Consumer Technology and Services Conference. I'm Will Power, cover cloud software for Baird. It's my great pleasure to introduce our first company here this morning, Five9, a leader in cloud contact center. Pleased to have Mike Burkland, who's the CEO. Next to him is Barry Zwarenstein, who is the CFO, and we have Dan Burkland, President and COO. So thank you all very much for being here. We're gonna. I'm gonna jump into a number of questions, and then if you all have some questions that you want to submit from the audience, you should have instructions in front of you, and I'll get to those towards the tail end. I know Barry's gonna start with a quick safe harbor, and then we'll jump straight in.
Thanks, Will. Before we start, I'd like to remind you that forward-looking- we will be making forward-looking statements during today's discussions, including regarding future events, trends, expectations, projections, beliefs, that may affect the industry or our products, or the company's product development, AI information, and potential growth drivers. These are predictions, and not- should not be unduly relied upon by investors. Actual events may be materially different, and we take no obligation to update. Please refer to our most recent Forms 10-K and 10-Q for more information on this. Thanks, Will.
Okay, thanks, Barry. Yeah, so I know given some of the market concerns, questions out there, we want to get into AI, but I think because we have some journalists in the room here, it may make sense just to provide a 60-second, you know, rundown of, you know, who Five9 is, kinda your target market, key value proposition.
Sure. Thanks, Will, and, nice to see everybody. Five9 has been leading the CX market in terms of, you know, cloud contact center, specifically replacing on-premises legacy contact center solutions on-premises. We've been at this for a long time. We're also a leader in AI-driven customer experience in the contact center. We're doing business with some of the largest brands. You've heard a lot of those announced on our earnings calls recently, and it's an exciting time in our industry. You know, CX is becoming front and center for a lot of these large brands. It's becoming strategic, but the shift to the cloud is also happening at rapid pace. It's accelerating. We couldn't be in a better place at a better time. We're helping these large brands reimagine their customer experience for their customers.
And again, it's an end-to-end platform, powered by AI and data, and we'll get into that in pretty good detail here.
Okay, great. Okay, well, let's maybe jump in on kind of the AI theme, since I know that's, you know, front and center for a lot of investors. It feels like every time there's a new ChatGPT iteration, it raises fresh concerns as to what that means, you know, competitively. So maybe just talk about, you know, what you're doing in AI today, what you're seeing competitively. Has there been any cannibalization in the market? You know, that's kind of a high-level blitz.
Yeah, Will. The good news is for Five9, I mean, again, we're not, you know, newcomers to AI. We didn't just jump on the AI bandwagon, so to speak. We were in R&D mode well before the Inference acquisition that we made 4+ years ago. The Inference acquisition was our acquisition of the leading IVA, virtual agent solution. Again, it was over 4 years ago. We built, I think 8 separate products or applications on top of that platform, and infused that in the Five9 platform. So, we're a leader in AI. We're recognized by, you know, a lot of industry analysts, including some of the Baird surveys. We're knocking down some of these largest brands, the Fortune 50 financial institution win that Dan's gonna talk about and did talk about.
The reason we're having so much success is that AI-led solution that we have. I think there's some, you know, there's some definite, I would say, debate going on in terms of, you know, the, excuse me, AI potentially replacing humans in a lot of software sectors, right? And the good news for Five9 is we provide software for AI, and we provide software for human agents. And, for us, it's actually the more automation that occurs in the contact center specifically and in broader CX, the more automation that occurs, that's the, the more TAM expansion we get. We have a higher revenue per interaction for AI solutions. A couple data points: We actually had 17% of our bookings in Q4 were AI and automation. That's ACV bookings, those are dollars, 17%.
It's becoming a big part of our business. So from our standpoint, again, the more automation that occurs in this industry, the better for Five9, and quite frankly, the other CCaaS players, too. Excuse me.
So when you talk about 17% of bookings AI, is there any way to kinda break that down between Agent Assist and call summaries versus IVA? 'Cause I think that there seem to be concerns, particularly, I think, more on the IVA front over time. What does that mean to seat count, and are we at a stage where these, these virtual agents can start to replace human agents? So I'm curious on the breakdown of what you're seeing in that IVA front.
Yeah. So the good news is, IVA is our leading AI solution, number one by far, in terms of bookings and revenue.
Okay.
Again, as I said, our revenue per interaction or, you know, revenue per customer, so to speak, goes up significantly. So if there's, for example, you know, 5, 10, 15% automation to self-service over time, and that's what most of our customers are really targeting, it's not an extreme example, but as that automation occurs, our TAM expands pretty much in line with the percentage of automation that's occurring, just because of our pricing, you know, and the pricing in the market. It's driven by that high ROI of labor arbitrage that, you know, is very significant. It's a 10-to-1 or 15-to-1 ROI for our customers as they potentially deploy an IVA.
Right
to replace a human agent. We're providing the software to do that at a much higher price than we would get for the human agent.
But at this point, you're not really seeing seat compression, are you? Or, or do you, are there signs that that could start to happen, even if, even if it could be a net positive?
What's interesting is we're not, our customers aren't really talking that, that much about it. It's kind of theoretical at this point. There's a theoretical argument, and we could see it happen over the next 3-5 years, but we believe it's going to be on the margin, and not significant. But if it is significant, if there is a replacement of humans by automation and AI, as I said, our TAM actually expands. Our opportunity goes up.
I guess the other question is, what are you seeing in terms of customers bringing in outside vendors, you know, to potentially compete or, or perhaps partner with your platform? You know, are they looking for chatbots or IVAs elsewhere, as opposed to using yours?
Yeah, the good news here, Will, is the platform players have a tremendous advantage. We have unique access to all the communication channels, and we also have unique access to contextual data, whether that's specific to all the interactions that are occurring in real time through our platform, which again, other solutions are not going to have that full visibility. And in order to provide truly, you know, personalized experience, you have to have that contextual data. So it's not just the interaction data, it's the internal data in knowledge bases, in websites, in FAQs, in CRM systems, in billing systems, in legacy ACDs. And the platform players, like Five9, uniquely have access to all the data, all the contextual data, to deliver that end-to-end CX, whereas the point solutions, for example, do not.
Right. Okay. Anything you could speak to with respect to, you know, chat, or sorry, the chatbot technologies generally that seem to be... I could, you know, so you talk about ChatGPT-4, right? The first thing that people talk about is, "Oh, you got these new chatbot capabilities." Has that started to impact the business kind of at the lower end in terms of some of the basic, you know, capabilities?
Well, we have chatbot solutions, and again, you saw it in the Baird survey. Brands, enterprises prefer to purchase their AI solutions from their CCaaS platform provider, by far. And the reason is, again, it's that connective cross-platform visibility. And again, if you're a standalone chatbot, it's like tunnel vision. You don't have access to all the other interactions across all the other channels over time to understand who that consumer is. And the end goal of our enterprise brands is to deliver personalized customer experience. If you don't have visibility, if that chatbot it has tunnel vision, it only knows about that current interaction, potentially, right? You have to have access to all the historical interactions of that consumer across other channels and have access to other information as well. And again, that's where the platform comes in.
So these third parties, you know, can plug into our platform, and they do, and we monetize those connections as well. So we kind of win either way.
Okay. All right, maybe just a couple more, and we'll cover the core, you know, business, too.
Mm-hmm.
As you think about adoption, you talked about 17% of bookings AI generated. What does that look like for new customers versus existing, and where are the opportunities there?
Yeah, that 17% is on new bookings.
Okay.
So we're having tremendous success there, but we're also having tremendous success in our install base and penetrating our install base with AI solutions. One of the advantages we have is this 9-product portfolio infused in our platform, products like AI Insights. We can actually, you know, help our existing customers identify, through insights, which interactions are most appropriate to be automated, and then we can apply our other tools to help them, you know, deliver that AI solution. So again, our existing customers are very interested in the AI as well.
Another way to think about it is, if you look at AI and where does it make sense to automate, there's really three critical elements, right? One, you've got to have a use case that's going to be practical, where consumers and the brand are going to want to automate, and it makes sense to automate. That's one element. The second element is the LLM that you use, right? Having the choice of bringing the proper LLM for that particular use case is very critical. Not all LLMs are created equal, and not all perform the function at hand equally. So that's the second element you've got to look at. And the third element that Mike touched on is the data.
You've got to have access to all the data, all the data sources, and be pre-integrated to all those data sources in order for it to be effective. So to grab a point solution or a chatbot off the shelf, it's probably going to do one thing very effectively. That's why we all get frustrated with chatbots because we ask it a question, and it doesn't have access to the answer, and it can't get the answer, and so you have to go opt out and go down another path. The platforms like Five9, because we have all that access, we can look at all three elements. So when we look at our install base of customers, especially, we look at those practical uses. Is it a practical use case? Which LLM are we going to bring to bear?
Do we have access to all the appropriate data so that the outcome is what the customer, our customer, the brand, is looking for? If you bring those three things together, you can predict whether it's going to be a successful automation or not. That goes for whether it's a full self-service, like IVA or chatbots, or whether it's assisted self-service to help the agent be more effective.
So what do you think is holding back your existing customers from adopting it more broadly? I mean, is it just getting comfort with the tools? I mean, you're providing some of the insights, right?
Mm-hmm
... in terms of some of the areas where they could benefit. I mean, is there some sort of catalyst coming up where we should expect that to start to accelerate? 'Cause it seems like that's a big opportunity, right, to drive ARPU and-
A big, big part of it is the balance. While on paper it may look like a super compelling ROI, you do not want to automate at the expense of delivering a great customer experience. Nothing worse than frustrating a customer, having them quit a brand. Many of the consumer brands that we work with, it's very easy for a customer to go seek an alternative. So the last thing you want to do, although it may look good on paper, and there may be this, "Oh, look how compelling the ROI is," if you lose the customer, the ROI goes right in the tank. And so it's very, very important to make sure you have that balance. So when we see customers, our existing customers, implement AI in certain elements, they're making sure that they're not sacrificing the customer experience.
So that way, if they're peeling 2, 3, 5% of their interactions over to that self-service, that's okay. Just like they do that with their website and their apps on the smartphones today. They want to encourage people to go use the website for self-service. They encourage people to use the app for self-service, but they don't push everybody to go there for 100% of the interactions. They, they want to peel off a small percentage. So all these different automation tools that we've had for, in some cases, decades, when you look at the internet and smartphones, okay? We're looking at just peeling off a small percentage, but not sacrificing the customer experience, and that's probably the one critical element that the world out there doesn't understand, is that on paper, it looks very compelling to automate everything.
Brands are very careful not to over-automate or force their customers to go automation, because what will happen is they'll lose customers, and it deflates the entire ROI in the first place.
Okay, let me maybe shift gears a little bit to the broader business. And maybe, you know, starting with kind of your view of the macro environment, there have been a lot of mixed pictures, mixed signals from other software, you know, companies over the last several weeks as to what's transpiring in the, in the market. And I think generally, you all thought, you know, the macro has been somewhat stable, I think. I mean, still challenges, but, you know, not getting worse, necessarily getting better. Just love kind of your perspective on what you're seeing, what you're kind of expecting, you know, through the balance of the year as you think about sales cycles and-
Yes
... appetite to spend.
Absolutely, Will. But before I actually respond to the macro, I want to be sure that everybody in the room understands that fundamentally, under the hood, we have two businesses within Five9. We've got our net new business, new logos having to go from on-premises into the cloud. And the second part is that existing base. And the macro really, somewhat unusually, just impacts the, what's in the base. The net new, these are mission-critical systems. There's no new vendors for the, on-premises solutions, and people have to get moving because, for example, just one of many, if you want to do AI and automation, it's much, much easier to do it in the cloud than you can, than you can on-premises. So that part of the business is strong, irrespective of the macro.
With respect to the install base, we've seen some sputtering here and there, a little bit soggy in some areas, particularly on the consumers. We've done a lot of analysis on is it more goods than services? No clear conclusion. Is it on the upper end versus lower end, full price versus discount price? Not seeing a whole lot of that. We've got 17 verticals within Five9. The one that's been the most volatile, as you would expect, is the consumer, our third biggest. And we share that with the street in terms of credit and debit card spending from, for example, J.P. Morgan, one of the biggest issuers out there. And it showed pretty clearly that in the fourth quarter of 2023, things were weak.
That weakness continued as we predicted in our guidance in the first quarter, and we've assumed, Will, that for the rest of the year, the economy is not going to take any major step up or major step down, and so just sort of middling through, if you will.
And if I could just add, in spite of that macro impact on the install base, which is really a reflection of our customers' businesses, right? This is- these are contact centers that, you know, just have less traffic because of the macro economy, especially in consumer. But in spite of that, our subscription revenue growth, which makes, you know, subscription makes up about 80% of our revenue, was 20% this last quarter. So again, there's a lot of goodness in the market and in our net new business. And if I could just clarify one thing, when Barry refers to our consumer business, we don't sell to consumers. It's the brands that we sell to that serve consumers. So just to make that clarity.
Yep, no, understood. Okay, well, I guess maybe along those lines, maybe just update us, you know, given the current climate and where we are here end of June, just kind of what underpins confidence and, you know, getting to that 16% revenue growth for the year, given that, you know, that requires an acceleration of growth in, in the back half of the year, given, you know, some of the uncertainties you all just kind of-
Can I, can I start, Barry, and let you finish? Okay.
Please.
The confidence comes from that net new logo win side of our business growth, if you will. We're knocking down some of the largest enterprise brands. We talked about a Fortune 50 deal that we just closed in the quarter, $50 million ARR subscription revenue. That's just one of many, you know, deals. It's obviously the largest deal we've ever done. But the market's coming to us, and then again, in spite of the macro, the net new side of our business is very strong. We've got a strong backlog of bookings that haven't turned to revenue, and that's what gives us the confidence. But-
Yeah
... I didn't want to steal your entire thunder.
Let me just make it a little bit more crunchy. So in our guidance for the last three quarters of the year, we've assumed revenue increases by $116 million. So going back to my earlier bifurcation, the part that we anticipate would come from the net new, of that 116 is 54, and the part, the complementary part, is the sixty, excuse me, $52 million. And the complementary part is the $64 million from the install base. Let's talk about those in separately. In terms of the part from the net new, as Michael was talking about, we've been seeing a strong business, major orders, really big ones that are sitting in our backlog. Now, there's a small complement there that Dan and his team needs, we call them go-gets.
So that's to get in the next little while to recognize revenue in the course of 2024, but we feel pretty serene about that. Switch over then to the install base, and that's where there is some uncertainty. Frankly, our customers, as we sit here today, don't really know what's gonna happen in the Christmas season of December 2024. But at the end of the day, we have enough information in terms of our existing customers that are going live to say to the street that we have a dollar-based retention rate that we expect to reflect upwards in the second half of the year, mainly due to the fact that we got some major customers that are taking more than 12 months to ramp, and those are we consider part of the install base, even though they're relatively new.
And so those are the two components, Will.
Okay, no, that's great. Big customers. You know, you noted your biggest customer ever. Maybe any other background on, you know, what enables you to land, you know, that customer and, and what does that pipeline look? 'Cause I think, you know, that's, that's a big, you know, revenue contributor down the road. Probably not this year, right? It's gonna take a little while, right, for that to, you know, start to impact the numbers.
Correct.
But yeah, so what helped you stand out there, and what does that pipeline of big deals, you know, look like from here?
Great question, and if you've followed our history over the last couple of years, you'll recognize that, you know, from the large global parcel delivery service that covers every corner of the world, that we all know very well, the healthcare conglomerate, which again, has tens of thousands of agents. And then you look at the large insurance company. Those all helped contribute to our landing of this large bank. And it's across all divisions of this bank, by the way, and it will take several years for that to ramp and roll out and be recognized as revenue. But those four, along with many, many others that are in that 1 million-5 million annual recurring revenue bucket, as we talked about, are in the backlog and ramping.
That's why we have confidence in the second half acceleration. But we also, if you look at our pipeline is at a record all-time high, especially in that enterprise and strategic accounts. And part of the reason we're succeeding in those is they all talk. The CIOs of these large, large organizations absolutely turn and say: How are they doing for you? Not only do they do that and get the referenceability of our ability to scale, our ability to deliver better reliability, the ROI, and most compelling, the roadmap and the opportunity that they have and that they see over the next decade or two, that they're choosing the winner in AI. They know they're gonna deploy and develop and implement AI across the board in many different areas.
Do we have the right strategy and the right people and the right technology to help them get there? That's something that can't be underestimated. A brand like this $50 million financial services company spends several days in our headquarters, not only looking under the hood at the technology and the stack that we've built and the architecture of that to make sure it can serve their enterprise, but they're also looking at our people and our processes to see, is this the partner that can help them implement the example I gave earlier? Can we look at those three elements and make sure that we're applying it correctly to get them the best outcomes, not only in AI, but across the rest of the technology stack as well.
When you look at your, those three biggest wins, where do they stand then on deploying some of your AI capabilities?
All of them. There's one that actually paused and said: "You know what? It's gonna take us two years to get onto your platform, and we see the rapid development and, and how AI is evolving so quickly. We're gonna wait until we get everybody on the platform, and then we're gonna put your AI in-
Okay
... on top of that." If they bought it day one, what they bought would probably be obsolete in two years. So it's a matter of that. But all three of the others, a big part, and to Mike's point about the 17%, they bought the SKUs, the specific applications for IVA, for chatbots, and for Agent Assist , to be able to do things like auto summaries. Why have your agent sit there and input notes after their call very inconsistently? We're all gonna put different things in about what that call just transpired. If we can grab the transcript, use ChatGPT to summarize it, we've just saved, you know, several seconds or even a minute off of every call because they can go right to their next transaction and not have to work on the post-call wrap-up.
Okay, I do have a question from the audience, and if there are others, please feel free to submit them via the instructions you have. The question is: How much of your revenue is driven from company-owned technologies versus reselling other providers like a Verint? You know, how do you expect this to evolve over time?
Yeah, a very large majority of our revenue comes from our own solutions. We do have, again, some small set of partners like Verint, which we OEM their WEM solution, but again, it's a fairly small percentage of our revenue that comes from those OEM products.
Okay. Maybe touch on competition in the cloud space. I mean, I think we know that there's a big TAM taking share from Avaya and Cisco and others, and it feels like we're still, you know, pretty early, but... You know, what are you seeing competitively, whether it's NICE or Genesys, and is there anybody else really, especially upmarket, that you're running into at this point? Are there any new players you're running into? I mean-
Yeah.
folks worry about, are you gonna compete against Salesforce or ServiceNow or others down the road?
Great question, and there's absolute barriers to entry in this space. And there's a big moat in order to get there. And so it, when you move upmarket and you're in the enterprise space, it's a three-horse race. It's us, it's Genesys, it's NICE, and no one else has been able to crack into that world. There's been lots of others that have announced they want to get into this space 'cause they see the appeal, they see the ROI, and they see the compelling nature of this TAM expansion that Mike spoke of, as they bring solutions to market. The difficulty is, you have to go into an enterprise and be able to replicate and duplicate what they've had for years and years from a feature functionality, and then show them they can build on top of that.
They're not gonna sacrifice how they work today just to get one solution here. So upmarket, it's the three of us. When you look at the, you know, the others that have said, you know, whether it's the RingCentral or Zoom or Microsoft, and many others that have said they wanna be in this space, they tend to work around the fringes and the periphery, or they're able to do very simplistic things for the lower end of the market. And so that's where we see 'em. In our SMB or commercial space, we'll see others, but upmarket, it's the three of us.
Okay.
I will just add, our win rates continue to go up in the market, mainly because of our AI leadership.
Okay. And you'll see that against the bigger players, or is it kind of across the board?
Our win rates have now been north of 75% and getting better. When we see them head-to-head, we absolutely because of the reasons we described earlier. We have referenceability, we've built in the scale and reliability, and the people that we use to implement have proven that we can deliver the right outcomes for those companies.
Okay. Barry, one thing we haven't touched on are, you know, the real financial metrics, margins, et cetera.
Yeah.
What's the opportunity to improve gross margins over time, to get it more, you know, traditional software, like to get, you know, up above 70%? You know, can you approach 80%? How do you think about, you know, the gross margin outlook? What are the levers you have there? And similarly, to operating margins, is this the level you should, you know, we should expect for some time as you try to balance growth and profitability, or the levers that you can pull on that front, too?
Absolutely, Will. So first, with the gross margin, in order to understand what's likely to happen there, or is going to happen there rather, you need to disaggregate our revenue, 'cause there's three parts to our revenue picture, and they have a different gross margin profile. So as Mike mentioned earlier, approximately nearly 80% of the total is subscription revenue. There's another approximately 7, maybe 8% in some quarters. That is from professional services. And finally, the complement, the rest of it is, say, mid-teens on usage, the resale of primarily of minutes for agents talking on the phone. Our margins on the subscription are in the low 70s% and are set to go up, driven in part by the stronger revenue, which we will see once the economy recovers.
Our logo retention has been extremely strong, and, once inevitably we see a stronger, consistent, broad economy, we will be able to leverage against our fixed and semi-fixed costs. And we see that every year in the fourth quarter when our revenue is stronger. And then also, very importantly, is the ARPU from AI and automation. Those increases are helping materially. So that's gonna be growing faster and is the biggest part of the overall equation. The professional services is unlikely to grow, we, especially internationally, moving that more towards, partners. And with respect to the usage, those minutes that are mid-teens type, growth, proportion of the total, excuse me, those, are gonna continue to become a smaller and smaller part of our overall revenue. When we went public ten years ago, it was 36%. Now it's mid-teens.
The reason for that is some of these bigger customers, for example, the big bank that Dan just talked about, they bring their own telephony, and the margins on that are only in the 50s%. And by the way, we're losing money currently on the professional services. So as the months and quarters and years goes by, as subscription becomes an ever larger part of the total, we will see that showing up in the overall corporate margins. And then as far as the operating margins are concerned, we have a long-term model out there. It's become somewhat more aspirational on the revenue side, but on the OpEx side, we're within one percentage points in each of the three categories and have been for quite some time.
Okay, that's great. I guess for time purposes, we're gonna need to wrap there, but please join me in thanking the whole Five9, Five9 team here.
Thanks for coming. Thank you.
The company will be available in a breakout session in Astor Suite B for any additional questions. Presenting next in this room is BlackLine, Grand Ballroom A is Jack Henry, Empire Ballroom A, SPS Commerce, Empire Ballroom B, Amer Sports, Morgan Suite, Diodes, and Arlo Technologies in the Park Lane.
Thank you.
That's a-