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 are 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 a 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'm extremely pleased to report a strong start to the year. First quarter revenue grew 33% year-over-year. This growth continues to be driven primarily by the strength of our enterprise business. Enterprise subscription revenue, which accounts for approximately 60% of total corporate revenue, increased 46% on an LTM basis. Additionally, our quarter-over-quarter growth rate of 5% continued to outpace pre-pandemic levels of sequential growth, demonstrating the ongoing retention of the COVID benefit we experienced through Q1 2021. We continue to see many more years of LTM enterprise subscription growth in the thirties as we tap into the barely penetrated $58 billion TAM in the contact center space.
The penetration of this TAM, I remind you, is being driven by three immutable trends: digital transformation, the shift from premises to cloud, and the imperative of improving efficiency via AI and automation as labor becomes scarcer and more costly. Continuing our commitment to balanced and efficient growth, adjusted EBITDA for the first quarter came in at 13.4% of revenue, despite the significantly increased investments to both expand our professional services organization worldwide and to grow our public cloud footprint. This attractive combination of high growth and strong margins is the result of three factors: our platform, our go-to-market, and our global expansion. Taking each in turn, starting with our platform. With approximately 250,000 concurrent seats on our platform. With our largest clients individually deploying over 10,000 seats. With 99.995% LTM uptime.
With the highest levels of security certifications, Five9's platform is built for the scale, reliability, and security that enterprise customers demand. In addition to these fundamentals, what differentiates our platform is the increased cadence of innovation, in particular, the success we're enjoying as enterprises start to understand the practical value of AI and automation. For instance, last year, one of our biggest customers was experienced high average handle times and call abandonment rates, which were further exacerbated by labor shortage problems of recruiting and retaining agents. They needed to automate in order to improve customer experience and meet service delivery requirements. They decided to implement our IVA solution.
In just 10 months, through March of this year, they're deflecting more than 40,000 calls per month, which would require 36 human agents to perform this work manually, resulting in $2.2 million of annualized savings or approximately 10% total labor costs. We continue to see this traction building as customers expand the use cases for AI and automation in the contact center. At a base level, customers are using IVAs to deflect mundane tasks, leaving the live agents to handle the more nuanced and complicated interactions. The continued need for this is seen in our record IVA bookings. As customers increase their level of comfort with AI and automation, they're now moving on to additional use cases, such as using AI to assist and guide live agents.
As we stated last quarter, we'll soon be releasing the latest version of Five9 Agent Assist, which offers new capabilities around AI checklists and automated compliance. These AI capabilities ensure that not only does the agent have the information they need when they need it, but we've also seen our customers looking to adopt these features to help support agent onboarding, training, and upskilling. For example, one customer, a leader in prepaid broadband services, uses real-time guidance and reminders during calls, allowing for upsell opportunities for increasing data plans, turning their agents from support agents to sales agents. Similarly, another customer who focuses on enabling digital workplaces uses Agent Assist to improve CSAT and reduce the time needed to onboard their agents.
We're continuing to focus on how we make AI practical for our customers and continue to bring ongoing innovation to this space, expanding our capabilities to better meet growing customer demand. This is not only through our product, but also through our partner ecosystem and professional services. Positioning Five9 as an AI-enabled platform is gaining traction. Since the launch of our VoiceStream API, as referenced in our last earnings call, we've onboarded more than 24 partners to the platform. In addition, in Q1, we expanded the availability of the VoiceStream API to enable customers to access the real-time stream of data directly without the need for a third party.
We see this as a growing area of interest among customers as they look to invest more in contact center analytics and insights, a trend we see accelerated by AI, but not exclusive to AI use cases only. Finally, on the professional services side, we're improving the operational aspects of our AI and automation go-to-market. For example, our increased investments in professional services have enabled us over the last six months to reduce by approximately 50% the number of days between IVA's sale and starting the IVA implementation, allowing clients a faster time to value and a faster time to revenue for Five9. Another illustration is our recently launched IVA service offering. Virtual agents need to be trained just as human agents do. Existing use cases need to be tuned, and new use cases are constantly being added.
Our platform is simple to use, so customers can, and mostly do, perform these services by themselves. However, many customers have asked us to manage this with them, and hence this launch. In just a matter of weeks, we've closed several opportunities and have a very solid pipeline built out. I'm now secondly gonna discuss our march upmarket. As you know, for several years, we've been investing to fulfill our vision to move upmarket and win larger and larger contact centers. You've seen concrete evidence of the success we're having in pursuit of this vision, winning mega deals and achieving a significant increase in the trajectory of customers with over $1 million in ARR. This cohort, including a total of 134 customers in the fourth quarter of 2021, is the fastest-growing part of our business, with an average CAGR since inception of 93%.
Today, we're gonna absolutely and incontrovertibly demonstrate the success we're having in our ability to reach the very, very top end of the market when Dan talks about a landmark win that places Five9 amongst the leaders when it comes to large enterprise deployments globally. Stay tuned for that. We confidently expect that we'll continue to show strong growth in the enterprise market. Five factors give us the confidence to make this prediction. The first one is that the upper end of the market is comfortable now with accelerating their transition to the cloud. You don't have to look any further than our bookings to know that this is happening. Second, our platform has demonstrated now that it can meet the needs of the largest customers. I mentioned a moment ago, there's gonna be more on this when Dan presents his section.
Third, our industry-leading efficient go-to-market machine. Our four sales teams, strategic, enterprise, mid-enterprise, and commercial, enable us to match selling skills with market demand. Our strategic team, in particular, has been doing extremely well. These teams are complemented by an increasingly mature and committed set of channel partners, including systems integrators, service providers, technology solution brokers, VARs, and also ISV partners. In fact, first quarter channel bookings grew 68% year-over-year, driven in large part by the SIs who are increasingly helping Five9 in large strategic engagements as our customers execute their digital transformation programs. Fourth, success breeds success. The decision-makers on these mega contact center investments often consult with each other, and prospects seek validation from the companies in which we've already implemented our solutions, and they're getting excellent references.
Finally, fifth, and this is crucially important, is the trust that we've built up over the years. At the end of the day, we are a service organization providing 24 by 7, 365 days a year service globally in a mission-critical software. Our customers know that we have and will deliver through thick and thin. This commitment continues to be evidenced by our industry-leading NPS scores of over 80% for both professional services and customer support. As you can see, our momentum up market is stronger than ever. Lastly, the success we're having with expanding internationally. As many of you know, about two years ago, we decided to aggressively step up our investments outside the U.S., where the majority of agents are located. We've done that.
Our public cloud instances outside the U.S. have gone from zero a little over two years ago to over five today, with more coming in the near future. Our head count outside the U.S. has more than doubled over the last two years from 455- 962 now. We've seen significant increases in other areas, including channel partners, marketing spend, localizations, and the like. These investments are clearly paying off. With first quarter LTM revenue from non-U.S. companies growing 46% year-over-year. You should expect more of the same as we increase the percentage of international revenue from 9% LTM in the first quarter to the mid- to high teens by 2026. I should hasten to add that while the direct result of strong international growth is gratifying, the indirect benefit is even bigger.
By indirect benefit, I'm simply referring to the U.S. mega deals that we're booking. There is no chance, zero, that we could have won the mega global deals without the increased international footprint. In summary, the three fundamental building blocks needed to continue delivering balanced growth, our platform, our march to market and our global expansion are firmly and solidly in place. We continue to expect these building blocks to position us well to reach $2.4 billion in revenue and 23% adjusted EBITDA by 2026. I'd now like to directly address our employees. I want you to know that our success is the result of your laser focus on pursuing our mission and your clockwork-like execution. None of this would have been possible without you. So thank you very much. One last matter before I turn the call over to Dan.
The Russian-Ukraine conflict has prompted us to shut down our Russian satellite office in Nizhny Novgorod, where we currently employ some 176 people and establish a new European development site in Portugal, which, among other benefits, has a base of technology and contact center talent. We anticipate that many of our Russian staff will relocate to our new facilities in Portugal. I'll now turn the call over to our president, Dan Burkland. Dan, go ahead.
Thank you, Rowan. Once again, we continue to execute upmarket with unprecedented success by bringing unique innovation to help customers across the globe differentiate how they deliver customer experience. We've proven this with record performances in Q1 in bookings as well as pipeline growth and channel contributions, while also setting bookings records for our AI and automation solutions. Now for some key wins for the quarter. The first example I'd like to share is an HR and payroll software company. Their previous solution had no ability to provide AI automation and the analytics to improve and optimize the customer experience. They chose Five9 and have opted in for our full omni-channel offering as well as our IVAs, Agent Assist, WFO, workflow automation, and performance dashboards. This will all be integrated with Salesforce and several other CRMs.
We anticipate this initial order to result in over $3.7 million in ARR to Five9. The second example I'd like to share is a European insurance company based in the UK with over 38 million members and taking inquiries from patients, medical care providers, claims, and collections. They looked at all the CCaaS providers and chose Five9 for our full suite of solutions, including omnichannel, our IVAs, and our full suite of WFO powered by Verint for QM, speech analytics, WFM, and performance management. We are integrated to their Microsoft Dynamics CRM along with eGain for knowledge management. We anticipate this initial order to result in over $3.1 million in ARR to Five9. Now, as we normally do, I'll share an expansion example win from one of our installed base of customers.
This is a true example of a land and expand story. The insurance broker started with Five9 three years ago with less than 10 seats. They recognized the value we had brought to that one department and the potential to transform and automate their customer experience. In 2021, they expanded and added several hundred seats. Now in Q1 of 2022, they added our WFO suite powered by Verint for QM, WFM, and speech analytics. They also added our performance dashboards, IVAs, and Agent Assist, adding over $700,000 in ARR, bringing them to well above $1 million of anticipated ARR to Five9. This is a great example of truly bringing automation and AI into an environment and raising the ARPU significantly due to its compelling value and ROI. To wrap it up, I'd like to share our most significant win for the quarter.
You may recall just a few quarters ago, we shared a record win for the global parcel delivery service company, who is now ramping towards an anticipated ARR of over $30 million with Five9. Knowing the sheer size and scope of this customer, I was reluctant to say that this record would ever be broken. Well, today, I'm very pleased to announce that that record has been broken. After competing with all of the players in our industry, we signed one of the largest companies in the world, a healthcare conglomerate with retail, pharmacy, health insurance, along with many other divisions and brands. This customer will be rolling out tens of thousands of seats with Five9, starting towards the latter part of this year and throughout next year, bringing their anticipated ARR to Five9 to over $40 million in software subscription alone.
They were very siloed through many years of acquisitions and expansions and are now replacing all of their legacy on-premises solutions from Avaya, Cisco, Genesys, and NICE with Five9. Five9 was chosen for five key areas of expertise. Our ability to help them transform and deliver a reimagined, consistent, and highly differentiated customer experience. Two, our ability to provide valuable insights and analytics, allowing them to continuously evolve and optimize their contact center operations. Third, our deep and proven integration with Salesforce. Fourth, our complete WFO suite powered by Verint. Fifth, we were the only provider they felt could service them effectively across all of their subsidiaries and businesses. We believe this to be one of the largest, if not the largest CCaaS deployments in the world.
As you can see, we continue to execute successfully with companies of all sizes, with all of our products, and in all geographies. With that, I'll hand it over to Barry to share our financials. Barry?
Thank you, Dan. First, 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. We had another strong quarter with both top and bottom line results exceeding our expectations. As Rowan mentioned, revenue grew 33% year-over-year on top of the all-time record growth of 45% we reported in Q1 of last year, driven primarily by the strength of our enterprise business. Additionally, our quarter-over-quarter growth rate of 5% continued to outpace pre-pandemic levels of sequential growth of 3% we reported for both Q1 2020 and Q1 2019, demonstrating the ongoing retention of the COVID benefit we experienced through Q1 2021. In terms of revenue composition, enterprise made up 85% of our LTM revenue, and our commercial business represented the remaining 15%.
Our commercial business grew in the 20s on an LTM basis. As a reminder, we expect our commercial business to grow in the teens for the next several years as we continue to focus the majority of our investments on moving up-market. Recurring revenue accounted for 91% of our total revenue in the first quarter, and the other 9% was comprised of professional services. Our LTM dollar-based retention rate was 120%. Quarterly fluctuations are inevitable as mega customers come onto the platform at different times and ramp at different rates, and particularly in the near term, as we lap the one-time COVID benefit.
I like to remind you that our dollar-based retention rate is an LTM figure, which means that we will only fully lap the one-time COVID benefit once Q1 2021 is out of the denominator, which will not happen until Q1 2023. Over time, however, we expect the retention rate to trend towards the high 120s by 2026 due to a higher mix of enterprise customers, especially larger ones, which have demonstratively higher retention rates and higher ARPU from our automation and other offerings. First quarter adjusted gross margins were 60.5%, a decrease of approximately 350 basis points year-over-year due to the ongoing investments we have mentioned previously. These investments are in two areas. First, a step function increase in professional services, where headcount grew more than 50% year-over-year.
We are scaling up and building a worldwide PS organization to successfully implement the larger and larger customers we have been winning and expect to continue winning. Second, we continue to invest aggressively in public cloud to build our new sites for global expansion, which are currently only partially utilized. I would like to point out that on a sequential basis, first quarter adjusted gross margin decreased 230 basis points, similar to the 240 basis points sequential decline we saw a year ago. First quarter gross margins typically decline sequentially due to the FICA reset, and this year we have the added headwind of increased investments. As we have been saying, the accelerated investments in professional services and public cloud are transitory. We are forecasting them to peak as a % of revenue in the second quarter.
Therefore, we expect gross margins to decline slightly in the second quarter and start improving in the second half of 2022, with annual gross margins expected to finish at or above the 60.5% for the full year 2022 and continue improving in 2023 and beyond. First quarter adjusted EBITDA was $24.5 million, representing a 13.4% margin, approximately 270 basis points below the Q1 2021 margin due to lower gross margins. Expenses as a percent of revenue decreased by 90 basis points year-over-year, driven by G&A decreasing by 120 basis points, marking the 30th consecutive quarter of year-over-year improvement in G&A expense as a percent of revenue. First quarter non-GAAP EPS was $0.22 per diluted share, which was relatively flat year-over-year. Before turning to guidance, some balance sheet and cash flow highlights.
During our last earnings call, we mentioned that DSO was higher than normal at 36 days as a result of implementing a new billing system. Invoices were issued days or even weeks later than normal as we carefully validated each invoice before issuing them to our customers. To illustrate this concretely, we typically post approximately 50% of our invoices by dollar value on the first day of the quarter. After we implemented the new billing system in October, less than 31% of day 1 invoices went out on November the first, December the first, and January the third.
The rate had almost reached an almost normal 47%. As a result, I'm very pleased to share that while the three-month average DSO for the first quarter was, as I just mentioned, 36 days, we saw meaningful improvements each month in the quarter, and spot rate DSO for March was a normal 32 days. This resulted in us reporting a record quarter-over-quarter reduction in accounts receivable. This DSO performance in turn helped drive exceptionally strong first quarter operating cash flow, which came in at $28.7 million. We continue to expect operating cash flow margin to increase meaningfully in the longer term, driven by our demonstrated ability to expand adjusted EBITDA margins, our substantial NOLs, and our low DSOs. One other item on overall cash flow to note in your modeling.
Last quarter, I mentioned that we planned to make the $24 million earnout payment to Inference shareholders by March 31, 2022. Due to a delay in the response from the Inference shareholder representative, this was instead paid in the first half of April, with approximately $6 million reflected in operating cash flow and another $18 million reflected in financing cash flow. Before discussing our guidance, let me share with you the financial impact on Five9 resulting from the Russia-Ukraine conflict. We estimate the one-time costs of closing our Russian office and the associated one-time cost to attract and move Russian employees who would like to immigrate and join the new development center in Portugal to be between $8 million and $12 million, of which $2.7 million was included in the first quarter results. We've excluded these one-time direct incremental costs from our non-GAAP results.
We have allowed for the higher ongoing operating expense in Portugal in our bottom line guidance. Now I'd like to finish today's prepared remarks with a discussion of our guidance for the second quarter and the full year 2022. In terms of top line, we're guiding Q2 revenue to a midpoint of $179.5 million, which represents a 2% sequential decline. Slightly smaller decrease than the typical pattern heading into Q2 when we guided in the past to declines of between 3% and 4%. I would also like to point out that the implied year-over-year growth at the midpoint is 25%, which is the highest growth rate we have ever guided to when compared to pre-pandemic second quarters.
For the full year, we are raising the midpoint of our revenue guidance from $756 million to $771.5 million, which represents an increase in the year-over-year growth rate from 24% to 27%. As for the bottom line, we are guiding Q2 non-GAAP EPS to come in at a midpoint of 18 cents, a decline of 4 cents per diluted share sequentially. The quarter-over-quarter decrease is in line with the typical pattern for Q2 guidance and reflects the strong seasonal headwind we face on revenue in the second quarter, as well as the continued investments we are making in professional services and public cloud to further drive our enterprise and international momentum.
Despite these investments and the incremental run rate in Portugal, we are raising the midpoint of our full year guidance from $1.14 to $1.23 per diluted share. Additionally, I would like to provide more color on the quarterly profile of both the top and bottom line for the second half of 2022. For revenue, consistent with guidance in past years, we expect it to increase sequentially in the third quarter and more strongly in the fourth quarter. Given the shape of this revenue curve, we expect third quarter non-GAAP EPS to improve to approximately $0.30 and improve further and more significantly 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 first quarter performance and our ongoing success in moving upmarket, which will continue to help drive LTM enterprise subscription growth in the thirties for the long run. Operator, please go ahead.
Barry, thank you very much. We will begin our question and answer session by going first to D.J. Hynes.
Hey, guys. Congrats on the great quarter. Awesome to see that $40 million customer. That's awesome. Rowan, wanna ask a question for you on AI. Like, how would you characterize your lead there versus direct competition in the space? Like what do you look for? How do you measure that? Just curious, like what kind of data you can use in a sales pitch.
Well, it's tough, D.J. Thanks for the question. Wait, if you were sort of asking me, maybe I misunderstood the question. If you're asking how we stand up to the competition, you know, nobody reports this as a separate line item in terms of the revenue or anything like that. Competitively, we don't really know how that stands. It's not broken into a separate category. I think the framing of your question at the end was more around customer. You know, when we engage with the customer, how do we compete and how do we win and how do we
Yeah, like the technical differentiation.
Yeah.
Yeah.
You know, look, we bought what we thought was the best company in the world, and that was sort of backed up by analysts, you know, top right in the magic quadrant and all that was Inference Solutions. They had been working on for several years, a completely brand-new release called Studio 7 . That is now launching to our customer base, which is a massive leap forward. That's like a big part of it, is just innovation on the technology side. Then I think fundamentally, why they are number one is because the approach is very different than any of our competitors.
I'm not aware of any of our competitors who are built the way that we built. We have a different perspective, and Inference had a different perspective on this, which is to sort of stand on the shoulders of giants. Leverage the underlying technologies that were being built by the Googles and Amazons and the hyperscalers of the world so that customers can make their own choice, and then we build that layer that sits above all those technologies. You can reflect back on many conversations, DJ, that we've had, which is exactly this point. This was our strategy also to say, "Let's not use our R&D resources trying to spend a lot of money keeping up with the competition on automatic speech recognition and natural language processing or text-to-speech, are the two big ones, ASR and text-to-speech.
As a result, we've been able to apply those resources to take those kind of commodity technologies and apply them to the contact center in unique and different ways, and that's giving us our technology lead. Look, the product just stands up extremely well in demonstrations and, you know, proof of concepts with customers. It's clearly the leader. It's demonstrated in the success that we're having, and we're now starting to generate real customer references and use cases. One of our largest customers in the healthcare space drove a 10% labor savings by implementing our solution, completely replaced our IVR, and had. I think they had $2.2 million savings per year, which represented 10% of their total labor costs or 36 agents just by implementing this technology.
It's those kinds of references in the large enterprise that our customers are going, "Wow, you guys clearly do have the best technology, and we wanna get a piece of it.
Yeah. Great, great color. Follow-up along those lines, kind of a crystal ball question, but you take a contact center today that, say, has 1,000 seats manned by people today. In 5 years, like, how many seats do you think that same contact center has manned by people?
Well, doing what they're doing today, much less. How much less, you know, it's hard to say. Right out of the gate, we're seeing numbers like I just shared with you, 10%.
Yeah.
I'd anticipate that number goes up fairly dramatically. You know, when you look at the average contact center and look at what are the high volume but very low value kinds of calls, I mean, that could be 50%, 60%, 70% of the volume into a contact center. It depends on your industry. It's hard to give a kind of a general answer.
Sure.
I'd say the contact center in five years looks radically different than it looks today in terms of, like, think about the sea of cubicles and the people on headsets. Like, we're replacing that with automation and, you know, putting those humans to work at what they're really, really good at. I couldn't give you an exact number crystal ball-wise, like you asked, but it's gonna be fairly dramatic in the next five to 10 years.
Yep, yep. Super helpful. Thanks, guys. Congrats.
Thanks, DJ.
We'll move on to a question now from Ryan MacWilliams at Barclays.
Thanks, guys. Feels like this time last year we were talking about, you know, could Five9 win a mega customer? Now, you know, after some of these deals, the kind of question is like, how many mega customers could Five9 win? Now congrats on the move-up market. Rowan, you know, we'll just hear perspective on these mega deals, kind of like why now, right? Like, are they ready for it from a technology standpoint, or is it the shift to work from home is really driving, you know, larger cloud adoption in the contact center? Then for Barry, just as these larger deals maybe make revenue a little lumpier, you know, just in terms of your guide, where could we see a little more upside from these deals turning on, like second quarter, second half, start of next year? Just want some insight.
Yeah. I'll take the first part. It's a perfect storm. I think of four factors. One is our readiness. Four years ago, we weren't ready to take on the size of, you know, the $44 million customer that Dan just talked about. Our technology wasn't ready four years ago. We're now ready, so we're able to land those customers. As we land them, we get those customer references, like Dan mentioned in this particular one. I mean, they called the parcel delivery service back channel and got a great reference. That's the second thing, is success breeds success. Number three, I think customers are ready. The market is, you know...
I don't know if this is post-pandemic, I don't know if this is, you know, what exactly is driving it, but the pipeline on the mega deals is really there in the way that it hasn't been over the last few years. I think it's just market becoming ready to move. Then the fourth thing, you know, I think this is really important, is the breadth of our portfolio and the fact that we now have technologies that you can get in the cloud that you cannot get on-premises. If you're an on-premises customer today, you can't get an IVA. They don't work on-premises. You must go to the cloud.
That factor, that there is now some extremely compelling reason beyond the normal cloud stuff for a large enterprise to move to the cloud, it's another good reason. I think it's a combination of those four factors. They're all kind of hitting at once, and it's creating this, again, a perfect storm scenario. Look, we invested ahead of it, Dan. You know, Dan's team started this two years ago, restructuring or creating the team in anticipation of these investments all paying off, and they are paying off now. You see that in the $44 million ARR customer we just landed.
Ryan, I'm gonna respond to your question in 4 parts if you don't mind. The first part is the parcel delivery service. That is currently the biggest contributor of the megas. That is still continuing to ramp this year.
The second one is the SI that was spun out. That too is also contributing currently and is also ramping for the rest of the year. The third one, which is the British insurance company that we announced almost 18 months ago now, is going live this quarter and will ramp throughout the rest of the year. Finally the latest one that Dan talked about earlier on, that'll ramp probably starting in the fourth quarter, and there will be a small contribution from it, but the majority of that will be next year.
Appreciate the clarity. Thank you, Barry. If I could squeeze one more in, maybe for Rowan or Dan. Rowan, just on the IVA on-prem standpoint, we're hearing about Inference wins, you know, in some of IVR and Cisco deployments. How does, like, that new logo growth seed future contact center wins for Five9? Like, is it a no-brainer to go with Five9 for the rest of the contact center after that? Or is it still kind of up for grabs after the Inference?
It's always a no-brainer to go with Five9, but, I'll give it to Dan to answer that directly.
Yeah, I know.
It was a softball, Ryan, sorry.
Yeah. Ryan, thanks for the question.
Yeah.
It's a great way to get your foot in the door. Not all companies are ready to make their transition to the cloud right now, but they can do so with IVAs. If you're in there at the front end with the IVAs, you're in the pole position when they do come around to transform and migrate to the cloud. We think it puts us in a very advantageous position.
Appreciate the color. Thanks, guys.
Thanks, Ryan.
We'll take our next question from Meta Marshall at Morgan Stanley.
Great, thanks. A couple of questions for me. Maybe first, just some differentiation or kind of additional color you could give on the partner traction. Clearly you were seeing a lot of. You noted kind of the 68% growth, but just any differentiation between maybe some of the newer partners that you've brought on versus some of the ones that you've had for a while. And then just kind of given the difficulty of the hiring environment, just where you're kind of finding the professional services adds, or are you able to add as many professional services people as you would like? Thanks.
Yeah. I'll take the first part, Mita, thank you for that. When you look across our channel partners, as Rowan mentioned in the prepared remarks, we've got, you know, five or six categories that are all we're not only hitting on all cylinders and signing up new ones, which are great for the long term, but maturing the ones that we've signed up over the last several years. That should not be underestimated. You know, at the beginning with complex solutions like we offer, you know, they can introduce us into those opportunities when they're in their infancy as a partner.
As they get smarter and smarter and certified from, you know, a professional services standpoint, and even on the pre-sales side, get more knowledgeable and have reference accounts of their own, we can leverage them to take on more and more responsibility. That only helps us from a productivity standpoint, on our side. As far as the hiring piece, professional services wise, we have, you know, no problem finding labor. There's certainly no shortage in that sense. If you think about all the legacy on-prem providers that have had professional services organizations, typically with platforms that require a whole lot more services than ours, those folks are looking to make that same move over to the cloud 'cause they see the future.
We've been able to handpick some very, not only senior high-performing leaders, but that they can handpick and select the best of the best to come over to Five9. We have no issue in hiring whatsoever. That goes both on professional services and on the sales side.
Great. Thanks.
Yep.
Before we take our next question, we'll ask the analysts, please limit yourselves to one question just to help us get through all questions possible in the time that we have. Having said that, I'd like to move on to our next question from, I'm sorry, that's Scott Berg at Needham.
Hi, everyone. Congrats on the fantastic quarter. I'm gonna throw out a 36-part single question, so better get ready. No, I wanted to follow up on some of Barry's commentary around the costs to move some of your Russian employees out, but pivot that maybe to a general sales question within Europe. I know you all have made a big push into the European theater over the last, you know, couple years, you know, heavy partner sales over there. From what you're seeing right now in that environment, is there any, I guess, headwinds to either sales cycles or demand for the Five9 platform over there, or is it still kind of business as usual?
Okay. Well, that was multipart, wasn't it? I'll let Barry comment.
Good vision.
On the Russian operations and from a cost perspective, but I'll kind of give the high level here. Number one, our European business is doing great. You know, we invested there. We've said that's a big focus for us. We've made some really good hires, you know, including in the mainland, on the continent in Germany, going after that. Europe's doing great, and this is actually gonna bolster that even further. We're gonna use a good chunk of the Russian employees as a seed team to establish an R&D center in Portugal. We're going right into Portugal, establishing a large R&D center, low-cost R&D center for Five9.
There's, as you know, a local base of talent there that we plan to go after aggressively, and move into the Five9 culture, and we think that that's gonna really help from an ability to expand and having local resources in Europe is gonna be very helpful. We're kinda using this as a jump start, if you will, and a great opportunity. Financially, I'll let Barry comment on that.
Yeah, real briefly, Scott, that $8 million-$12 million, we don't quite know yet, exactly how many people are gonna come over. This is a major life decision for these people that are caught in the middle of this, hence the range of 8-12. The major components in that are the severance because we're actually shutting down an office and that comes with severance costs. Then the cost to move and attract and retain the people in a new country, and also, you know, mundane things that add up like immigration costs and legal fees and so on. This is being extremely well run and we're very optimistic that we will be able to get the majority, well, a meaningful number to come over.
Yeah. Just to be clear, that $8 million-$12 million of one-time expense associated with restructuring, that's somewhere in the $45,000-$68,000 per employee. It's a small. It's a very small number when you think about it. When you just think about establishing a new R&D center, right? Hiring and ramping and training new employees, we actually couldn't have done this at this level in this successful of a way before the sort of conflict in Ukraine broke out and the war broke out because our employees in Russia wouldn't have been as willing to move. Given this current situation, we've got a lot more interest in actually relocating out of Russia, so we're using that to our advantage.
Also, just to emphasize what I said on the call, Scott, there is a slightly higher cost in Portugal, and we've absorbed that in our bottom line guidance. Yeah. You're on mute.
You're on mute.
Oh, congrats. Thanks again, everyone.
All right.
Thank you, Scott.
Moving on to the next question. This is from Taylor McGinnis at UBS.
Yeah. Hi. Thanks so much for taking my question. If I look at the implied recurring revenue growth in the quarter, it looks like sequential growth of 3% was actually in line with the pre-pandemic levels. You know, Barry, is it fair to assume that the quarter might not have seen or might have been a little bit light in terms of some of those larger deals ramping and falling into place? I guess as we look ahead, how should we think about, you know, sequential growth relative to the pre-pandemic levels in recurring revenue as some of these mega deals really start to ramp?
Yeah. The first part, clearly we benefited from the ramping of these mega deals as I described in the earlier question. Taylor, in terms of the future growth rate, sequentially, we've given a guidance which I emphasize is prudent guidance as we customarily provide. But if you want to do some scenarios with, you know, basically arithmetic, in terms of sequential growth, on the one hand, you could assume that everything goes extremely well and these megas all come on stream on time and et cetera, et cetera, and you have 5%, 12%, 14% sequential growth in the next three quarters. That then, I'll save you the arithmetic, gets you to 37% growth year-over-year.
On another example, though, and remember that 5%, 12%, 14% is from 2020, where we were COVID benefited. On the other hand, if you use growth rates that are not COVID benefited, like in 2021, 2019, 2018, you get instead 4%, 7.5% and 11%. Then that gives you a 32% growth. You know, we're sticking with prudent guidance, and we'll update it. It's still early in the year as the quarters unfold, but in the meantime, you know, you're going to need to make your own conclusions beyond our guidance.
Perfect. Thanks. That's helpful. Congrats on the quarter.
Thank you.
Moving on to Jefferies and Samad Samana.
Great. Hey, good evening. I'll echo the congrats on the strong results. Maybe this one is for Dan. You know, it sounds like the quarter itself is very strong. The guidance reflects that's sustaining. But just can you help us understand what you're seeing in terms of deal cycles? Are they getting longer, shorter, staying the same versus maybe the last couple of years as we've all been at home? Then maybe also comparing that to pre-pandemic time frames and same for close rates as well around deals.
Yeah. Thanks for that. Regarding sales cycles, you know, they're continuing and actually getting condensed slightly as time goes through, whether COVID or not. We're not evangelizing cloud, you know, any longer. We're also working with more channel-driven opportunities where they bring us in, and they've already set the tone and perhaps had the first several meetings. So we tend to be brought in, you know, more midstream of a process or, you know, not trying to engage and create a process and create the ROI to begin a process. So that overall means a reduction in the cycle. At the high end of the market, which is where we're really seeing the biggest, the largest momentum, you know, up in those mega deals and even the higher end of the enterprise and the strategic deals.
In that case, those are starting to condense slightly as well. The very first time you go into that market, you do have to start and evangelize and be able to position all the technologies, prove to them why we believe CCaaS and Five9 in particular is a viable alternative for their large enterprise. Should they go disrupt their enterprise for, in some cases, over a year in order to get these benefits? You know, they scratch their head. Rowan alluded to it earlier that, you know, there's all the benefits of moving to the cloud, but if you're gonna disrupt your environment for a year, where's the incremental value?
We've got to really position and set forth the business case and the ROI for them. Once they start seeing that, and once they start seeing other enterprises go first, you know, success breeds success, and we see that momentum continuing, if not accelerating.
Great. Appreciate the color. Thanks, guys.
Yep.
We'll take a question now from Jim Fish at Piper Sandler.
Hey, guys. Congrats on the quarter. You know, last quarter, Rowan, we were talking about you guys unlocking the team from these larger deals, and it's clear you guys have. Just, you know, how should we think about the competitive environment for these larger deals, especially as, you know, obviously you've had Amazon Connect that really hasn't been part of the bake-offs that you guys have been part of. You know, Microsoft and Google now entering the space. Just secondly, you know, Dan, you've mentioned $40 million ARR on just the software subscription. What could the usage element of that contract be, given a typical contract is, you know, 75-25, let's call it, or is this kind of pricing in usage already? Thanks.
Yeah.
Maybe I'll take the first part.
Okay.
Around, you know, competitive. There, you know, we're not seeing the Amazon or Google. Well, certainly not Google. I mean, they just have a partnership with a very small startup in this space. Microsoft have announced a product. Really it's us and Genesys and NICE that are in these deals. You know, Dan said previously, and I'll reiterate, you know, where Amazon does show up, like if we're in the last stage where we're fighting against Amazon, something's gone horribly wrong. That doesn't happen because the companies make a decision early on, do they wanna buy a product or they wanna go try to build their own, you know, sort of platform using Amazon. We're just not seeing that very much, to be honest.
We are seeing Genesys and, NICE in terms of cloud competitors. Realistically in these very large, it's Genesys and Five9 in terms of ability to potentially serve the customer. You know, obviously we think we're winning more than our fair share of these deals. Dan?
Yeah, no, I think you said it spot on. I mean, if you take the competition, it's, you know, all those mega deals do evaluate and look at Amazon Connect. But they either have the appetite and the wherewithal and the R&D, you know, IT shop to go to build and create and customize for years before they're ready to go into production, or they recognize that we have a finished product that they can enhance with all of our AI and automation on top of it, and that's really what they're eager to get their hands on. They can hit the ground running with us much sooner and much quicker.
I also think the investments in the scale and the platform that we built, we really re-architected our platform over the last few years. You know, that's been a big focus on the R&D side. That's what's paying off right now. That investment in R&D, we re-architected the entire platform, and that's allowing us to land these mega deals. Frankly, I think we've jumped ahead of the competitors in terms of ability to execute here and ability to scale with these largest of the large customers. That's also helping as well.
Makes sense. Dan, just following up with that large customer on the usage side.
That customer is not gonna put usage through Five9. You know, sometimes these large companies have long distance calling contracts for multiyear with large carriers, some of whom may be a partner of ours. We're very careful to make sure we honor that. The good news there at the end of the day is over $40 million in subscription revenue alone. That's margin accretive 'cause we don't have that, you know, the lower margin usage pulling that down.
Makes sense. Congrats, guys. Thanks.
Thank you.
Jim.
Taking the next question now from Terry Tillman at Truist.
Yeah, thanks for taking my question as well. I'm not gonna ask Dan if there's a $50 million ARR deal this upcoming quarter. That's not one of my prepared questions.
Thanks.
I'll go with my prepared question. It's a slight two-parter. On IVA, where do you think you are in terms of, like, innings, in terms of traction with the installed base going back to them and just the attach rate on new deals? I'm just kinda curious how long of a tail we have because that seems like that's a real new key product cycle. The second part of it is, how will Agent Assist compare to IVA in terms of impacting ARR, in general? Thank you.
Yeah.
Yeah.
Great, great question. We are in the very, very early innings. We're just getting started with IVAs. If you really look at the market, we talked about attach rate of 10% to our enterprise business at the last quarterly meeting. If you think about it, that's the folks that are saying, "Great, we love the story. We're going with Five9, and we're gonna start with probably an initial use case," which is kinda the obvious high volume, low complexity, let's bring that onto the platform. As we've talked about over the years, those customers are gonna start adding use cases. What else can we automate? What else are customers getting comfortable with speaking to a voice interface that's not a human being?
I think that comfort level, we've already seen it, you know, in our own behaviors, you know, talking to Siri and Alexa and other voice interfaces. It's getting more and more comfortable for people. I think if we introduced the same technology five , six years ago before those interfaces were prevalent throughout our homes, people would have kind of been scared off by them. I think timing was critical. The accuracy is getting better and better. As we can implement these in more streamlined and bring it down market, in many cases, to be kind of the standard, you'll see more adoption. That's one. Then if you look at our install base, yeah, just the opportunity is there in spades.
We have yet to really penetrate that to any meaningful level to where it starts being, you know, truly incremental revenue, coming in. You know, stay tuned. I think this is an industry, you know, particularly the automation, whether it's IVA or Agent Assist, that's just getting started, and that's probably a decade or more of, you know, adoption that's gonna continue to increase as companies and as individuals get more comfortable with it. As far as Agent Assist versus the IVA contribution on revenue, I think, you know, Agent Assist is one where you can apply. If you think about the automation, we're listening to conversations and transcribing into text. Then the question is that's the base level. You know, as Rowan said, we're leveraging other companies to do those functions.
The question is, what do you do with that data? There's so many new opportunities and use cases that can leverage that data, whether it's in real time to coach agents, whether it's historical to pull out insights and deliver to management to say, "Hey, these are the most common things being either asked for and unaddressed on your phone calls or just being asked for that are mundane, repeatable questions. Well, wait a minute. Why don't we prescribe automation? 26% of your calls are asking this question, and it's the same answer every time. Let's go apply IVA to automate that." A lot of this is consultation, and it's a combination of Agent Assist, and I think they both feed each other. The Agent Assist will help us feed more IVA opportunities.
Thank you. Congrats.
You bet.
Moving on now to Will Power, Robert W. Baird.
Great. Thanks for taking the question. I know you all referenced record you know bookings again in the quarter. I'd love to just understand, better understand how you view the key drivers there, the key components of that. Any way to further break out, you know, IVA and Virtual Observer? I mean, obviously, those seem like very strong growers. How important now are those to bookings? Any more color on that front would be great.
Yeah.
Barry, you wanna take that one?
I'll say[crosstalk].
Oh, sorry. I don't know, Barry, if you wanna take the financial side of that one.
On the booking side, Will, it is pretty much, however you cut and dice it, you know, reasonably strong, or very strong. In the case of enterprise, it as Dan mentioned in the prepared remarks, the bookings were just a record. The installed base is not seeing the likes of what they had obviously during COVID. You know, still the momentum is there. In terms of IVAs, as we mentioned, Will, those were doing very, you know, very well in the prepared remarks. It said they were the record bookings.
No, I'm sorry. Will, you had asked about bookings. I thought you had asked about the revenue. Dan can probably comment on the booking side.
Yeah.
Sorry about that. That's a director problem.
Quite all right. Yeah, looking at the bookings, what are the drivers, you asked, for the bookings, the record bookings. I think the key here is, you know, we talk about hitting on all cylinders and cliché, but when you think about the drivers, having the automation technology being brought into the contact center for the very first time, in the, you know, 20+ years, almost 30 years I've been in this space, really is driving decisions. The fact that you can only get these from the cloud is driving folks to make that transition to the cloud. That's number one, absolutely, is having this technology available.
Whether they implement it day one or not, and I say that because when we talk about our 10% attach rate and folks are trying AI, the Agent Assist. What we're finding is the majority of the decisions, though, are being made because they hear the story, they see the demonstrations, and they say, "This is fabulous. Okay, first step is let's get everything off of our premises into the cloud, and then we'll start adding this automation." It's helping Five9 win deals because of the story, as well as the technology itself. Then I think that to dovetail that, it's what you do with technology, right? I talked to a customer just this morning, and we shared the fact that, you know what?
The vendors that they were looking at, the suppliers, all three of us had way more technology than they would ever exploit or take advantage of. It's overkill for what they need. The question is which one is gonna optimize and implement it to extract the most value from what they're trying to accomplish. That's where the partnership, not just the technology, but the partnership. Do we have a professional services team that will consult and come out and optimize it? Do we have an ongoing support model that allows them to take advantage of the changes that they're gonna have in their business and how they can tailor the solution to that? That's an area that oftentimes gets overlooked or neglected in the selling process.
We emphasize it heavily because we believe we're the best at it.
That's great. Thank you.
Yep.
Next is Mike Latimore, Northland Capital Markets.
Great. All right. Great. Thanks. Hi, guys. Just on the IVA pricing, is that still kinda consistent with what you've been thinking in the past? Given just the strength in IVA bookings, should we think about, you know, ARPU continuing to grow this year?
Never mind. Go ahead, guys.
IVA pricing, what we've got, if you think about, we've come out with roughly $450 per IVA. You know, think about that as the software and the virtual agent itself versus, you know, applying $200 to a human agent plus the, probably 10x that for the human cost. What we have found, the ROI is extremely compelling. Rowan alluded to the example earlier, the healthcare company that just basically were offsetting 36 humans, roughly 10% of their workforce, with the IVA. You know, that becomes a very compelling new dynamic in our industry that we just haven't had in the past. You know, having that contribute to the ARPU. We talk about attach rates.
You know, oftentimes, though, we'll get a 500-seat customer that might say, "You know what? I don't know what my adoption rate's gonna be." Remember we talked about, well, what's the adoption rate? What percentage can you really deflect over to IVAs? It totally depends on so many factors. One is, you know, the industry you're in, the types of questions you're handling in your contact center, the comfort level of your customers and the type of demographic you're dealing with there. There's all these factors that weigh into it. A lot of the big customers that, you know, have hundreds of seats of human may just try it and see how it takes and then decide, will it expand from there? When you look at the ARPU, it's starting to contribute an incremental increase to that.
Again, the volumes aren't high enough across the entire base. Until we start really penetrating that base, that's when you'll start to see increase. Will it go up? Sure. To what degree? Hard to say at this point.
Okay. Got it. Thank you.
Yeah.
Ladies and gentlemen, that is all the time we have for questions today. I'll turn it back to our speakers.
Thank you very much. We really appreciate the time and you joining us today. Another great quarter for Five9 behind us. Again, the strength continues. Strength to strength. We are in this sort of perfect storm of growth opportunities with the strategic enterprise, and you can see that in our numbers. We're looking forward to a fantastic rest of the year. Thank you all very much.