well as providing high level commentary on 2022. For the fourth quarter, we are guiding revenue to a midpoint of $165 million, which represents the highest quarter-over-quarter and year-over-year growth rates we have guided to in any Q4 at 7% and 29% respectively.
For 2021, we are guiding annual revenue to a midpoint of $601 million, which represents a record year-over-year growth rate of 38%. As for the bottom line, we are guiding fourth quarter non-GAAP net income per share to a midpoint of $0.36, representing an $0.08 quarter-over-quarter increase, which is the highest sequential increase we have ever guided to in any quarter, resulting in a midpoint annual non-GAAP net income per share guidance of $1.09. I would now like to provide some preliminary high level commentary on our current thinking for 2022. Before doing so, however, I would like to share with you how we have been looking at our overall investment stance for the upcoming year.
As Rowan and Dan have amply demonstrated, we are operating in a market which we believe is set to enjoy many years of sustained high growth. This massive market opportunity warrants a temporary acceleration on investments in a number of areas, including in automation initiatives, the continuing march up market, and further global expansion. We believe now is the time to capitalize on both our leading position and these opportunities to drive growth and enhance our future returns. Let me emphasize, however, that this does not mean we are becoming a growth at all costs company. This is a responsible decision born of market conditions and growth.
With this in mind, for 2022 revenue, we are comfortable with the current Street consensus of 24% year-over-year growth. Revenue will once again follow our typical pattern with slightly more than 50% of our revenue in a seasonally stronger second half. We expect 2022 non-GAAP net income per share to come in at approximately $1.09, the same level as the midpoint of our 2021 guidance, despite the accelerated investments we have embarked upon. In addition, we would like to provide an outlook on the quarterly profile of our bottom line. If you look at our historical financials, non-GAAP net income per share is always amongst the weakest of the year in the first quarter, and we expect this to be especially the case this coming year.
We expect earnings to improve slightly in the second quarter and to improve meaningfully in the second half, especially in the fourth quarter. Please refer to the presentation posted on our investor relations website for additional estimates, including share count, taxes, and capital expenditures. In summary, we are very pleased with our third quarter performance. We remain laser focused on executing like clockwork to deliver sustained, durable growth. Operator, please go ahead.
At this time, I'd like to ask all of the analysts to go ahead and turn on their cameras. Okay, we have our first question from DJ Hynes with Canaccord.
Hey, guys. Great to see everyone and congrats on the results. Dan, maybe I could start with one for you on the go-to-market. I mean, it's great to see the massive expansion on these mega deals that you guys have closed in Q4 and Q1. Can you just talk about the pipeline for the mega deals going forward? Are there more of them out there? And has the narrative that your competitors are using to sell against you changed at all in light of kind of what's happened over the last four months?
Great. Thanks, DJ, appreciate it. The mega deals from a pipeline perspective absolutely continue to grow. We continue to go at market. Part of it is the market opening up, right? They've now seen that the cloud can deliver on a global basis the most complex, innovative requirements that they want to reimagine the customer experience. Pipeline, generally, we shoot for a 5x multiple, meaning the 5x coverage over the anticipated quota. In our strategic teams, which handles the high end of the enterprise accounts, that number's closer to 10x. We feel very fortunate about the future and more and more mega deals, so to speak.
Yeah. Great. Maybe I could follow up with one for Barry. Barry, if I'm being honest, I didn't expect you to come out and confirm the 20-26 long-term target. Understanding you said it's kind of a 50/50 target, can you just talk about kind of what needs to go right in your view to get there?
Yeah. Thanks, DJ. As you just alluded to, we did say it's down the fairway, 50/50. A target that we will strive towards, and distinguishing it clearly from our typical prudent guidance, quarterly and annual guidance that we provide, which will remain conservative. What is our confidence? Our confidence comes from the fact that this management team has repeatedly demonstrated in the past that we would hit every goal that we have committed to, and our level of commitment on this particular one is exactly the same. You know, inevitably, the fluctuations in the near term, as we accelerate some of our investment. That march towards that $2.4 billion will continue.
There's no certainties, DJ, in business, obviously, but we do take considerable comfort from the fact that this is a massive market. It's coming towards us, the new front door is opened, and it's driven by immutable trends that Rowan talked about. What we do is truly mission critical. It's a sharp point of the spear with customer engagement. We have over 2,000 employees across the world, expert in all aspects of the contact center, from design, sales, implementation, support, and who love working at Five9, as witnessed by our lower attrition rate and our Glassdoor rankings. As I said before, we have a leadership team under Rowan that has repeatedly, year in, year out, demonstrated ability to execute.
Great. Well, thank you guys for the color, and I'm glad we're still doing this.
Thank you.
Next question is from Meta Marshall with Morgan Stanley.
Great. Thanks. A couple questions for me. First on, you know, some of the eight-figure deals that you had won earlier in the year, you were noting, you know, it might take till year end or kinda beginning of the year for some of those to roll out, but yet you're already kind of seeing expansion of some of those deals. Just wondering, you know, is that implementation going faster or kind of what's causing the upside so early? Just second question for me, just conversations with customers, maybe post dissolution of the deal or kind of conversations with customers during that deal and just kind of,
You know, what the circle up process has been like, post the dissolution of the merger?
Yeah. I'll take the first part of that. Rowan?
Yeah, yeah, go ahead.
The first part on the larger deals, they're absolutely right on track. I mean, as anticipated, they have much more complexity, many more groups that wanna be involved. You know, if you imagine in certain cases, these are large companies trying to revamp how they support their customers, and they wanna create a consistent, yet new and innovative way of serving their customers. There's lots of internal discussions. It's almost like herding the cats within the customer is most of the delay. You know, people ask us, "Well, why is there such a long lead time before revenue?" It's if we could get the customer to decide on exactly how to implement, I think it would be a lot faster.
that's primarily the reason, is pulling all of their groups together and making sure that they've properly designed what they wanna launch at the outset. Rowan?
Yeah. I think that sums it up real well. I think some move actually fairly quick and some take a while, and so they're kind of all over the map on that front. On your second part of your question, Mita, you know, a fairly balanced response. I mean, there was some customers who were wanting to slow down and understand some of the security implications related to the Zoom acquisition. There was some of that, especially at the large enterprise side. Obviously, when we you know, moved beyond that deal, those questions kinda got taken off of the table. Nothing really negative from customers, particularly, either way, either on the transaction itself or on the dissolution.
It's been relatively balanced, I would say, and not noticeable in one way or another.
Got it. I mean, just to follow up with Dan real quick. I mean, on the $14 million deal that was upsized to $23 million. Is that kinda what Rowan was referring to as a customer, like, that customer had moved faster and so was already starting to upsize or?
Yeah.
Okay.
Part of it was decision-making across different theaters or regions of the world. Some were ready and prepared to process and negotiate their contracts and place their orders, and some of the other geographies weren't quite ready. I wouldn't tie that to implementation timing. It's just a matter of they independently make their final decisions and final contract negotiations. You'll notice in the script, I mentioned that it was so far, so-
Okay.
We're not done.
Great. Thank you.
Next question is from Jackson Ader with JP Morgan.
Oh, great. Thanks, guys. I'm on for Sterling Auty tonight. It's good to see you. First question from our side is, did the, you know, the Zoom merger or kind of that period of time, did it impact any deals? You know, did people put things on hold while those discussions were being had? If so, have we closed those since that, you know, deal has kinda gone by the wayside?
Yeah. I'll start that. Nothing was really put on hold. We had several accounts where they wanted, as Rowan alluded to earlier, to have more meetings and multiple discussions around whether it was security, on changes, how we would support them. But all along, we had intended to operate as a separate entity, and we explained that very clearly that you know, these were very different swim lanes that our two companies were in. It would have been incremental business for us to be with Zoom, but we needed to maintain our focus on the line of business buyer and implementation and support the way we've always done it. I think they took great comfort in the fact that we were gonna remain largely intact the way we have been.
Nothing really got pushed or, you know, taken off the table. It was just a matter of extra meetings and longer discussions and just a few extra items there. Everything remained on track. We didn't miss a beat. We, as I mentioned in the prepared remarks, we had our two largest bookings quarters ever, you know, both in Q2 and Q3. Onward and upward.
Okay. Gotcha. Quick follow-up for you, Barry. The commentary on the pandemic tailwind and that kind of flipping in the first quarter maybe to a headwind. Could we just get a clarification of that? Are you just talking about coming up against difficult comps, or is there any reason why you know a reopening might impact the number of users or seats that you guys actually have live on the platform? Thanks.
Yeah. For us, the COVID tailwind, that one-time tailwind, Jackson, was you should consider it basically Q3 of 2020, Q4 of 2020, and Q1 of 2021. As I said in the prepared remarks, the incremental revenue that we picked up 4-5 percentage points sequentially to the quarters in those three quarters, you know, has started to abate starting in the second quarter. The residual quarter-over-quarter increases in Q2 and now in Q3 of 4% and 7% respectively are the high end of the pre-pandemic level. We're keeping all of that.
The way to look at our business through Q1 of next year is to look at the sequential growth rate, 'cause that really is the true comparison until we lap those tough comparisons.
Okay. All right, great. Thanks, guys. Good to see you again.
Thanks.
Thank you.
Next, we have Ryan MacWilliams with Barclays.
Hey, good to see you guys. Pleased to hear that you're seeing more deals and larger deals in the pipeline. Now, with the frequent addition of inference to your enterprise bookings, are you also seeing improved seat pricing for new enterprise wins?
You know, we're starting to see, you know, an uptick in the ARPU, if you will. That's primarily from the plethora of applications that we have in our portfolio, right? Where it's not just IVA, that's the most prevalent that the enterprise buyers are opting in for. Some of them, they'll opt in for a very small number so they can test and see what use cases are gonna be most effective and deliver the best ROI. When you add workforce optimization and the workflow automation and the other applications that kinda go across all the seats, you get more uplift. We're starting to see an uptick. We can talk more about that at the financial analyst day when we dig into more detail.
Great. There's two quick ones for Rowan and Barry. Rowan, are we starting to see contact centers return to in-person? Barry, just for booking seasonality, you know, as you move more and more enterprise, you think you'll see more booking seasonality shift to the fourth quarter. Thanks, guys.
Thanks, Ryan. On in-person, I don't know if Dan has more color. I only have anecdotal. You know, we're seeing something similar to what we're seeing with office work, which is it varies by country. In the Philippines, they've just ordered 10% of their employees back into the office, I think, for example, by government mandate. I think it's kind of all over the map, and it's hard to say, but to generalize right now.
I'm flattered that you would ask me the question, but I'm going to actually, on bookings, I'm actually going to defer Ryan to Dan to talk about whether or not the fourth quarter would be typically now with enterprises a more stronger seasonal quarter.
Yeah. Typically, you know, year-end, there's budgets to be spent. There's folks that wanna get projects completed. We can't really talk too much about the future, but, you know, Q4 started off very nicely, and, we see great optimism in reaching our numbers that we've put in place for you all.
Great. Good to see you guys again. Congrats on the result. Thanks.
Thanks, Ryan.
Next question is from Scott Berg with Needham.
Hi, everyone. Congrats on a good quarter, and thanks for taking my questions. I wanted to go back to something that Rowan, you'd said in your prepared remarks. You made a couple different comments around partner traction in particular, both kinda downmarket a little bit, but specifically upmarket on the higher end. You'd mentioned channel partners are starting to contribute some deals greater than $1 million in ACV. I guess as you look at those partners that are helping on the high end of the market, is there any reason to think that those customers can't help drive some of the same maybe high single million-dollar ACV deals that you have or eight-figure deals in your pipelines?
Maybe Dan, you could take that one.
Yeah. Well, they are. Scott, are you referring to our resellers and partners bringing us million-dollar plus opportunities and deals?
Yes.
Yeah. That's happening already. I think as Rowan mentioned, you know, we've seen several of those that are coming through the channel now. The channel business is growing. Just resellers and referral partners alone make up over 40% of our bookings. It's giving us great reach. If you think about it, we've got thousands of people now out in the market, globally, representing and endorsing Five9, and it just brings more opportunities to bear. We're seeing that regularly. As I mentioned earlier about the very high end of the market, you know, we talk about this under-penetrated TAM. At the high end of the market, we're just getting started as an industry. I mean, this is. They are the last folks to go.
When we talk about some of these mega deals, they really are the early adopters of the large enterprise. When we talk about our pipeline growing in our strategic accounts, it's clearly our largest area of investment and our largest and most accelerating area of growth. All positive there.
Great. To follow up, Barry, on your comments, my guess is you're not gonna take this one. You'll defer this one as well. You had talked about reiterating your 2026 revenue targets. That was in the merger proxy. How should we think about that? You know, what's driving that growth rate over the next, you know, 3, 4, 5 years? Because it's certainly a step-up function from what the company's seen in general over the last 4 or 5 years. Is it more of a function of just more deals in the space 'cause we've hit that inflection point where everything's going cloud? Is it a change in win rate assumptions in there or maybe just this large deal environment that's driving, you know, some of that confidence? Thank you.
Yeah. I'm happy to take a stab at that, Scott. I'd be delighted to, and if Rowan and Dan will course correct, I'd appreciate it. Basically, it is more of the same boring story that Five9 has been talking about. We're in public, it's 22% year-over-year growth. The March upmarket in a strengthening environment has taken that now to 38% against a tough compare year-over-year, I mean. It's all evidenced by the fact, Scott, that enterprise LTM subscription revenue, Rowan has been saying now for I think three years, plus or minus, that we'll grow with a three handle consistently at least. The confidence that comes around it is that every business in America, in the world, aside from an occasional mining company or fishing company, needs a contact center.
The contact center is becoming more important post-pandemic. It's the new front door. Think of y ou know, basically retail sales growth becoming contact center agents. We happen to be one of the leaders in this area and have picked areas to focus on that can really help. We've got all this international runway ahead of us, all the automation, increase in TAM ahead of us. You know, we've got two very well-respected and responsible competitors when it comes to taking away business from Avaya and Cisco, but those, our win rates against those two are very, very high. You know, well over 70% in each case. It's not an increase in win rates that we're assuming.
Great. Thanks. Nice to see everyone again.
Thanks, Scott. Good to see you.
Next question is from Samad Samana with Jefferies.
Hi, good evening. I'll echo the congrats on executing and with a lot of noise in the background, which is, I think, what we all appreciate a lot about Five9. Maybe, Rowan, I wanted to start off for you. You know, just we talked about customers. Maybe we could talk about how partners, how that conversation has been with your other UCaaS partners, now that you know, you're back on course to go it alone. Just maybe how have your partners reacted, and what has the conversation been like there?
Yeah. You know, we continued to stay connected to all of our partners through the conversations with Zoom. Really never backed off on that. That was a good thing, right? We've frankly seen, you know, further leaning in by some partners post the breakup announcement. That's been positive to see. You know, of course, that was our strategy before, was to kind of be Switzerland and support all the vendors out there. I think this really does help us on that front, you know, continue to see the momentum from the other UCaaS partners who need great CCaaS offers. It's been positive conversations.
Great. You can clearly see that in the strong numbers. Just from a company recruiting perspective, it was great to hear about low attrition. I'm just curious, as far as the company's headcount, if that was how recruiting was in terms of are you ahead of plan, at plan for kinda how you thought the shape of the quarter would go for your own headcount? That would be helpful too.
Yeah. So we're at over 2,000 employees now, and we've been, as Barry mentioned, we really haven't been having a challenge with hiring. I think the culture of the company is fairly renowned, at least in our little corner of the world. People wanna come work for Five9, and we've also seen record low attrition. I think at a time when, you know, the headlines are filled with the great resignation and this and that, our employees have really stuck with the company, believe in the vision and the mission, and have been, you know, really the ones behind the results that you saw today. That's just a reflection of the team's commitment and the deep gratitude I have for our team.
That's great. Barry, if I could just slip a quick one in for you. On the quarterly seasonality that you talked about, is that more comfort around the cadence of subscription revenue coming online from implementations or more around the usage trends now that you have enough evidence over the last several quarters?
No, they typically move in tandem. Not always, but sometimes the usage, as Dan has schooled me, precedes the seats because you don't hire an agent and get them in a seat until you have the calls there. They move pretty much in tandem. That's why we call it the recurring revenue.
Great. As always, I really appreciate it and great quarter, guys. Thank you so much.
Our next question is from Taylor McGinnis with UBS.
Yeah, hi. Congrats on the quarter, and thanks so much for taking my question. You talked a lot about the drivers, I guess, to get to the $2.4 billion. I guess on the flip side of that, maybe can you talk about what some of the risks are in achieving that guide? I guess what's causing, you know, some of that split comfort, and how does that compare to what you guys are seeing in the pipeline today?
Barry, you wanna grab that, please?
Sure. There's basically three ingredients, and I'm oversimplifying for ease of communication, Taylor. There's the market, the competition, and the execution. It's self-evident that the market is there, and we humbly submit that we've also got the execution. It's really around potential competitors. In that regard, this is not a little app in a phone. This is something that takes four or five years to develop, as witness what was done, for example, at Interactive Intelligence at the time before they were bought by Genesys, and a lot of money to do that. You've gotta have the software telephony DNA combination to be able to do that.
If you look back and if you consider the part of the line of business buyer who is buying, replacing Avaya or Cisco switch, there's really the three companies and, especially I'm talking about at the enterprise level. That's been that way for more than a decade. There's been no new entrants, in other words, or scale into the industry in years. There may well be competition. It would be arrogant to assume that there wouldn't be. I'm gonna conclude with this. It's also not just the product, Taylor. You've gotta match that with all the complete services from the partners from ourselves across the world in implementation and support. That takes a long time to build. Competition may well come, but we think we're still pretty well positioned to be able to do that over the next five years.
Got it. That's really helpful. Then my last question is, can you just maybe talk about what you guys are seeing today in terms of sales cycles and pace of migration activity? Growth obviously has been very strong these last several quarters, but maybe you can talk about some of the assumptions, you know, embedded in the first half of this year, maybe being lower growth, the low 20s%, 2022 guide, and how to kind of bridge that with the $2.4 billion out-year guide. You know, is there any part of here where the pandemic could have caused, you know, some bump in activity, but as you look forward, you know, growth might be more lower but more durable and higher into the future?
Barry, you wanna take the latter part of that?
In terms of COVID bumps, how installed-base bookings, which show the most evidence of that, show that that ended basically in the first quarter of this year. It's still reasonably strong, but not as strong as the three COVID quarters. In terms of the pattern for 2022, we have a pretty consistent pattern that normally if you exclude the pandemic benefit, and I always hesitate when I say pandemic benefit, it sounds cruel. If you exclude that, the second half is clearly stronger, especially in the second quarter, but also the first quarter, and the fourth quarter is always the strongest.
with going up to, as you also asked about 2026, it's as I said gonna be fluctuations, but we'll continue on our way to that number. With respect, if I could just add, I was always there talking about the top line, with respect to the bottom line, as I mentioned and stressed on the open call, the first quarter is always one of our weakest quarters, and that'll be prominently the case this coming quarter.
Got it. Thanks.
Thank you.
Next question is from Joe Meares with Truist.
Hey, guys. This is Joe Meares on for Terry. Thanks for taking the question. Obviously, you guys have had really strong growth in international markets. I'm just wondering if that's mostly being caused by customers landing larger or are they expanding more quickly? Kind of just give us some details on what the underlying trends are there.
Yeah, I'll take that, Joe. As far as the international markets, we've staffed up, not only our pre-sales, sales folks and SEs, but also our channels team. Signing up local entities that those companies are used to buying from and have brand awareness in the local market, that's made a big difference as well. It's clearly from landing new logos and bringing on new customers. Some expansions, like always, but it's primarily just landing new accounts. That's been primarily in the EMEA region. We've set up our hub kinda in the U.K., just outside London. We have, you know, operations throughout the surrounding, mostly Western Europe countries. We have a big prominence in Latin America as well. Those are our two main international markets.
Excluding North America, we obviously have Canada as a big market as well.
Awesome. That's it for me. Thanks, guys. Appreciate it.
Thanks.
Thank you.
Next question is from Jim Fish with Piper Sandler.
Hey, guys. You know, enjoy keeping it going here with Five9. Just actually wanted to touch upon some news recently with Microsoft Dynamics 365 Voice getting announced as a CCaaS solution, while you guys also about a month ago announced integration with Teams. I guess, how does this relationship really shake out, and how will that change the landscape from your view, especially for kind of that low to mid end, where you're starting to see a desire for CCaaS and UCaaS together?
Yeah. I'll take that one, Fish. Good to see you. It's pretty straightforward. What they announced is very similar to what, at least the way I read it, was very similar to what I think Zendesk had done, you know, some time ago with Zendesk Talk or Zendesk Voice, I'm not sure what they call it, and also frankly, what Salesforce kinda did with their partnership with Amazon, but much more similar to Zendesk. They added the voice channel. Dynamics already had the digital channels, but they didn't have any kinda capability for voice, so they added that. They added that in. I think they said they're using the Azure Communication Services API.
I think it's, you know, in keeping with that kind of activity, and it's interesting that it wasn't the Teams, you know, Microsoft Teams group that did this, but it was the Dynamics group that did this. The Dynamics are really the ones who we've had a partnership with for a long time. I think they also said in the same sentence as their announcement, "But we're gonna continue our relationships with Five9, et cetera." I think the recognition there is, you know, if you need some sort of They need some sort of lightweight built-in talk capability, but for a full contact center solution, they're still gonna be leveraging partners. At least that's the way I read it.
Makes sense. Maybe, I know we touched upon IVA having a really strong quarter with enterprise. Maybe can we talk a little bit about the attach of Agent Assist this quarter and how that momentum has really been, not just in the last quarter, but the last six months, especially post-Enterprise Connect, where you guys were talked about as the best AI product. Thanks, guys.
Yeah, thanks. We've won a couple awards on that front. Frankly, we're seeing most of the traction around IVA, but Agent Assist is seeing quite strong interest. I think in terms of where especially the larger enterprises, they want to see that you're playing in these various parts, because I think nobody sees a one size fits all in any one. There's no like silver bullet here, like one of the technologies can solve all the problems. What they're really looking for is a
Complete solution that they can buy. We're seeing much more traction on IVA just because it's a little easier to see direct line of sight to the return on the investment from a customer perspective. That's what we're seeing. Agent Assist, you know, we've had very strong bookings. We continue to work on that, and we're actually gonna share more details on this in our Financial Analyst Day, so stay tuned on that front.
Thanks, guys.
Thanks.
Next question is from Peter Levine with Evercore ISI.
Great. Thanks for taking my questions, Chris, on good quarter. Maybe just the first one is, can we get an update on the Mitel relationship? Just trying to gauge if there are any hiccups or delays that came up during the Zoom transaction and what are you baking in or expectations for the Mitel deal going into 2022, perhaps even 2023?
Yeah, we really don't have any expectations baked in from that. You know, there's upside there. I would say, look, early progress has been good. We've signed up a few of their bigger partners, and so we've already seen some transactions on that front. Still very early days. You know, candidly, you know, during the Zoom conversations, I think that conversation took a bit of a back seat. Yeah, we'll give you more actually at Financial Analyst Day on this one and others.
Cool. Then maybe one more for you, Rowan, is just I guess on longer term, it's just the durability of maintaining your current pricing per seat. You obviously have a lot to go back to your customers on today, drive higher upsells, but you know, obviously as soon as you move further up market, by evidence of the deals you have today or you won today, you know, there's some discounting. How do we kind of balance that, right?
There's discounting on the core. Your thesis is fundamentally right. There's discounting on the core offer, but what you find in these enterprises is that they buy the full portfolio. Those, especially the strategics, they have a real need to drive efficiency in their labor spend, and that's where you see the IVA add-ons. The rest of the additional portfolio add-ons that we've added are actually sort of maintaining that $200-$205 ARPU. Frankly, there's an upward bias there where it's starting to go up. It's actually being driven by the larger customers. It's, you know, there's a lot more that we can do for these companies. Digitization is not driven. This spend is not a cost savings activity primarily for businesses.
When we talk to customers, it's not about grinding us on price because they're just looking to get a lower, you know, sort of per seat price. It's actually the conversation is all about how can you help us improve our customer service and our, you know, outbound sales efficiency and all the different things that we do for customers. The price pressure hasn't really been exceedingly evident in our base, even across, even up into the larger enterprise.
Thank you.
Next question is from Steve Enders with KeyBanc.
Okay, great. Thanks for taking my question here. I guess I just wanna touch a little bit more on the investments that you're making into the next year that is keeping EPS flat, I think, versus the guide. Just kinda wondering what the biggest areas are of incremental investment that you're making and where those dollars are gonna be primarily focused on.
Barry, you wanna take that one?
Steve, it's at a macro level, it's three things. The automation, international, and the march up market. Taking them in turn, there's still in terms of automation a fair amount both in terms of the incremental R&D, no product is ever completely finished. On top of that, it's expanding the capacity. Given the explosive volumes that we've seen, that Rowan cited in his remarks, we need to keep ahead of that, and that takes people and hardware and maintenance. The second one is the march up market. That's actually more of the same, but we need extra channels and extra features and capabilities to satisfy some of that, especially the global requirements.
Lastly, and importantly, and by the way, also in terms of marching upmarket, is building out the professional services team. It is a different kettle of fish handling a company the size of, you know, some of the ones that we've recently been talking about versus the smaller companies. Lastly, international. Going into a new country involves a host of startup expenses, recruiting, legal, admin, and then you've got to sort of be able to find the right people. That takes time. You might not always get the right people the first time around. All of those things across the world for these global mega deals takes money.
Okay, perfect. Thank you. Appreciate the questions.
We only have time for one more question. Our next and last question is from Will Power with Baird.
Great. Good afternoon. Great to see you all on here again. You know, I guess probably Rowan or Dan, you know, one of the reasons you all had pursued or agreed to the Zoom transaction, I guess was in part because you were seeing some increased interest in bundled UC and CC offers. I wondered if, you know, you could comment just kinda qualitatively, as you look at the pipeline, which seems like it's at record levels, you know, how much of that now is still line of business. I assume that's still the bulk of it. You know, what are you seeing in terms of UCC interest or UC CC interest? And how do you make sure you still capture that piece, right? Solidify those relationships.
I guess kind of the third kind of piece of that, any interest in some sort of UCaaS solution, you know, longer term as something that might fit?
Barry, I'll take that one. I'll cherry-pick one of the things you said about the LOB buyers in our base. LOB buyers in our, you know, in our pipe are really almost 90% of the buyers. They're very much, you know, there are some IT, but the vast majority, almost 90% are LOB-based. The opportunity with Zoom was really an offensive opportunity to grab a new buyer, and that was the IT buyer. It was mainly. If you look at the Zoom presentation on the rationale for why they were interested in Five9, it was all about the fact that they were selling UC, and they could bundle a contact center solution to their buyer and their IT buyer.
The buyer of the UC solution is typically IT. It's a different swim lane than ours. We're not seeing those buyers drive our business, and they don't see line of business buyers drive their business. In fact, that's pretty well reflected when you see the way that we talked about the integration. The conversations that I had with Eric were really about we had to keep Five9 separate because it was a very, very different go-to-market. That is a real benefit for us as we walked away from that 'cause nothing really happened to our go-to-market. We were gonna keep it completely separate anyways. As we move forward here, we still got an incredible opportunity.
Frankly, I think we're seeing growth in the line of business and tech-savvy, you know, kind of business leader who's driving a standalone or a digitization effort to upgrade your CX, you know, sort of your customer experience. That results in, you know, a CRM upgrade often and then a contact center upgrade. UCaaS is kind of not any part of that conversation. So good for us. We're gonna continue to drive incredible momentum here as we shared, and the confidence in the long-term model, I think reflects that. There's no stepping into the UCaaS market, by the way, baked into that long-term model at all. That market, as a headline, is going down, right? I mean, the UCaaS space as a total market is declining.
You know, voice over IP telephones are not the end-all be-all. It's not the next generation thing. It's a replacement cycle for a legacy platform.
Great. Thank you.
Thanks.
Before we close the call, I'd like to pass it back to Rowan for our closing remarks.
Great. Well, thanks to everybody for joining our call this afternoon and supporting Five9. We really appreciate it. We have an upcoming financial analyst day as we reiterated numerous times. Please join us for that. That's gonna be on November eighteenth. Barry, correct me if I'm wrong. Very excited to be able to share more about the long-term prospects of the company, the market, and where Five9 is heading. With that, I'd just like to close by thanking all of our employees and partners. The real heroes of all of our sort of execution and the crisp delivery that we have been so well-known for on Wall Street is as a result of our employee base. I just wanna close it out by saying thanks to all of our employees and partners.
Thank you all very much. See you on Financial Analyst Day. Bye-bye now.