If we are live, I'm gonna go ahead and get started. Thanks everyone for joining us. My name is Sterling Auty. I'm a software analyst here at SVB MoffettNathanson. Very happy to have with us the management team from Five9. We have Dan Burkland, who's President, Barry Zwarenstein, who's CFO, and Callan Schebella, who is EVP, Product Management. Thanks guys for joining me. I really appreciate it.
Of course, yes.
Thanks, Sterling.
Sterling, can I just jump in?
I was just gonna hand over the mic to you.
Thank you. Today we'll be making forward-looking statements about events and trends that can affect the industry, the company and its operations. Obviously, actual results may differ materially from what we talk about today. For the factors that could cause such a difference, I refer you to our filings of 10-Q, 10-Ks under risk factors and other captions. Thank you.
All right. I appreciate it. Well, listen, I wanna go into a couple of high level, you know, items, then we're gonna hit the elephant in the room. We're gonna talk at length about AI. Maybe to take a step back, if we think about some of the changes that have happened over the last couple of years, especially with Mike coming back into the CEO role, you know, after his stint as just chairman of the board. What would you kind of characterize as the changes in priorities or prioritization that's happened? Is it the same or, you know, what things kind of stand out to you in his second stint?
Yeah, let me take that one, Sterling, and Dan, please jump in. Basically, I'll start with something that is not changed, which is the focus on our growth strategy, which has got three elements into it. First of all, march up market, which has been demonstrated very clearly. For example, with the package delivery company and the major healthcare conglomerate, arguably the biggest, one of the biggest, if not the biggest, installations in terms of cloud contact center. Our growth in terms of $1 million-plus customers, when we went public some nine years ago, we had three, now we had 161 and growing nicely. I emphasize these because they have typically a higher dollar-based retention rate meaningfully.
They also tend to pay higher prices because they might get a keener price on the basic VCC seat, they tend to buy the other complementary stuff. A good business growing rapidly. The second item is international. We made the investments in terms of international cloud operations, professional services, sales and marketing, it's clearly paying dividends. 9 out of the last 11 quarters, revenue more than 40%, this last quarter, 49%. Most of the agents are abroad, and we're just scratching the surface there. Thirdly and finally is innovation, which Dan and Callan will talk more about. We've been beating the drum in terms of the advent of automation and AI and automation for the last many years.
It's good to see now it's finally coming to fruition to the benefit of our customers who are gonna get the labor arbitrage and ourselves, we've got the platform for it. Now what is changing, two things. First of all, a focus on alignment and operational execution. Mike has come in with an incredible amount of energy. He has taken a number of major initiatives, where in terms of alignment, where we've got multifunctional teams with regular cadence focusing on and solving certain key issues.
For example, we talked about on our last quarter Project Pull-Through, which is a investment in several key partners or enablement of several key partners who make investments to bring our products up themselves at the standards that we expect, giving us gross margin leverage and also giving us top of the funnel type of input. In terms of operational excellence, one of the favorite sayings that Mike has, which is, "Take it down to the ground, go into the ground." In that he means simply that managers at all level shouldn't just make assumptions. They need to understand what's really happening. If you're meeting with Mike, know what you're talking about, otherwise it's gonna be a tough conversation. Not that he's a... I'll leave it at that.
Mike, if you're listening.
Yes. Finally, culture. You know, we have 2,400 odd people working at Five9, passionate experts in the contact center, but the connective tissue for that is our culture. You know, Mike is the one in his first stint to build that culture. It's incredible. It's just the, in every fiber of his being. He walks the talk, he talks the talk, and it is quite astounding to see just how much people enjoy working at Five9.
I'm a huge believer in culture. It's one of the things that is very difficult to put a number on, but you know it when you see it.
Yeah.
That's great to see. I also wanna just, you know, hit upon just the macro environment in general. Obviously, the last couple of quarters, macro taking its turn, rising interest rates, fighting inflation, increased layoffs, et cetera. You know, how has just the change in the macro environment impacted your business head on, especially with what's happening with headcount out there?
Sterling, the best way to understand it is to bifurcate between what happens in our install base and what happens with our net new business. In, and the split typically on an annual basis, it varies by quarter, is 50/50, although with what's happening in the macro, it's more in shaded more towards the net new business. In terms of the install base, we track 17 different verticals. I'm gonna spare you the details in terms of the ups and downs on particularly in our three biggest ones, which in order ranking are healthcare, financial services, and, um, consumer. But basically, the growth has slowed there. It's less economic activity overall and less need for interactions on our platform.
One thing though that's important to remember is that our logo retention has remained excellent, and when inevitably, the economy comes back, we're gonna see a pretty sharp improvement both in the top and the bottom line from that aspect of the business. Different story on the net new. There pretty much across the board, Dan, I'll just be very brief over here because Dan is the one who's forgotten more about this than I know. Basically, the situation is that the on-premise vendors are retrenching. They're not coming up with new products. Focusing the mind of our customers into replacing their on-premise solutions, which absolutely need to do in order to get the AI and automation benefits.
With some odd 13 million agents out there still on premise, we're feeling pretty good about that net new business pretty much across the board, especially at the upper end. Dan, anything you wanna add on the?
Well said. Just to clarify, Barry mentioned the 50/50. That's 50% of the growth is attributed to install base versus net new historically.
Yeah.
What we are seeing on the, on the net new side is, you know, the interest level because of the legacy on-premises vendors, you know, either end of life-ing products or discontinuing enhancements to them, those 13 million seats out there in the world, in contact center have to do something. They have to move to the cloud. There's an acceleration of that effort that's taking place, not only because of those legacy platforms getting very long in the tooth and being end of life, but also, the advent of AI and the automation solutions that we're gonna talk a lot about today, are really encouraging and accelerating interest to start a process, especially at the high end of the market, as Barry mentions.
The large enterprise and what we call strategic accounts, for the very first time, they had to get past 2 things. One, they had to see that CCaaS, the cloud contact centers like Five9, are capable of handling large global enterprises at scale with the reliability, the data protection, the full feature functionality, and give them a platform for innovation. In doing so, we had to see those couple very large, you know, multi tens of thousands of seats go in and be successful. Now others have taken notice and said, "Aha, if they can serve them, they can serve me." We're seeing a pipeline. We mentioned our pipeline growth of 100%. It's doubled from this time last year to now.
We're seeing lots of new process and new folks enter, and primarily because they wanna get to the cloud. They know it's gonna take them a year or two to get there that they can take advantage of all these great innovations and AI that we'll talk about.
When you look at that upmarket, you always have to get that first one. Like you said, most customers want that proof point, that lighthouse account to say, "Well, you can do it for them, you can do it for me." What was it? What was the trigger that finally got that first one over the hump to say, "Yeah, I'm gonna do this?
Yeah, great question, Sterling. I think, you know, it's that challenge. Everybody was looking at each other, waiting for the other guy to go first.
Yeah.
Make that move. It was a combination. There were table stakes that we had to deliver just as prerequisites to be considered even as an industry. That was that, those points of scale, reliability. I had to show them, you know, more scale than they could achieve on their own, better reliability than they could achieve with premise-based systems. Make sure we had protection of their data, show them that we can do everything that they're doing today and then some. Then show them the innovation opportunity for them to have a platform that they could then really change and evolve and reimagine how they deliver that customer experience. That's really with the AI. The only way to get those enhancements or those improvements, if you will, is to first get to the cloud.
Yeah.
We have the customers, like the parcel delivery service was in a situation where they had, you know, a variety of different systems, very siloed and inefficient because of that. They, you know, said, "Hey, we've got to get, you know, over 10,000 seats up and running before the holiday season," so they could deliver all of their packages throughout the world. They did so, and we helped them do that and accelerated that. You know, they sent us a letter I've told you about, you know, that says, "Hey, thank you. You went above and beyond, helped us solve problems that weren't even yours, and you helped us deliver Christmas to the world," was the comment they made. It was like, wow, I've never seen a letter like that.
You got a letter from Santa.
Yes. They said, and they even said, "In this industry, we haven't worked with a partner that went to this length." It was beneficial to both of us, of course.
Yeah.
You know, we wanted to get that up. That helped really propel us into the healthcare conglomerate. The two CIOs spoke to one another, and they raved about what we were able to deliver. The second one, the healthcare conglomerate, you know, $40 million in annual recurring revenue coming. The AI and automation, I've mentioned this, they bought 0 of that. Why did they make the decision to go with Five9? Because of our AI and automation. What they said was, "Look," that was the decision-making criteria.
They said, "Look, it's gonna take us two years to get all of our divisions onto Five9, onto the cloud, and then we're gonna implement the AI and AI and automation, because we know it's gonna evolve so quickly, and it's gonna be far, far different in two years from now than it is today." Again, we're finding many decisions being made to go with Five9 because of our AI and automation strategy, regardless of how much they go in with day one.
I've just always been amazed that it took as long across a lot of different SaaS segments for it to happen. It's usually, "Oh, you can't... You know, you don't have a customer our scale." That never made any sense to me, because if your, you know, accumulated users are bigger than that account, you don't really, you know, care if you're serving up 500,000 individual accounts or one account with 500,000 individuals, right? It... That's what shows the scale.
In theory, yes.
Yeah.
There are some things that we had to make sure a single tenant could scale to, you know, tens of thousands. So there are some things there, but you're exactly right. Once you build out that platform and you've got the hundreds of thousands of seats, the complexity of allowing that to be across a single customer isn't a great leap of faith.
I wanna hit on one other thing that you said, 'cause I think this is key. I get the question a lot from investors why companies would make the transition this year, now. Why are they starting now? It feels like this is the type of stuff, if I think about the traditional CCaaS infrastructure, this is technology that lasts, right? It's kind of like PBXs, generic PBXs in terms of this stuff lasts 10-15 years. You know, it feels like why isn't this the perfect project to punt down the road until you're in a better budgetary environment?
Well, two reasons that I'll point to on why they're moving is, one, those legacy platforms are really old. They're, like you said, 10 to 15 years. If they haven't been upgraded recently, they're in a world of hurt, and they're very expensive to maintain. They're very difficult to maintain. They're not operating with the same set of functionality that you require. One of it is they've got to do something and get off of those platforms. The second is, when you look at a provider like us, we're always upgrading our platform. It's not a 10 to 15 year. We believe it's indefinite. When they move on to our platform, our platform has changed dramatically from where it was 5 years ago. If you look at what we've done to re-architect while the...
You know, we say, you know, we're re-architecting it while the plane's flying. We're taking care of that. So we've really modernized the platform and the architecture. We talked about scale. Panos Kozanian came in as our head of cloud operations and really re-architected this to where we got 10x the capacity on a single tenant, and we took the reliability from where it was to Five9, our namesake. That was something that he did simultaneously. I personally was skeptical that, well, you're gonna accomplish one at the expense of the other. You know, we're gonna have bumps in the road if we try to get scale or we're gonna have, you know, issues scaling if we try to get Five9's reliability. He did both in a matter of about two years.
Here we are, and now we can serve the largest and most complex environments in the world.
No.
AI and automation as well is a prompt.
Yes. Bringing on the AI and automation through not only our internal efforts, but also acquisition of Callan's former company, Inference.
Which you can only do in the cloud, well, practically.
Yep. Makes a lot of sense. Well, that's a great segue. Let's hit the AI question, you know, head on. Maybe we'll start with just as we think about the growth of large language models and the adoption, just high level, open-ended, how do you think it's gonna actually impact the CCaaS industry?
I'll take that one. I mean, I think the thing to keep in mind is that a large language model is essentially an engine which is part of an overall solution. People, you know... There's been a lot of hype around things like, you know, ChatGPT, and people sort of think that that that's something that you're gonna, you know, take over your contact center or something like that. That's really not the case at all. It's not even possible. In fact, if you were to do that, it would be an absolute disaster. What you actually need is you need, firstly, a way to ingress all these customer contact channels.
Whether it comes across voice, whether it comes across chat, whether it comes across email, social, whatever, you then need to attach the understanding to that, and that's where the engines come in. We have a large number of engines under the hood today, and an LLM represents just a new class of engine. We would have switched out and in engines half a dozen times in the last five years, this is a continuation of that process. The really big part is the bit that comes straight after that, which is once you have that understanding, how do you take some action? How do you, what we term as fulfillment, how do you make something happen in the real world? How do you put that into the CRM? How do you track that parcel?
How do you purchase that stock or whatever it is that you need to do? You really need all three pieces to be able to actually have something that looks like a solution that a contact center buyer could use. I think what LLM will allow us to do, in fact, it is, 'cause we already have three products based on LLM in the market, it will allow us just to expand the types of interactions and that are possible to benefit from automation. One of the big ones, for example, and this is a really interesting, you know, case study, is what happens after a call or after an interaction with an agent, where in most contact center environments you're going to have to, say, summarize that interaction. People would do that manually. It would take them several minutes to do.
We introduced more than a year and a half ago, a post-call summarization option powered by, let's call it Generation 2 technology. It was okay. It was reasonably well-received. Generation 3 technology, which we're talking about with LLM, basically takes that product and just amps it up. Now that it is essentially available to any customer of any size because of the inherent advantages of LLM over, say, the pre-prior generation of technology.
If you kind of take from that high level, do you think CCaaS as an industry is an AI winner or a loser?
It's a, it's a winner. Yeah. I mean, the reason being is, if you look at all the interactions that are coming into your, into your contact center, and you currently divide them up between which ones can you use automation techniques to handle and which ones do you need people to handle, it's gonna change that dynamic. A platform like Five9, we sell both, right? The automation offerings are essentially more expensive on a revenue basis than the basic seats are. As that divide swings more into automation over time, you'd expect the wallet share that you're getting from any particular customer to increase over time as well.
Yeah. It makes sense. I think where the general populace or, you know, a lot of the investor discussions I have where I think it goes awry is the view, okay, if ChatGPT can answer question, then it's the solution when it's just the interface. It's the front end. Yeah, it can help and augment, but it doesn't actually do anything.
It doesn't actually do anything. That's right. It is literally, if the analogy we use a lot of the time is a, is a jet airplane, it's the engine attached to that wing, we're talking about a new class of engine. You still need the entire airplane. You still need every part of that service from end to end. You need the ability to implement it. You need the ability to report on it. You need the ability to keep it, you know, Five9s available. You need it available all over the world, you need it integrated with every other part of that airplane. Yeah.
I think the other aspect of it is investors have looked at it and said, "Well, wait a minute. You sell based on call center agents. There's roughly 15 or 16 million of them on a global basis. If we have this LLM that's able to more efficiently and quickly answer questions, maybe you only need half of those.
Mm-hmm.
Isn't that going to kill your business?
Yeah. I'll take a shot at that, and then feel free to add to it. If you look at the automation, we've been. By the way, for the last 4 or 5 years, we've been touting our leadership position in AI and automation and bringing it to contact centers so that they can reimagine customer experience, they can operate much more efficiently, and hopefully do more with less agents. The most expensive part of any contact center is the labor, obviously. We've been playing the labor arbitrage card for a while here and trying to help convince customers, and it's finally here. We're excited as heck, and we believe not only are we a winner, but we're leading this charge, and we have an opportunity to really set the bar very high for that.
What that does, if you think about as the pendulum swings from every interaction requiring a human to handle that interaction. If you think about what the LLM engines are doing, in many cases, it's helping the agent get their answer more quickly and more effectively so that they can deliver a better experience to that end user. In some cases, they may completely self-serve. Like you said, we have an IVA that somebody can come into, ask a question, it'll fetch the answer, speak it back to the customer, and they can complete or have full containment within the IVA. If that occurs, for each transaction where that occurs, and it's more effective. By the way, in most brands, most enterprises will want to offer the choice to their customer.
To force somebody to use automation is a very uncomfortable experience for a large portion of the demographic that you're speaking with, depending on your product or service that you're providing. At the very least, you wanna offer the choice. Some people are gonna opt for that full self-service, and that's great because then there is a tremendous labor savings. You wanna give them that choice. If the answer gets solved in a virtual for what we call from a virtual agent, okay. The software that drives that single thread and transaction. In other words, think of it like a.
When people say, "Oh, well, the automation's gonna take over, and the agents go down," we make twice as much money, twice the revenue for a transaction that occurs in an automated fashion than we do from the transaction that occurs from the human. In other words, our software is of roughly $200 per month per human agent that we give that software to help the agent be more effective. The software that we use to go fetch the answer and bring back and speak the answer to the customer is $400 per month. Think of it as concurrent sessions.
Yes
... in the system. If you have 100 concurrent sessions and a customer says, "Well, I wanna deflect 10% of my traffic," we think that it can be moved over to self-service because it's simple and repeatable and doesn't need a human being to have that empathy and care and feeding and consultation. Wonderful. Now I only need 90 human agents with $200 software, but I need 10 of these other ports at $400 per port. I still have my 100 transactions coming into the business simultaneously, and instead of getting 100 humans times the $200 for the software, I now have 90 times 200 and 10 times 400. The more this pendulum swings and the more automation that takes place within the contact center, the more we benefit from it.
To the point earlier about are we a winner or a loser, we're a huge winner. That's a huge TAM expansion for us, and that's just one example. We have eight different modules where we leverage AI, the one is the easiest to understand is that simple one, which is it's either a human interaction or it's a self-interaction. The example Callan mentioned, which was to put the summaries. An agent after a call typically spends a minute or two typing in their notes into the CRM or into the order system. Now, because we're listening to the call and we can transcribe it, we can now summarize it with GPT or other engines that will be available to us and insert that into the CRM in a matter of seconds.
The agent can go, "Oh, I just summarized my call." It can scan it, hit Submit, it's done. I've just shaved 1 minute off of every call by a 5-minute call length. I've taken 20% of my minutes off. Yeah, I can reduce the humans. We've been trying for decades to look at technologies that will reduce the number of agents.
IVRs.
All. I mean, it's one thing after another, from popping the screen back in the nineties.
Yeah.
which will save 10 seconds to, you know, routing more effectively and efficiently. That's been the goal all along, is to continue to reduce agents. There's the technology. They have to pay for the technology in order to do so. The benefit to the customer is they save probably a $4,000 per human labor rate and replace it with a $400, you know, self-service solution. We think it's a great, it's a great ROI, and customers are very eager to take advantage.
I'm glad you put that last one, 'cause I was gonna push you to go that, you know, why the heck would a customer say, "I'm really jazzed to pay $400 instead of $200 on the last two." It's the ROI.
Exactly.
net savings that's there. The other thing that I've started to talk to investors about is I think some. They've lost sight of you're not a contact agent software company, you're a contact center infrastructure software. Meaning that...
Yeah.
could be human, could be automated.
Yeah.
It needs to be the full breadth of solutions.
It's interaction management.
Yeah.
We're managing every interaction. Human, self-help, all sorts. It's all sorts. Some of it's, you know, chatbots and email autoresponse or human response. Again, regardless of whether there's humans or automation involved, it's a combination.
Yeah.
It's always gonna be a combination. The more we can infuse the solutions with automation, the more efficient and cost-effective it's gonna be for companies to run their, call it a contact center or call it just handling their customers' interactions, handling their communication to their customers. The more we can help them automate that, the more it's gonna save them, because the technology will be less than the human manual labor. That's where we look at it and say the scales are tipping towards automation. Hallelujah. It's about time. We've been looking for this moment.
The other element that, I think this is a legitimate pushback, is, okay, we go that route. What's gonna maintain or expand that $400 on the automation? Won't it commoditize at some point, you know, as we shift more to the automation side?
Yeah. We're finding actually our PU goes up because it, you know, you add automation to do self-service, like with an IVA at 400, guess what? We can apply summaries to... I would argue that it's perhaps even more important to have a summary of the conversation that took place between the consumer and the automated system, 'cause there'll be no human witness there. I wanna be able to have a summary of that call and make sure that that's put in. You start adding in other automation solutions and the numbers just get greater, not less.
I think the thing to stress here too is this idea of bringing engines in to understand human language and automate some sort of interaction. Five9's been doing that for four years, and the company that I ran before that many more years again. The price of the virtual agent has continued to rise over time because it is literally looked at as an alternative to what the human agent would cost. Even if the engine prices are becoming commoditized, we have not seen over the last 10 years a reduction in the effective automation solution price in the market. That's why you're able to offer, you know, very high margin IVA solutions today, because it's the overall package and it's the overall platform that people are actually investing in.
They're expecting the underlying engines to change and improve and be switched in and out over time. I mean, just to give you an example, in a simple IVA interaction today, it would not be uncommon to be consuming three, four, five different engines from different vendors all within one conversation. They're switching in and out as you need them. Yeah, this is just another example of an elite class of engine.
I think a key part of this is the rate and pace in which we see the deflection from, you know, a traditional human agent to some sort of automation. Where are we in terms of that state generally? You know, where are the outliers in terms of what are the high end, you know...
Yeah.
getting to?
I'll start and let Callan take over, but if you think about that, yeah, I've been in the contact center industry for over 30 years, and it's quite interesting. We are at an inflection point where this technology is being introduced for the very first time. We're just getting started with it. When you think, as Callan mentioned, we've had years and years of introducing it and really creating it. You know, I'd ask all of you, when was the last time you called into, you know, a company and fully self-serviced, speaking to an automated, you know, virtual agent? Perhaps never. Not yet, anyway. Introducing the technology to companies, the big question out there is, well, what % of calls are gonna get deflected? We talk to...
I talk to customers every day, and they ask me, "Well, how many of my calls am I gonna be able to deflect?" It completely depends, and it depends on a lot of variables. You know, what's the current service you're offering? Is it very simple to fetch an answer and feed it back to the customer? Does it require any human consultation at all? What's the demographic of the people calling in for this service? Do you normally make them wait 20 minutes for an agent, for a human agent? 'Cause if you think about it, I'm gonna wanna opt for self-service if some of those things are true. I may be apt to wanna use self-service when I'm in one environment versus another, right? I may go to the website for self-service.
If you think about self-service offerings and automation, we've been at this for years. You know, we all go to a website or an app now to make our airline reservations, to make our hotel reservations. That's all self-service now. Guess what? The airlines and hotels have massive contact centers, because when I get stuck and I'm in Houston and I need to get to San Francisco and my flight got canceled, I'm gonna, "Hey, how do I get there? What are my options? Is there any first class seats left here?" There's lots of back and forth consultation. That's very difficult to do with automation. There's a place for it, there's also, you know, the human I don't think will ever, you know, go away. I think there's a lot more human interaction that we can certainly enhance.
We have what's called Agent Assist, where we can be eavesdropping on the conversation, looking up suggestions and coaching the agent to be more effective, but still have the human on it. That is where I see the most impact, is to helping the interaction and helping the human. Most of the self-service stuff, a lot of it, we've already moved over to self-service. People say, "Oh, password reset." I haven't called a contact center and said I need to reset my password. I do it online. A lot of stuff has already been done. Smartphones and websites have taken care of a lot of that. We're looking for the next lowest hanging fruit to automate in the contact center, and that will happen.
A lot of customers find that, gosh, if I can deflect 3%-5% over to automation, that's huge. Depending on the number of agents, again, that labor savings can be significant and oftentimes pay for the whole spend with Five9, just by having a small percentage move over. People say, "Oh, 30%, 50% someday." I'd argue two-twofold. One is perhaps if it's very simple questions coming back. Think about all the time when you contact, and I use this example, we have customer SelectQuote as an example. You see their ads on TV. You know, we shop, you save, they're gonna find you an insurance policy. When you call that number, they have 4,000 agents every day, all day selling these policies. When you talk to them, guess what? You're getting a salesperson.
They're not gonna automate that. Also a lot of servicing companies, you call in, they take care of your service problem, "Hey, you're eligible for an upgrade." They wanna upsell and cross-sell you more services. Really hard to do that with automation.
Yeah. I would just say, you really just think about it as any customer contact care workload, you can divide between conversations and transactions. Anything that's transactional in nature is gonna be a good candidate for automation. Any part of a conversation that is transactional in nature is a good candidate for automation. If I am paying something, automate it. If I'm tracking something, automate it. But if I'm engaging in some sort of back and fund refund or customer complaint, you absolutely want those interactions being handled by people. It's really about identifying which customer care workloads that you have should be sent here and which should be sent there. In fact, one of our...
one of the Five9 platform products is a product called AI Insights does exactly that. It looks at all of the interactions coming into your contact center. It works out the reason for why those people were interacting with you and then suggests to you, "This one's a good candidate for an automation. That one's a good candidate for automation.
I would actually wonder, I thought in a number of industries, this isn't new. IBM Watson has been used in, you know, a couple of industries extensively.
Very much.
certainly hasn't seemed to impact your growth.
Well, I think the other thing is that cumulative customer care workloads, so the number of simultaneous interactions for the industry continues to grow year-on-year. Despite the fact that Watson's been around for well over five years, despite the fact that Amazon Lex has been out for years, Dialogflow from Google's been out for years, and we use all of these engines, the overall interaction volume just continues to grow year-on-year. Not necessarily voice traffic, but when you look at all of the channels interaction, they just grow.
Which kind of brings up the question, all right, is there a risk that the AI portion could somehow subsume some portion of the traffic away from Five9, and you're left with, let's say, a lower value, you know, set of traffic?
Go on. Yeah. I think it comes back to why do people buy something like Five9 in the first place. When you buy Five9, you're buying into a platform. I think, it was mentioned earlier, the reason why people having to get off of, say, premise-based legacy systems is that they're looking at systems that don't get upgraded every year or every two years or every three years. We push features and functionality into the cloud several times per day, right? When you buy into Five9, you're investing in a platform that essentially does all of this end to end. One of the questions I would have for anybody considering, let's say, a point solution, like, just a chatbot out there that you could just use and maybe that takes some interactions away.
You could do it there, or you could do it on the Five9 platform. Why would you do it on the Five9 platform? Well, because all of the reasons you come to a platform in the first place, the integrated reporting, the service availability, the language support, the professional services support, the tech support, if you ever need anybody. All of those things are why people invest.
Security compliance.
Security compliance and so on. Yeah.
The other element that is starting to bubble up in more of my conversations is.
The compressing of innovation cycles, that if we think about the use of AI in code development, for example, does this actually shrink the moat and allow companies to come in and compete in your space that either weren't there before or, you know, does it somehow level the playing field, you know, across the competition?
I think there's always gonna be these point solutions, as Callan mentioned, around the periphery, and there have been for years and years. If you take the example of chat and email, you know, for a while there, you know, 10 years ago, folks were out coming up with standalone chat solutions, standalone email solutions, and companies would take them and then try to bolt them onto the contact center platform. The difficulty there, now we have chat and email that gets sold with just about every system that we provide, that we sell to our customers. The beauty of having it be part of the same system is I wanna create a very consistent experience.
Regardless of how my consumer or customer has reached out to interact with me, I'm gonna want to integrate and retrieve the same data, whether it's the agent retrieving the data, whether it's the chatbot retrieving the data, whether it's the email system retrieving the data or the IVA, as we now have. We wanna be able to retrieve that data and give it back to the customer in a consistent fashion, so we don't have to build multiple integrations to those back office data systems. It's just one from the platform itself. You know, in the last earnings call, we used the analogy of the airplane versus the jet engine. These jet engines as Callan referred to, are gonna be continuously upgraded and changed very rapidly.
Yeah.
We can insert new ones and enhance what we offer. To go build the airplane, going off of these legacy systems onto the cloud, that's a huge moat. It's really all, for all the reasons we just said. To try to build that airplane and get it off the ground and make it fly, you don't see a whole lot of new entrants. You don't see virtually no new entrants into our space in the last 10 years because the companies that have tried that, it's been a long multi-year effort to be able to build all the capabilities and not only the thousands of features and functions that are...
The compliancy and the security and everything that goes along with that, but when you build a feature for a multi-tenant platform that's gonna be hosted, hosting it for hundreds or thousands of companies, every company wants that one feature the way that they want it implemented. You got to build each feature six different ways. You know, because they all want it to work a little different. It's more complex than would meet the eye.
Yeah, I mean, it's a big, big decision, like a career-limiting decision to get customer care wrong in a big organization, right? Like, you got to make that decision very, very carefully. You may be enamored by a point solution, and in fact, I built a company which was a point solution, and what happened? It grew and grew and Five9 bought it, right? Because it was seen as, oh, that's a fundamental part of the modern airline, if you like, or jet airline. That's, that's intensely what you see happening. You have a lot of entrants that are trying different things. But for a big company or even a mid-sized company to take a risk on something like that, is done very, very warily. They inevitably go to a trusted platform provider to do it.
Yeah. Inevitably, when those point solutions do make traction and they are best of breed and unique, they get scooped up by companies like us 'cause they're great technology tuck-ins.
Well-
Starting to get the impression how we feel about this.
Yeah, just a little passion there.
One of the key elements that I'm a big believer in that's gonna separate the winners and losers within AI is access to data sets. You know, I think A couple weeks ago, CEO of Reddit said, "Listen, if you wanna scrape Reddit to train your, you know, LLMs, we wanna get paid." I think this is just the very beginning of companies realizing, further realizing the value of their data sets, and I think they're gonna close their arms around it and make it even more difficult to get access to. You know, talk to the investors about what is that data set opportunity at Five9.
Yeah. I actually. There's actually a fair bit of misunderstanding about how this sort of data is used in an LLM world or even a generation 2 world. If you go back to something like, oops, sorry.
He's okay.
It's okay.
Just there.
It's a microphone. If you go back to, let's say just let's go 12 months ago to something like a Google Dialogflow, Amazon Lex-based, NLP-based solution, let's call that generation two. It was all about having access to as much data as possible because every single intention from every single interaction was actually programmed in manually and then trained on many examples of someone saying, "I'd like to track a parcel. I'd like to change my address," or whatever it might be. Data was absolutely king. With an LLM, basically you're saying, well, it's pre-trained, so essentially understands kind of everything about language and can or attempt to answer pretty much any question. In that sense, LLM sort of resets some aspects of that data collection playing field.
However, the most important data is that temporal data, the one that's the piece of information you have right now because you're on the phone with somebody or you're in a chat with somebody or whatever. That's the hardest data to get access to. Five9 is the aggregation point for that data. Not only the aggregation point for that data right now, but all the historical examples of that over time. Could be, you know, many millions and millions of interactions for any given company, for example. LLM allows us to make really good decisions on very small amounts of data, but very important amounts of data, like stuff happening right now. It also allows us to draw insight from all the data that we've collected over time as well.
That's I would encourage people to think of that as separate to building, let's say, generation 2 language models, which is sort of what we're gonna see, fade away gradually.
I guess my thought was the training aspect of it in a vertical application. You know, the optimization, for intent-.
Mm-hmm.
You know, within a company, for example, and then being able to take your expertise because of the millions and billions of minutes of interactions that you have, and being able to apply that to, you know, to a customer data set.
Yeah. I mean, where you do see a lot of that happening is you see it in the way that dialogues are actually designed in general. If you think about what is the secret sauce of having done this lots of times, the next time you do it, you do it very efficiently and it works really well for a customer. If you look, for example, at Five9, we have been developing out verticalized tasks for automation for various industries. Healthcare is an example. If you wanna come in and do appointment booking, you don't have to invent the wheel if you come to the Five9 platform.
There's literally a template there that says, "This is how we suggest you do something like that." It's built based on lots and lots and lots of experience across lots and lots of companies doing this. The types of phrasing that we use and the way we respond to you and the interfaces we present to you are all kind of well thought out. That's another reason why you would come to a platform provider as opposed to building something from scratch. Yeah.
Switching gears a little bit, still under the broader AI umbrella, you know, topic, are there other areas within the business that you're using AI yourselves? Thinking about marketing and sales, so thinking about content generation, thinking about, you know. Well, I leave it open-ended, you know. Is it starting to sprinkle into the business?
Yeah. I'll speak on the sales front. Absolutely. We have several tools that we use today that allow us to understand what's happening I probably shouldn't say too much, among prospects and companies out there and being able to intelligently know, you know, what they're searching for and what they're looking at and who they're speaking with. It's remarkable how much insight you can gain that is out there in the market.
Yeah. I mean, on the product development side, you know, we obviously use tools that allow us to look at sort of real-time interaction data. We don't necessarily build those tools. Those tools are becoming embedded with AI, of course. In fact, every industry is. Just, you know, as we look as to where we spend our dollars on the various pieces of tooling, we're looking for somebody that has a strategy that incorporates AI, just like the same customers that come to us look for that as well.
Barry, last question on the topic. As you think, just conceptually, how does all the AI items that we just talked about influence the financial model longer term? I'm thinking about, does it have a gross margin implication? We kinda got to the revenue implications if ARPUs are going up, but, you know, what are your thoughts there?
Yeah. Just to emphasize on the revenue side, the way we look at it's $200 to get on the platform, just to get that economy ticket. You want first class, you're gonna pay a bit more. In terms of gross margins, it varies, and we're still evolving on some of the products. Some of these are still recent. On the IVAs, which is the more established one, when we bought Inference, margins were solidly in the eighties. They continue in the eighties. We have every reason to expect or the way that Callan talked about it earlier, the fact that these things, the cost is becoming commoditized. Five9 has always had the policy, unlike some other companies, we're not smart enough to take on the hyperscalers.
for things like automatic speech recognition, text-to-speech, NLP in the past, now LLM, that's just one small component. The drive to get that cost down is driven by the fact that a lot of it's used for search, where there's no income coming in, so it's gotta go down in price. We are charging for it. We're pretty optimistic on the gross margin side.
Well, that's great. Then we've got 2 minutes left. I'd actually like to dive into, Dan, you guys have executed well in terms of delivering on the quarterly expectations. From a sales execution, you know, viewpoint, what elements, what levers have you pulled as the economy has changed over this last year? I'm thinking about pipeline coverage, I'm thinking about territory allocation, sales quotas, et cetera. What are the levers that have allowed you to be consistent in what you've delivered?
Yeah. We look extremely closely at all the different segments of the business to make sure that we have a full coverage on the areas that we wanna cover, and then the areas we see that have the most growth coming. As an example, we have sales teams that are segmented from, you know, all the way down in the small and medium-sized businesses or commercial business, as we call it, to mid-market teams, enterprise teams, and then strategic. The large enterprise and strategic teams have been growing significantly. Those are the ones that are accelerating. We're seeing pipeline growth. We've gotta make sure not only that we have the right coverage, but the right people, the skilled folks that are used to selling into large Fortune 500 companies with very complex sales that have experience in contact center.
One of the beauties we've had is we've I brought in a leadership team years ago that were used to selling into the largest enterprises, some of these companies that we've referred to already, and said, "Just be patient. You know, we've gotta wait for the market to get here and wait for the technologies to get here. It will happen." You know, I remember sitting, you know, in a chair like this, you know, 5, 6 years ago, and we've had certain folks that have come into the business and said, "I don't have the patience. I don't wanna wait 5 years for large enterprise." You know, they didn't wanna do the transactions at the smaller and medium size.
Lo and behold, here we are. You know, a lot of those folks are thankful that they waited, but they've got the skill sets. Aligning, the biggest thing I look for is making sure that we have enough coverage, but then making sure that we align the right skill sets with the right opportunities. That not only is salespeople, but it's all the supporting teams around them. It's the solution consultants. We have strategic managers that handle some of these large accounts that really herd the cats and build the team around how to go execute against, you know, some of these large healthcare and financial institutions.
Some of those, we have, you know, 12 people focused on, you know, a single opportunity 'cause it's, you know, tens of millions of dollars to us.
Makes sense. With that, Barry, Dan, Callan, really appreciate it. This was a fun conversation. Thanks again.
Thank you.
Thanks, Gerald.
Thanks, everyone. Thank you.