Ready to kick things off. I'm DJ Hynes. I'm Canaccord's Senior Software Analyst. This is the forty-fourth year we've done this conference, which is incredible. We couldn't do it without the companies that support it, so thank you to the Five9 team for being here. The investors that ask all the smart questions, we appreciate all the support. As I said, we have the Five9 team here, CEO Mike Burkland, CFO Barry Zwarenstein. We're gonna do this as a fireside chat. If there's any questions in the audience, I have plenty to get us through a half hour, but if there's any questions, please, you know, chime in, raise your hand, we can work them in the conversation. I'm gonna quickly turn it over to Barry for a safe harbor comment, and then we'll get right into it.
Good morning, everybody. Before we start, we'd like to remind you that we will be making forward-looking statements during today's discussion, including, but not limited to, those regarding future events, trends, expectations, projections, beliefs that may affect our industry and our com- or our company, product developments, AI, automation, and potential growth drivers. Such statements and other comments are predictions and should not unduly be relied upon by investors and are subject to risks and uncertainties, many of which are beyond our control.
Actual events or results may differ materially from those projected or suggested by any of our forward-looking statements. These forward-looking statements apply as of today, and we take no obligation to update these statements. For a more complete discussion of risks and uncertainties that could impact future operations, refer to our SEC filings. Unless otherwise noted, all numbers today, other than revenue, will be adj...
on an adjusted non-GAAP basis. You may find a reconciliation of GAAP to non-GAAP financial measures on our investor relations website. Thank you.
I missed the end of that. Can you repeat it? No, just kidding. All right, lots to unpack.
Yeah.
I'm gonna get right into it. I figure we'll skip the business intro part. I think everyone's familiar at this point. Let's talk about Q2 results. What's top of mind coming out of the quarter? What have investor questions focused on? Kinda give us-
Yep
... your view of where the business stands today and kind of the setup for the second half?
Yeah, happy to, DJ. So Q2 results were very good, top line and bottom line. We had a nice beat both on the top and bottom. We surpassed $1 billion revenue run rate as a SaaS company. That's a big milestone for us, we're proud of. So it was overall, a very, very good quarter from a results perspective. Subscription revenue, which is the most important metric that folks need to pay attention to, it's nearly 80% of our revenue mix, and that grew at 17% year-over-year. And enterprise LTM enterprise subscription revenue grew 21% year-over-year, so a solid quarter in Q2.
However, we did reset guidance lower in the second half of this year, based on a few things we saw in kind of the latter half of June and into July. And it was essentially, you know, two things, I should say three things. Our net new bookings came in lighter at the end of the quarter in Q2. Somewhat macro-related, somewhat execution-related. We can talk about that. We wanted to leave room in the classic Five9 fashion for beats in the second half. And, you know, we've been talking with our install base customers about their businesses, especially the seasonal ones that tend to be, you know, back-end loaded in terms of their growth in the year, Q3 and Q4, we get...
You know, from retail and education, as well as some healthcare companies that we do business with, that are our customers. Their businesses typically expand seasonally in the second half, and as we talked to many of them, over the last, you know, several weeks, it became evident that they're projecting less growth seasonally in their businesses, even compared to last year, which was a muted seasonal-
Sure
... bulge, if you will. So again, we're being prudent, that's the way we do things, but we're very, very bullish on the long-term outlook for, you know, Five9 and our market. AI as a tailwind, we'll get into that in a little bit, but it's an exciting time. That may sound surprising, but it's an exciting time for us.
Good. Well, it's an important message to get across. Barry, I wanna dig in on the guidance with you. I felt like how you guys were positioning the guidance for the year, it was a lot of the second half re-acceleration was coming out of backlog implementations. It sounds like nothing has really changed there. We're on track with the big implementations. The other piece was the seasonal piece, which I understand isn't playing out. And then it was positioned like... And there's a small amount of Q2 go-gets that we need to get to hit our numbers. Obviously, the go-gets didn't transpire in the quarter, but it led to a $40 million cut to the second half, which surprised me. The magnitude of it surprised me.
Walk through the puts and takes of those three pieces, and kinda how it shaped your view of guidance for the rest of the year?
Thank you, DJ. And I'm going to cover a little bit of the same ground as Mike, with just a bit more color. So, a great summary. Starting with backlog deployment, that's a neutral factor in that $40 million. It's going largely on schedule. There's normal ebbs and flows, but that's working out as we would expect, because we've got a lot of visibility into that. And just to cement that in your mind, we turned up more seats in Q2 than we did in Q1, which was a record. A Q1 record, admittedly, but still a very strong quarter. So that's a neutral factor, the backlog. Let's go into the three that Mike alluded to, that did drive the three factors that did drive the $40 million.
The first one, and the biggest one, was that, net new logo bookings, came in lower in the latter part of, June, which is when we get, typically, most of our major, orders. To cement that in your mind, look no further than what Dan Burkland, President and Chief Revenue Officer, talks about each quarter in his, earnings call, in, in his prepared remarks. Each quarter, up until this last quarter, he would talk about a $7 million deal, a $2 million deal, $5 million, a $50 million deal. This quarter, he talked about two $1.1 million deals, and these are the lowest ever, and, one expansion order, $1.3 million, so meaningfully less.
We took that information, and then, as Mike said, we looked at the remaining orders for H2, and we prudently cut that to take into account what we were currently seeing at the time. And, you're probably wondering, "Okay, big deal!" Well, it is a big deal because the professional services that go with that start almost immediately. The customers have been negotiating, and now they're finally ready to go. We're ready to go, and that professional services kicks in immediately. And so we lost that, and also to some extent, because we model three months to go live, four months to ramp, some revenue in the fourth quarter, so recurring revenue in the fourth quarter from subscription and usage. So that was the biggest one.
The second biggest one was, we needed to, as Mike also said, we needed to beat to beat these numbers, and so we prudently cut the forecast so that we could indeed beat those numbers. The third one, and the smallest one of the three, was the fact that we did see some gathering storm clouds on the economic horizon. We spoke to our largest seasonal customers, not just in the consumer, but also, as Mike said, in healthcare and education, and they're still growing, but meaningfully less. So, in summary, after the quarter ended, we looked at the net new. We cut it prudently, we think. We looked at what we were hearing from our top seasonal customers, took that into account, and did what we normally did.
We cut it, and we cut it prudently. Thank you for also, you know, talking about specifically what I was saying and then and now. When we were talking in the conference circuit, up until our quiet period in the middle of June, we did not realize there was going to be a meaningful reduction in those net new orders, which occurred after we went into our quiet period.
Yeah. Yeah. I want to revisit a question I asked on the earnings call, which is, and I think it's probably the most important thing to the stock at this point: Does it feel like the revenue growth re-acceleration has just been pushed out, or does it, or the recent execution kind of call into question that it actually happens at some point?
Yeah, I'll start, and Barry, feel free to chime in. We're very confident, DJ, in our ability to re-accelerate revenue to the 20%-30% growth rate that this market and our position in it will generate. At the same time, again, we're being prudent, as we said, in the back half of this year, based on what we've seen. We're a highly instrumented business. We're looking at metrics, and again, as soon as we see the necessary metrics that we feel confident, you know, we'll update our guidance as the rest of the year unfolds. But we're very confident. Just to be very clear, we're very confident in the ability to re-accelerate to 20%+ growth-
Perfect
... in the long run.
Good. Let's hit on the execution in Q2, the bookings side of the business. I mean, the question I was getting like: Is this macro? Is this Five9-driven? You know, others are pointing to competitors in the space that are growing faster, which would lead you to think that maybe Five9 is losing share. How would you respond to that comment?
Yeah, it was a combination of macro and execution, DJ, as we said on the call. Understand that, you know, this is a macro backdrop with tight budgets, and so we saw that come into play at the end of the quarter. You know, from my personal perspective, my opinion is we can always get better. What we're doing from a sales execution standpoint is we're layering in, you know, a new EVP of sales, someone that's been with us for 10 years in our sales organization, for a 100% dedicated focus on getting better. But at the same time, it's not gonna be disruptive. I don't expect us to miss a beat. From a share gain perspective, again, I think it's important to compare apples to apples.
We don't have a legacy business. Our two direct competitors have legacy businesses, which they're converting to the cloud. And even with that, remember, subscription revenue grew 17%, enterprise LTM subscription revenue grew 21% in the quarter. If you look at what they call cloud revenue growth, we're very much in the same, same category in terms of growth rates. And, again, we're very confident. Our win rates continue to be north of 75%, for our two direct competitors in aggregate, and we're, we're really excited about, about where we are in the market, from a share perspective. So again, I wouldn't read, anything more into it.
Good. That's useful. Expanding the scope on the competitive dynamic question, there's been some lower price entrants in this space, whether it's the UCaaS vendors or Microsoft making some noise. Have those folks been disruptive to sales processes? Are you seeing them show up in RFPs? How do you think about Microsoft as a, a player in this space?
Yeah, look, there's some noise out there for sure, right? I mean, whether it's Zoom or Microsoft or others, or other UC players that are trying to break into the CCaaS market, in the end of the day, we've talked about this a long time. The barrier to entry is significant. When it comes down to it, the finalists are the same finalists for large enterprise CX, CCaaS-
Yep
... opportunities. We're not really competing against those low-end solutions. And, you know, except for in our commercial business, which is a very small percentage of our revenue and target market. That said, again, we know this is a very attractive market. We're running very quickly to extend our leadership position, whether it's core CX platform, innovation, or it's AI. We'll talk about AI in a second-
Mm-hmm
... I'm sure. But, you know, we've still- we have made two significant announcements even in this quarter. We've got, what we call the, the Five9 Genius AI Suite, it, of AI solutions embedded in our platform. We're way out ahead in terms of AI when it comes to CX powered, or AI-powered CX, I should say. And, so we, we feel really good about that.
Yeah.
Yeah.
It's a good segue. Let's talk about AI. Maybe an intentionally open-ended question, and I know how you're gonna answer it, but we'll give more, get more color from you.
Mm-hmm.
Is AI a good thing or a bad thing for the CCaaS vendors?
It's a great thing. I wouldn't say it's even a good thing, it's a great thing for CCaaS and all of us. We actually have a slide up on our investor deck. I'd encourage all of you to look at that. It really quantifies the TAM expansion that CCaaS gets from GenAI. It is very simple math. We've talked about three of our customers, just as examples. There are several of our customers where we're seeing this exact same pattern, where if they can automate, you know, 5%-15% of their interactions with self-service, yes, they're gonna have a labor savings in the long run. Oftentimes, you know, that might be less growth in, you know, agent count.
But it could even be a labor savings in the near term, but they're also spending money with us on our AI software to automate those interactions. And our subscription revenue in those three cases and across other customers, too, if they've got, for example, a 15% automation scenario, where they're deflecting and automating 15% of their interactions, which is a very high percentage, for us, results in a 30% TAM expansion for overall subscription revenue, including puts and takes-
Yep
... on a net basis. So it's a, it's a great opportunity for us. It's a, it's a catalyst for these large enterprises to move to the cloud. Is there a lot of confusion and prioritization by CEOs and CIOs these days around figuring out AI? Absolutely.
Yeah.
That is also part of the equation in our market, which is maybe in the near term a little bit of a confusion, or if you will, a distraction for CIOs to make purchase decisions.
Sure.
I do think that's part of what's coming into play here. At the same time, long run, and even medium term, we see it as a very good tailwind.
Yeah. How would you say Five9's AI strategy differentiates from others in the space?
Well, we're fortunate, DJ. We got off to a great head start with the Inference acquisition almost four years ago. We're not new to AI. We've expanded that Genius AI Suite of products on top of the initial Inference product, which was IVA. We're now helping some of the largest brands in the world elevate their CX with AI. AI is now 8% of our enterprise subscription revenue mix, so it's real. And from a differentiation standpoint, look, our strategy has always been consistent. We're engine agnostic, we deliver practical AI solutions, we're doing it responsibly, and it is, you know, it's a really important thing for these customers to be able to deploy AI and get real ROI, tangible benefits, and we're helping our customers do that.
Again, we think this market is just a wonderful tailwind.
Yes. The question I get asked a lot around AI is, like, the future of agent seat count, do we see compression in seats driven by AI? You alluded to some of the economics. Does that evolution call into question, like, traditional pricing models in the space that are seat-based? Like, do you see that evolving towards more of a usage-based model? Or how does this all play out if we look forward three years, five years?
As I said, it's a TAM expansion for us, and from a pricing standpoint, we offer all of our AI products on a consumption-based pricing model, and in some cases, where it's appropriate, you know, we'll offer a seat-based pricing model. But again, either way, the revenue per interaction is what you have to pay attention to, and that is what provides this TAM expansion for us.
Yep.
Whether we're providing AI software or software for human seats or agents in the contact center-
Mm
... we have both, we get more revenue per interaction to Five9 for that AI subscription or AI software that we're selling them. So-
Yeah
... overall, it is a TAM expansion, and, you know, we're starting to see that in that revenue mix that I've talked about.
Yeah. One more on AI, and then we can move to different topics. But how much of AI usage today is kind of human-in-the-loop use cases versus fully autonomous-
Yeah
... AI running? Like, I'm just trying to think about how quickly contact center operators are kind of lifting the guardrails and, and-
Yep
and letting AI really run?
It's a great question, and GenAI changed the game in this regard, right? In the old days, AI was all about data scientists, and we were in that game, you know, 'cause we got into AI very early. And, in those days, it took a lot of heavy lift in terms of humans in the loop, to get these models trained and so forth. And, GenAI has changed that. What's really game-changing is some of the products we just talked about on the last couple earnings calls, GenAI Studio, it's all about contextual data, and that's the real differentiator for delivering personalized, accurate, AI-powered customer experience.
Yeah.
Right? And so we're talking about differentiation against competitors. We have a huge differentiator in GenAI Studio. It allows our customers to combine those, you know, those best-in-class engines for the use case, but it also allows them to integrate contextual data, whether that's in a backend system like CRM or a billing system, or whether it's interaction data. And that power of the platform, having all those integration points, being able to leverage all that contextual data into the AI, is really what's differentiating our solution against others.
Yeah. Let's transition and talk about Acqueon a little bit. You guys announced an acquisition during the quarter. I feel like it got lost in some of the noise and the changes in the numbers. Maybe just talk about from a strategic standpoint, how it fits into the strategy, what they do, and kinda what the go-forward plans for that business are.
Yeah, we saw Acqueon in many of our large enterprise mega deals, and they were either already in the account, or partnering with us in winning some of those accounts. What Acqueon does at the highest level is outbound omni-channel customer engagement. Think of that as outbound. It can be via voice, but it could also be digital outreach. It can be, you know, via website visitors. It's an ability to provide... You know, a lot of our enterprise customers want to provide proactive outbound service, whether it's an appointment reminder or following up on a support issue, or whether it's, you know, a collection revenue generation issue, whether it's an upsell opportunity.
There's a two-way street here when it comes to customer service and customer interaction, and what Acqueon provides is the best in the industry, outbound omni-channel solution. It opens up, quite frankly, new avenues of communication for our customers to reach their customers, in an outbound, proactive fashion. But it also opens up for Five9 long term, an ability to extend outside of customer service and into sales and e-commerce and marketing. Now, that's a little bit visionary, and it's kind of in the future, but it's, it's a huge step in that direction for us, and we think that's... You know, our long-term vision is to be the interaction, engagement, orchestration engine, if you will, for customer engagement across the entire customer journey, so it's a step for us in that direction.
Is there a cross-sell opportunity in the base that you're excited about, or is it more about kinda landing new customers?
Oh, it absolutely is an upsell opportunity for us. That's—we saw it in our these accounts, right? So that was what attracted us to acquire them and why we want to own it. It's also the right time to acquire a company. They're the right size, and we think there's just a tremendous upsell opportunity-
Yeah
... into our base.
Good.
The pipeline together, we already have developed a pipeline 'cause we've been reselling their solution for a while now.
Yeah, yeah. Can we step back and kind of assess the pipeline in general, not just Acqueon-related, as we go into the second half here? Like-
Yeah
... what are you seeing, and what's the confidence level that we can see improved bookings outcomes in Q3, Q4 that set us up for 2025?
Yeah, the pipeline is really strong. And if you take out the $50 million ARR deal we did in Q1 and just take that out of the equation, our pipelines are, you know, record levels and, you know, I have very good confidence in our ability to continue to execute on the sales side, in spite of what happened at the end of Q2.
Okay.
Yeah.
Maybe I'll pause and see if there's any questions in the room. I have a couple more we can finish up with, but is there anything from the audience? Sure, Tom.
Can you talk about the verticals in the seasonal business that you saw slow down, anticipated for the fourth quarter? And then, how accurate are these clients in actually forecasting what their business is going to be?
Maybe I'll just repeat it for the webcast. The question was around some of the seasonal pressures, what verticals is it happening in, and how accurate are those folks with predicting kind of the pressure that their businesses are facing?
You want me?
No, go ahead.
Yeah, so, we're talking about three primarily, primary, verticals that are most seasonal: obviously consumer, but also education and, and, healthcare, mostly, insurance, open enrollment, and the like. They, in terms of... It covers a spectrum: fashion, gourmet foods, home decor, online learning, you name it. And they, they don't know perfectly, but they have a pretty good idea directionally. They're still planning to grow, but growing meaningfully less than last year.
Last year was-
Last year, to your point, was muted, yes. That's what we're seeing.
Thank you.
Barry, with the slower growth outlook, you also kinda committed to a sharper focus on margins. What does that look like in your view, and I guess I'd be particularly interested in kind of how you intend to close the gap between free cash flow and adjusted EBITDA margins?
Yeah. So, we did say to the street that we expect to be an EBITDA over 20% by the fourth quarter. There's no certainties in business, but we believe that very strongly. Driven by revenue growth, the mix away from usage, which is actually negative in some quarters, to subscription, and the higher the revenue growth, the more leverage we get against fixed and semi-fixed costs. Some IaaS initiatives we have, some PS initiatives we have, selling AI into the base. And so that then informs that 20% plus objective. Now, you also asked about the spread between EBITDA and free cash flow. If you look at it first into operating cash flow, it's very volatile.
We've gone from over the last just 6 quarters, the spread has been as low as -2% to as high as 19%, driven by a whole host of factors, which I won't go into in the interest of time. But on average, for a full year basis, we look a bit more extended, you see pluses and minuses go back and forth, we somewhere between 4% and 6%. So that, that 5% spread, it's gonna be difficult to compress that. So we're talking about 5% approximately or 6% there, and then to get to free cash flow, another, the guidance this year is about 5%, which is pretty reasonable. So a 10% spread, and, frankly, don't see that compressing a whole lot more.
We believe much more, it would be on the expansion of the EBITDA margin.
Okay. Okay. We're bumping up against the clock. Maybe any concluding thoughts? I mean, my, my point of view, if you can get back to the growth rates that you're talking about, this stock is far too cheap, but what's the message you want investors to leave the room with today?
Yeah, DJ, thanks, and thanks for having us. Again, I think it's all about our confidence in our ability to return to 20% revenue growth. And again, remember, we just had 17% subscription revenue growth. The market's there, our solution's there, our team is the best in the business. You know, stay tuned, but we're very confident in the future.