Can you guys hear me? All right, perfect. All right, we're gonna go ahead and get started. Thanks everyone for joining. For those of you that don't know me, my name is Arjun Bhatia. I cover Five9 here at William Blair. For a full list of our disclosures, go to williamblair.com. I'm pleased to have Mike and Barry from Five9 here. Before we get started, Barry, I'm gonna hand it off to you to read some disclo
I'll disclose.
For your disclosures. Yes, there we go.
Thank you. Hello, everybody. So I want to remind you that the forward-looking statements made during today's discussion regarding future events, trends, expectations, predictions, beliefs that may affect our industry or our company's products development, AI and automation, and potential growth drivers, statements are predictions and should not be unduly relied upon by investors. Actual events or results may differ materially, and Five9 undertakes no obligation to update information of such statements. And lastly, refer you to our Forms 10-K and 10-Q to understand why those things may be different. Thank you.
All right. Thanks, Barry. All right, so maybe to start off, Mike, I think it'd be helpful if you can just lay out a little bit of background on Five9, where you fit into the broader contact center space, and as you look at your growth over the last couple of years, what are maybe some of the major factors that have been impacting the growth story?
Yeah, happy to, Arjun, and thanks again for having us. So at the highest level, we're, you know, a software company, a cloud software company, that has been changing the game, quite frankly, in customer experience for some of the largest brands in the world. We've announced some of them recently, as many of you know. But we've been in this game for a long time. We've got a, what we call our Intelligent CX platform, which is really an AI-powered, an AI-led solution, but also is a data-driven solution. It's important to understand AI and data are a big part of what we do.
And at the end of the day, what we're doing is in the contact center part of CX, we're replacing legacy on-premise solutions like Avaya, Cisco, and Genesys on-prem, with our cloud contact center solution, our CCaaS platform. Obviously, that will evolve over time. It's becoming more and more of an AI solution like everybody else, but this is real. 17% of our bookings last quarter were AI and automation solutions, in addition to our core contact center. And that's just gonna continue to grow as we evolve with this market. Our large enterprise customers, which are for the most part, you know, it's 88% of our business is large enterprise, you know, they're looking to reimagine their customer experience. They can't get a great CX. All of us are consumers, right?
We've all interacted with call centers and contact centers over the years. Those legacy solutions cannot deliver even a good CX, and we're delivering great CX for our enterprise customers that are looking to take advantage of AI. Think of us almost as a little bit of the platform or the vehicle to help these large enterprises deliver AI at the edge, so to speak, 'cause we've got a portfolio of nine products now, AI products, starting with IVA and Agent Assist, but I'll talk more about that. But again, a lot of the tailwinds are coming in our business. By the way, our subscription revenue grew 20% the last quarter. That is the key metric.
It's almost 80% of our revenue, and it's being driven by the end of life of a lot of these legacy solutions, the importance of delivering real CX, good CX, we call it joyful CX
Mm-hmm.
and taking advantage of AI and automation now. So those are the drivers of growth, and it's an exciting time to be in our market. I've been here 16 years as CEO and chairman of the company, and there's never been a better time to be in cloud CX and cloud contact center, in spite of some of the narratives you're all hearing.
So, I certainly wanna, yeah, we'll dig in, I think, a lot more to the AI theme. I think before we get there, I wanna go back to the last kind of platform shift that happened in, in tech, which was cloud. And, I think the CCaaS space is pretty unique because there is a big install base of on-prem contact center solutions. And now we have cloud that's been around for a while, and we have generative AI that's taking off. So what are you seeing from that legacy install base of customers that are at some of your competitors? Is there a greater impetus to move to cloud as a kind of steady state? What are you seeing from those customers?
It's a great question. It's absolutely inflecting. The best indicators I can talk about are, you know, the growth in our bookings, our net new logo bookings. We haven't quantified them exactly, but we've told you quarter after quarter after quarter, we keep making records. Our top-of-funnel RFP flow, if you will, went up about 100% year-over-year five quarters ago, and it's kinda maintained that very high watermark. It's an indicator of this market inflecting. Part of it is the end-of-life announcements that some of these on-premise solutions have announced. Again, it's a market that doesn't move quite as quick as many other markets, mainly because contact center is mission-critical. It is the touchpoint for an enterprise brand and their consumers or customers.
And it's literally like heart surgery to move off of one of these legacy. Actually, they're not usually moving off of one. They usually have, like all three, both Genesys, Cisco, and Avaya, somewhere in their enterprise. They're typically, the ones we win, in particular, are moving off multiple legacy ACD systems, and they gotta run their business at the same time. So these are transformations, they're long-term projects. They, you know, this large financial services, you know, company that's a large bank that we just announced, took them several years just to get to the point of selecting us as their vendor. Now, we run a multi-year deployment journey of that, and we've got to keep them, you know, keep their business running the entire time during that migration.
So if we were to just compare today to five years ago, let's say, just as an example, like, is the quality of the customers that are coming off of on-prem, are those deployments now getting more complex? And how is that impacting your implementation times for these customers that are saying, "Oh, we wanna go to Five9 because we wanna go to cloud, and we wanna get the benefit of AI"? How is that changing?
What's changed from five years ago is the size of the enterprises that are moving to the cloud.
Mm-hmm.
With size, with greater size, bigger and larger enterprises, comes more complexity usually. Not always, but usually there's more complexity, especially in the way of integrations. This large bank we talked about, we talked about on the earnings call, they have integrations. We are now going to integrate as we deploy at this bank, integrations with 20 CRM, 24 CRM systems.
Mm.
Those are different systems.
Wow!
Some homegrown, some departmental, some vertical, and some off-the-shelf classic, you know, Salesforce and other CRMs. So again, it just goes to show you that these large deployments are complex. They take time, not because we can't move fast. We turned up the large parcel delivery service. We turned up 10,000 seats in literally weeks.
Mm.
We can go as fast as they can go. It's typically that these are multiple business units across global, you know, multinational corporations, and it's a separate project for every business unit. That's really why these take time.
Okay. Is there anything that you, as you think about what you can control, is there anything that you can do to help them with their business trans-- Like, is there
Oh, yeah.
more professional services? Is it getting partners and SIs involved? How do you, how can you mitigate that pain a little bit of
Yeah
you know, upgrading to a, to a better CX?
Well, frankly, that is why we win a lot of these business, these deals, because of our professional services and implementation team. They've shown, you know, time after time with some of the large mega wins that we've had and the reference ability of those, a lot of that reference is around how we help them succeed on our platform. So our expertise is important in this, I call it a heart surgery. I mean, it really is open heart surgery on migrating these legacy on-prem to cloud, to our cloud or anybody's cloud. But we've also, we made a key acquisition recently, a company called Aceyus.
Mm-hmm.
Which was a company that is very unique. They actually. We saw them in a lot of these large enterprise deals that we were winning, and they're, they're, think of them kinda like MuleSoft or an API platform for the contact center CX market. They've got integrations, pre-built integrations to every CRM, back-end billing systems, legacy ACDs. And that legacy ACD integration allows us now to be able to normalize all their, their reporting and analytics while they're in this migration. It's a, it's a huge benefit that we have to help these large enterprises make the migration. Aceyus, that's why we acquired the company, and it's a reason we won this Fortune 50 deal as well.
I wanna go to AI because I know that's certainly on top of everyone's mind, and it's been a big initiative for you as well. I think you've shared some metrics in the past about AI-related bookings, so it's clearly something that customers are investing in. But as you think, like, take a step back and think broadly about the customers that you wanna serve and sell AI capabilities to, where do you think they are just in terms of readiness to be able to actually adopt AI capabilities? Because there's business transformation needs that they need to meet, and there's data readiness, and, you know, we hear about a lot of these things. So where are we in that process at this point?
It's a great question. I mentioned data for a reason earlier. We just had our customer advisory board a few weeks back, and one of our largest customers was talking about, you know, data readiness and the fact that it. There's a sequencing to this, especially when it comes to AI. You can deploy AI without your data, and if your data is not ready for that. Now, again, AI allows us to access a lot of unstructured data, which is great, but there's still a, you know, a data readiness element to really taking your CX to the next level. And our customers are focused on that. They're getting there, but, you know, again, we're deploying these large enterprise solutions every day, and that's what drives our revenue.
You know, I would say one other thing when it comes to kind of what our customers are thinking. When it comes to AI, they're looking to us as their CCaaS platform player, or vendor, to provide those AI solutions. Part of the reason is it has to be part of a platform. To have a point solution just it gives you a tunnel vision. We all hear about these chatbots that are replacing agents, but those are in very unique cases. Again, they're not gonna be part of a broader platform that allows cohesive visibility, reporting, cross-channel escalation or movements. It's an important part of this, is to have the whole platform. But I would say again, there's a lot of interest in AI and automation.
There's some narrative out there about agent counts and seats disappearing and, you know, and IVAs taking over the world. We can debate all day long about how drastic the seat cannibalization might be of AI, but it's important for everybody to understand, our customers are not thinking that way in extreme. They're thinking about 5%, maybe 10% labor arbitrage, which is a huge ROI in and of itself. But even if there was a drastic reduction in human agents and contact centers, like some people believe might happen, Five9 and CCaaS players in general are winners because we provide AI software solutions at about 2x the revenue per interaction. So our TAM, our available market, the more automation, the more that automation replaces agents, the larger our TAM becomes. So it's a 2x increase.
Right now it's 5 to 10, potentially 5% to 10% labor reduction, but you're seeing the pricing-
And that's over, and by the way, that's over-
Over time
probably three years.
Yep.
By most of our customers, that's what they're telling us, if they're gonna reduce at all.
But you're seeing a 2x uplift on price.
Yep.
So your revenue is increasing at a rate that's greater than whatever the seat reduction might even be? Yeah, over-
It's a factor by a factor of two to one.
Okay, interesting.
Yeah. So if there's a 10%, you know, automation reduction in agents, there's a corresponding 10% increase in our TAM because we lose the 10, but then we get 20 back.
Is your pricing model for your AI capabilities already adjusted such that it's, if it's an IVA, that it's usage-based and there's a consumption element to it?
So we're doing both, you know, kind of, port-based and usage-based or consumption-based pricing-
Mm
for our IVA and other solutions now. In the end of the day, it all comes down to ROI.
Sure.
So remember, the labor arbitrage, if they're successful in doing this, they're gonna get a 10 to one labor arbitrage savings.
Mm.
So the ROI being so significant for our customers allows us to get that 2x, and it might even be 3x in some cases. I'm being conservative with that 2x.
Yeah. Okay. I think one of the other debates that investors have about the CCaaS market is, you know, this element of build it yourself, and you talked about this a little bit. But I think there's been some, you know, early examples thus far of businesses saying, "We'll build a bot ourselves and deploy it, with, you know, an Open AI integration or whatnot," whatever it is.
Yeah.
And what, what are the like, what are the challenges that, you know, that kind of, a deployment might be overlooking?
Yeah.
What might they not be able to address-
Yeah
that they could with Five9?
We talked about this a year ago, the airplane analogy, airplanes and engines. And in order to, you know, you don't. The analogy, I'll use it really quickly, you don't fly across the country on an engine. That engine has to be part of an aircraft. We're the aircraft. The LLMs, the Deepgram, all these language, these large language models and other engines, foundational engines, we just plug them in, plug them into our platform. So they in and of themselves are not a product. You can build, yes, a great chatbot, but it's just a chatbot. It's not the end-to-end platform.
Mm.
And what you need to deliver true personalized CX, not just in the chat, but across all of your channels, you have to have the platform that has visibility into all the channels, whether it's voice, whether it's other digital channels, whether it's self-service, IVA. We've got one platform that allows an enterprise brand to have full visibility across all those channels and have them. Again, if you're on a phone call as an agent, or if you're even in an email interaction as an agent, you have to have visibility to what's happening in those other channels, otherwise you're not gonna deliver personalized CX. It's that simple. So again, most companies, all of our customers, they have no desire to do a build your own chatbot because it's gonna be a siloed solution.
Yeah.
I'll give it that way. They want the platform, they want it from us or another CCaaS vendor. The other element that you have to have to deliver real personalized CX is contextual data.
Mm.
That's also, we have integrations with CRM systems, billing systems, now legacy ACD systems. We have an ability to infuse knowledge from the enterprise brand's FAQ website, white papers, the list goes on and on, all of the content specific to the products and services that they provide, as well as real-time data about the consumer on the other end of that interaction, real-time transcription of either a voice interaction, a digital interaction, an IVA interaction. That's all happening with our AI. We know that, you know, the system knows, the brain, if you will, in our AI, knows exactly what you just said 10 seconds ago. You have to have, not to mention all the stuff you did last year.
Yeah.
So you have to have that full visibility. You've got to have all the data. And, again, the large enterprises that are doing business with us, they understand what they really need. That's why they're doing business with us.
Can you, on the, on the ROI side of the equation, can you talk about when you're going to market with your AI capabilities, is the ROI pitch today more about cost savings from a labor perspective? Because we do see sometimes tens of thousands of seats deployed in contact centers. Is it better CX? Like, which one resonates more with customers as they're looking to-
It's what's great is it's both.
Yeah.
It really is both. It's a great business case. You can make an easy, easy business case. In fact, we had one of our large enterprise wins that we talked about, a business case that justified the entire $40 million ARR contract with Five9 was the labor arbitrage savings.
Mm-hmm.
But at the same time, they're not solving just for cost, they're solving for a better CX. And by the way, AI and automation is part of better CX. For the stuff that, you know, for this stuff, the interactions that can be handled by AI, the consumer loves that.
Yeah.
But what you don't want to do as an enterprise brand is force automation onto the consumer when they don't want to be automated. This gets back to the old days of, you know, the IVR hell. We've all experienced that, right? You're trying to get to an operator, operator, operator, zero out. All of our customers are fearful of doing that again with AI. They don't want hallucinations, they don't want inaccurate information. AI still has to, you know, it has to go through a maturity curve like everything. And again, our customers are very conscious of their customer experience as well as their cost savings. It's both.
Okay. Can we, if we can talk about competition for a second, because certainly I think the AI use case is pretty compelling in the CCaaS market, but you have competitors in the market that have similar AI capabilities. When you think about... Maybe you'll debate that, but what is the differentiation and what is the competitive advantage that Five9 has over others-
Yeah
in the CCaaS market
And again,
especially related to AI?
Yeah, no, our AI leadership is, well known.
Mm-hmm.
If you look at surveys by, you know, some of the other firms, I don't wanna name your competition, but there are surveys of channel partners out there. They talk about who's got the best AI. Five9 is not just, like, a little bit ahead. We're viewed as well ahead. There's a reason we're winning these large enterprise deals, 'cause our AI is ahead. It's partially because we made an acquisition over four years ago of a company called Inference, which had the leading IVA in the market. We built eight new products on top of that and integrated it into the Five9 platform. So, our strategy was also, I would say, differentiated.
In addition to the acquisition and the AI solutions that we've built being kind of ahead, that's one element of this, but our strategy of being engine-agnostic from the very beginning, it was the perfect strategy that this Gen AI revolution and GPT-4o now, and whatever's next, plays right into our strategy. We never invested a single R&D dollar to build our own engines, and our competitors did. So they've had to kind of pivot, and we focused on building the application set and those nine SKUs. And our competitors are, you know, they've spent a lot of their R&D dollars building their own engines. Those are obviously not gonna, you know... They're gonna toss those and evolve.
Okay. Barry, maybe I wanna bring you into this. I think it's been an interesting time, I think, in tech and software in general. We've seen some choppiness in the demand environment from other companies that have reported. I think you've called out some verticals that have been more challenged than others as well. Can you talk about just what you're seeing now in terms of getting deals across the finish line? Is it getting harder? Is it... Are you still able to close deals on time? What's happening with sales cycles? Just give us some sense of what the demand environment looks like.
Yes. When you look first at the net new business, we did see some elongation of sales cycle, in part because of what Mike was talking about with the AI: What's happening to my data? Who's gonna see it? Is it private, et cetera. But that has returned to normal. And for the reasons Mike also gave, we're seeing very strong bookings momentum on the net new side. These are mission-critical systems. They're not being enhanced, aside from maybe for security patches or bug fixes or whatever. And you want to do AI and automation, and where do you do AI and automation? You do it in the cloud, not on-prem. And so, we see very considerable momentum.
On the other side, to which you began your question with, Arjun, which is the install base, we track 17 different verticals. The one that, however, that has got the most variability is our consumers vertical, our third biggest vertical. It has a seasonal strong second half, typically, and last year was no exception, but more muted. But it also is suffering from the macroeconomy. If the transactions are not there, then we're not gonna have agents sitting in their seats, sitting idle, because they can flex the number of agents' seats. So, we started seeing that weakness in the course of last year. It certainly continued into the Q1, as predicted, of 2024.
By the way, one way to look at it from the external world is looking at debit and credit card spending. For example, JP Morgan puts out data, and for January, February, and March of this past year, it was basically negative real growth. Normal growth was negative and plus 1% or 2%, so after inflation, it was negative real transactions. And that's what we've assumed in our case for the rest of the year. We're not assuming any downtick, further material downtick in the economy, nor any uptick. Were an uptick to happen, at some point it will happen, we're feeling very, very happy about that because our logo retention has been very strong. You don't switch out these systems. Mike called it, these are heart transplants.
Our gross retention on our enterprise business, which is 88% of the total, is the mid-90s. And when those tick up, and you'll, you'll see it, it'll be both virtuous from the revenue point of view, but also from the margin point of view, because of the leverage against fixed and semi-fixed costs.
That's, that's very helpful. And the other piece I wanna touch on is, I think just as I've looked at the shape of your guidance for the remainder of the year, it seems like there is an inflection, a ramp, kinda baked into the back half of the year. And you've talked about backlog. There's some deals that you've won, that you're just getting implemented and live. What is your sense now, just on timing of those go lives or those implementations still on track? How do you feel about that back half ramp that's kind of implied in the guide?
Yeah. So, I'm gonna talk about the remainder of the year, including Q2.
Yea because that's how we've guided. If you compare the last three quarters, 2024 versus 2023, it's $116 million of incremental revenue. Bifurcate that in your mind between the installed base business, which is $64 million of that $116, and then the new business, the backlog implementations and so on, is a complementary $52 million. So I'm gonna start with the 52 first, 'cause that's where we have the greater visibility. Most of that, not 100%, but the vast majority of it is already in backlog, and we've got a nd this is a statement of fact, not an assertion, the best professional services, 500 people in the industry, and they have joint commitments with our customers to make those deals go live.
They've both got interest in not wasting resources, and so those are very predictable. Switching up, and there are some go lives that are also needed in order to start recognizing revenue before the end of the year, but we feel very confident around those as well. Switch over now to the install base, where we've had this sort of spiky or soggy type macro environment that's hampered the consumer vertical. There, we've said that we would expect an inflection on our dollar base retention rate in the second half. We're sort of around 109, 110 right now.
If you use just the flat 110, partly for the ease of arithmetic, and apply it to our recurring revenue the year before, you get to, $64 million I talked about. Lastly, now, where can we have the confidence to the extent we can on the dollar-based retention rate increasing? Well, first of all, we have the actual spot numbers, but more importantly, there are these bigger customers, take more than this, the healthcare company, for example, take more than 12 months to ramp, and they're already in the equation. And we know pretty much, as I alluded to a moment ago, their ramp schedules.
And so that gives us the confidence that these bigger companies that take more than 12 months will help us inflect the dollar-based retention rate in the second half.
Okay, perfect. Mike, maybe I wanna... Actually, this might be for both of you. But, if we now just think about, maybe if we fast forward three years, let's say, and your AI bookings are a bigger portion of your business, AI is a bigger portion of your revenue, there's a lot more demand. What does that mean for margins for Five9? Is that margin accretive to your business?
It is. And Barry, I'll let you kinda comment if, if you have further comment, but, the best data point for us is, when we acquired Inference, which is just an AI solution company, they had gross margins significantly higher than our current blended gross margins. So, you know, again, we're running that, that part of the, the platform in a very similar fashion, so the margins are higher.
Okay. Is there any sort of, does the usage component, is that, is that the mechanism that ensures your margins stay higher? Yeah.
So we should be really clear about usage. When we say usage, you think about our revenue in total as having three components: subscription-
Mm-hmm
usage, as we call it, but that's pretty much long-distance minute usage.
Mm-hmm.
It's not consumption-based AI solutions. Consumption-based AI solutions will be in the subscription.
Okay.
Usage revenue grows significantly slower, and that's a good thing. Subscription, usage, professional services. Usage and professional services are growing significantly slower than subscription, and that's by design. We're actually not attaching long-distance usage to a lot of our large enterprise deals, including that big Fortune 50 bank. That is because they either have their own carrier for long distance, telephony, or it's sold with or through a partner of ours, AT&T, BT. They bring the usage. That's their business. That's we don't wanna take that. It's low margin, it's low growth, it's not something you should pay attention to. And by the way, subscription's 80, nearly 80% of our revenue, and it'll continue to take more and more of the mix as usage doesn't grow very fast. Professional services, we talked about project pull-through.
That is enabling these SIs and third parties to do the implementations for us. We don't wanna, you know, grow our professional services organization. It's really important as a differentiator. We're gonna continue to do it for some of the, you know, the larger and more important deployments, but expect PS. By the way, PS is a negative gross margin part of our business. That's only 7% of revenue?
Yep.
So again, I would encourage everybody not to really look at usage or professional services revenue as a meaningful metric. Subscription revenue grew 20% in the quarter, in this last quarter, 20% year-over-year growth, and that's where people should kinda focus their energy.
Okay.
That's AI software, as well as software that powers, you know, human agents. But again, it'll always be a mix at this point.
All right. Perfect. Well, that's all the time we have today. Mike, Barry, thanks so much for joining us. Really appreciate it. For anybody that has follow-up questions, we are doing a breakout upstairs in Jenney B, so please feel free to join us.