This is the 43rd year that we've been able to do this conference. We couldn't do it without the support of our customers and, and business relationships and partners that bring the content, that brings all the investors into the room. Thank you to the Five9 team for, for being here. We have CEO, Mike Burkland, CFO, Barry Zwarenstein. We're gonna do this as a fireside chat. I have a bunch of questions. We have a great audience here, so if there are questions from the group, raise your hand, we can work them into the conversation. I'm gonna turn it over to Barry quickly to do a safe harbor, and then we can dig in.
Good day. We'll be making forward-looking statements today, about future events, trends, expectations, regarding the products, development, AI and automation, potential growth drivers. Such statements of prediction, you know, should not be unduly relied upon by investors, and we take no obligation to update them. Please refer to our 10-K or 10-Q for factors that could cause a difference between what we say and what actually happens. Thank you.
Can we still hold you to what you say today?
Absolutely.
All right. Good. I'm gonna assume... I see a lot of familiar faces, so I'm gonna assume most folks are familiar with the business and the problem you're solving. Let's dig in right in, and talk about Q2 results. Kinda what you saw in the quarter, how you feel about things coming out of it, and kinda how that sets up the view of the back half in, into 2024.
Yeah, sure, DJ. You know, very solid top line and bottom-line performance, highlighted by enterprise subscription revenue growth at 28%. Very strong bookings, as you heard us talk about four, I won't say mega deals, but very large enterprise deals. We don't really define what a mega is, but it was a great.
$20 million counts.
It was a great, it was a great quarter and on the bookings front. You know, we had a couple other highlights. Aceyus acquisition, so we acquired Aceyus, which we will talk about. That's an exciting transaction. Really, really excited about that. Last highlight, I guess, I would highlight is the fact that we are now back in the Leaders quadrant of the Gartner MQ.
Yeah.
That's, that's a big, big darn deal.
Yeah
For our industry.
Yeah. Yeah, it's good. Yeah, I quite frankly, I was a little surprised by the stock reaction. I mean, obviously, we, we took the numbers down a bit for the second half, and we can get into why we did that, but, you know, the strong bookings certainly set you up for what should be a promising 2024, and you have this implementation backlog that's, that's working. It seems like a pretty good opportunity to me right now. We can maybe unpack why that's the case. Let's start with the enterprise bookings. Like, what's working? What's the pipeline look like as we go into the back half of the year?
Yeah. You know, we've talked a lot about the market opportunity that we're in, and, and the large enterprise market is still, you know, probably closer to 10%, but less than 20% penetrated. It's a massive market that, frankly, is shifting to the cloud, and this is a massive TAM. We've talked about the size of the market at $24 billion in recurring revenue. Large enterprises are no longer having to be convinced to go to the cloud, and that is driving our pipeline growth to record levels. It's driving these mega deals. It is... It's a real tailwind right now, and I've been here 15 years, 10 as CEO, five as chairman, and now another one so far as CEO.
I, I gotta tell you, DJ, I've, I've never seen this market anywhere near as, as hot-
Yeah
In terms of large enterprises shifting to the cloud. It's still a three-horse race, predominantly.
Yep
in the large enterprise market, and we're winning more than our fair share. We're just extremely bullish about the future in the next, 10 to 15 years, quite frankly, of, you know, being able to penetrate this massive TAM.
Yeah.
The macro backdrop has definitely hit our installed base in their businesses, and that's, I think, where there's probably some question marks around what's, what's, you know, what's driving the, the, the, the revenue growth not to be higher.
Mm-hmm
than where it was. Again, we're at the tail of two sides of the coin. We've got the net new logo business just on fire, and we've got some of our installed base in certain verticals that, quite frankly, they're- it's out of our control.
Yeah.
They're subject to the macro backdrop that is not good in their industry. We allow those customers of ours, to flex their license count with us on a pretty real-time basis. You know, that's what we're seeing, and as soon as the macro lifts, look out.
Yeah. Just to be clear, I mean, you, you mentioned record pipeline. What we saw in Q2 was not a draining of that. You still feel good about, you know, what's set up in the back half?
Oh, absolutely.
Yeah
DJ, absolutely. It's never the pipeline is. Again, we closed a lot of businesses.
Yeah.
This is, you know, again, some of the, the largest of the large deals, again, there's a little lumpiness there, but what was neat to see is it wasn't like one mega.
Yeah.
Right?
Yeah.
This is four large deals that we talked about. The diversity of the pipeline, the number of opportunities, is increasing. You know, whereas I think a year or two ago, it might have been like the, feeling like the tip of the iceberg, now I feel like we're the... It's, it's, it's broken open.
Yeah.
There's gonna just be a lot more transactions that occur every single quarter.
Yeah. Perfect.
It's good.
One of the other things that came out, in Q2 was the channel, right? I mean, it seems like we're seeing a, a lot of momentum there. I think you called out, 15 partners with, you know, more than $1 million in net new ACV, or ARR, I guess, in the quarter.
ACV.
Maybe just talk about kind of what, what's happening there. Like, why is the channel? Is it driven by international? Is it maturation of kind of those relationships? What's driving the success?
Yeah, so we talked about large enterprises wanting to go to the cloud, right? The end of life of some of these on-premise solutions that they've been running their contact centers on, the channel's very similar. The channel is their channel.
Mm.
All of these SIs and VARs that have built their business on reselling and, quite frankly, implementing these large legacy on-premise solutions in a large enterprise market, they need a cloud strategy. They've pivoted away from these legacy players that are either going through bankruptcy or end-of-lifing products or not paying attention to contact center, and they wanna, they wanna go all in with Five9. We've just seen this dramatic increase in the number of channel partners across multiple routes to market, SIs, VARs, technology solution brokers. I mean, you name it, they're, they're leaning in to Five9. We've still got a lot of headroom there.
You know, part of what I initiated about 10 months ago when I got back in as CEO was Project Pull-Through, which is essentially allowing some of those third parties, not all of them, but a select few, to do the implementations.
Mm-hmm.
Of our, of our wins. Historically, in the U.S., we've had a lot of those implementations done by our professional services team. International, internationally, we've kinda always had a bit of a hybrid. We've now increased, we mentioned it on the prepared remarks, 60% of our implementations internationally were done in the quarter by third parties.
Yeah.
Again, that's a real opportunity for them to build their businesses. The reason we call this Project Pull-Through is that it creates, you know, a pull through of opportunities for us because they wanna, they wanna do business with Five9.
They want to work.
Yeah.
Yeah. Yeah. Barry, let's talk about kind of the, the guidance. I think that's where maybe there was some disappointment in the street when, you know, and probably was partially responsible for the stock reaction. You guys beat the quarter by $8 million. You raised the full year by $1.5 million. Implicitly, it was a guide down for the second half. Help us unpack kind of what's driving that. I mean, Mike alluded to some of the challenges in the base, but maybe you can kind of put a finer point on it?
Absolutely, DJ. Let me just level set real quick. Of our annual year-upon-year growth, half comes from the, what Mike was talking about a few moments ago, with all the new bookings, new logos, and the other half comes from the install base expanding. We have 17 verticals that we track. There was, in this last quarter, a pocket of weakness in terms of our consumer vertical, which is our 3rd biggest, and by the way, our most cyclically volatile, vertical, one of the two, actually. The other one's also healthcare. I'd like to bring it to life with you and bookend it with some macro data and some micro data. The macro data.
Using Chase debit and credit card spending, on discretionary items, I'm gonna give you six numbers, starting with January 2023 through June 2023. This is year-over-year growth on discretionary items. 12%, 8%, 4%, then 3%, 3%, 2%. Dramatic slowdown that we did not foresee in the second quarter. By the way, when we're talking about 3%, 3%, 2% in the second quarter, we're really talking about real discretionary spending down year-over-year. That well, that's what matters to us, is the number of transactions, not the dollar value being spent. On the micro side, we want to validate the data. What are we seeing?
We've got several hundred customers there. We have neither the time nor the inclination to examine each one of them, the smaller ones. What we did do is we went through all the big ones. There were a handful that were not macro-related, bad management, a meme stock or whatever. For the most part, whether you're talking about used car sales or auto parts or gourmet foods or footwear or apparel, or dog grooming, whatever you want to talk about, that was really the macro type environment. Two implications of that. The first one is, in the second quarter, lower consumer, lower growth in the consumer. It's still growing, just at a slower pace. There were some that reduced, but the vast majority just grew slower.
That then, recurring business, rolled over into the second half with a lower amount of, of, of revenue. Then faced with this uncertainty, on this third biggest seasonal vertical, we took some additional prudence as well, to allow, to make sure that we continue to do to meet street expectations.
That, that's shocking. You were conservative with your outlook?
I don't know how to put that tactfully, so. The real thing also to keep in mind, is the logo retention is stellar. In fact, it's improved marginally. When, inevitably, the macro economy comes back, we'll be benefiting from that right away there, 'cause the customers, when they see more transactions, they have more seats, and we'll see that reflected in the DBRR and the LTM enterprise subscription rate, et cetera.
Yeah. I mean, and look, one of the appeals of going to the cloud is this elasticity of aging count that it gives to customers, right?
Right.
It works in your favor sometimes.
Yes.
It works against you in an environment like this. There are minimum thresholds there. They can't completely collapse what they've committed to you, right? What's the usual, the band, is it, like, 10%, 15%?
Yeah, it varies, but 10% to, 10% to maybe 20% on the high end in terms of that flex capability.
Yeah.
As Barry said, the benefit to us is visibility. These are not companies that are going out of business or no longer Five9 customers. They're staying customers. They're just having, you know, less activity in their contact center, and we're allowing them to adjust their license count.
Yeah
To reflect that. When the macro turns again, they're existing customers, they'll, they'll expand with us.
Yeah.
Again, that's if you think about our growth, as Barry said, half from net new logos, half from the installed base, you know, kind of organically growing. This is out of our control to some extent.
Yeah.
When it returns, you'll see, you'll see growth accelerate.
Yeah. Let's talk about Aceyus.
Yeah.
$82 million... 82?
Eighty-two.
$82 million acquisition in the quarter. What was the rationale? What does it do for the business?
Yeah.
That sort of stuff would be helpful.
Yeah, great question, DJ. Aceyus is, you know, a company that we came across in most of our mega deals that we've closed in the last couple of years, as well as the ones in our pipeline. Aceyus is a data integration and analytics platform. Small company, 66 employees, but, man, do they have a foothold in the largest of the large enterprise. They've got a customer base that is made up mostly of Fortune 100 large enterprises, and they're providing essentially data integration into so many back-end systems, whether those are legacy ACDs, like the ones we're replacing. Again, large enterprises typically have, you know, several ACDs, heterogeneous, different versions. Aceyus has integrations to all the legacy ACDs, legacy WEMs, CRMs, other back-end billing systems and ERP systems.
They're tightly integrated and have these API-based integrations into all the back-end systems. What that provides us during is really two big benefits, and it accelerates two big opportunities for us. One is the migration from on-premise ACDs to Five9 in the cloud, and that can be done now in a very streamlined way. I can double click on that in a second. The other opportunity is all that data that we now have enhanced our reach into other data sources because of this integration or because of the integration we do, but now that we own Aceyus, we expand our data lake. We now have a lot more contextual data, relative to who the consumer is, where their journey has taken them in the past, what products they have, knowledge bases, billing information about that customer.
All that contextual data allows us to, to deliver, in the end of the day, allows our customers to deliver that personalized journey that everybody wants. We're all consumers, right? We all want a personalized interaction with the brand. The only way to do that is to have that data about you as the consumer. So Aceyus also brings us greater reach to more contextual data, and that applies to our core products, that we've delivered forever, NICE inContact center, for any interaction, but it also applies to AI. If you think about the way that AI really delivers value, it has to have contextual data in order to do its job.
Yeah.
It's really those three benefits, migration of legacy to legacy on-prem to cloud, streamlining that data access for contextual data for any interaction, and then enhancing our AI solutions with that contextual data.
Yeah. Maybe I would add a fourth that we talked about a little bit in our callback, which is, you know, they have some on-premise installed base customers with Cisco and Avaya that notionally Five9 now has first shot at.
This is absolutely true, DJ. They have been around for 20 years, Aceyus, the company. They started out as a services company, eventually built product and have a very good size install base in the legacy ACD market.
Yeah
Let's put it that way. So it's a bit of a, a hunting license-
Yeah
That, we've acquired as well.
Barry, what did you say run rate revenues were for Aceyus?
Let me- Oh, I forgot. It's... No, seriously, it is a, a tiny company, professional services type company that evolved into selling on the premises, and they do get maintenance on that, but that's it.
Yeah. Thank you.
You're welcome anytime.
Sure. Sure.
You had an estimate in your, in your note, which was.
Yeah
A reflection of the efficiency of American capital markets that you keep.
Let's talk about AI.
Mm-hmm.
I think initially, the market had some confusion around AI, how AI would impact the contact center. Just talk about kind of how you guys are positioned for AI, what are the trends you're seeing emerging, and, and kind of the economics of the business.
It's an exciting time, DJ, there's a lot to unpack here. AI has obviously become front and center in so many industries. We have actually been leading the charge in AI for 2.5 years. We acquired Inference 2.5 years ago, have built out a portfolio of eight AI and automation solutions for the contact center and CX market. It is a catalyst for helping really tip the scales for these large enterprises to move to the cloud. There's a lot of other reasons, but, you know, the fact that they want to take advantage of the efficiency and productivity gains that AI delivers, is only available in the cloud.
Yeah.
It's a great catalyst, first of all, for us as a cloud player in this space to get some of these large enterprises to move faster. They're all gonna go to the cloud at some point, but it's a nice catalyst. You know, the benefit of being a leader in this space is kind of obvious in that regard. I think some of the misperception was that, you know, that the contact center market and the contact center vendor market was going to be disrupted.
In the end of the day, we deliver software for helping our enterprise customers manage interactions, whether they're with a, a human agent on the other end of that interaction, or whether it's an automated system like IVA or DVA, or more, more, commonly, a blend of the two. As more automation occurs through AI becoming more powerful with these large language models and generative AI, the more automation that occurs, the more software we sell on that side of our solution set. We've got a platform that essentially, supports interaction capacity for our enterprise customers. We actually charge more-
Mm.
For our AI solutions and interactions that are going to be handled by automation or into AI than we do for a human agent. We're beneficiaries of more automation and more AI from a revenue per customer standpoint.
Yeah.
It remains to be seen how much automation the contact center industry will eventually be able to benefit from. I think there's a lot of theories, and we could argue all day long about how, you know, how this is going to impact the number of agents NICE inContact centers. Regardless of where that goes, as long as we're providing the software to, to help enterprises, you know, perform all of the interactions, we're a beneficiary.
Yeah. I listen to your competitors, and they tell similar stories around AI, right? It's hard as an outsider to discern who has the competitive advantage. Does someone have a better product? Like, how would you help me position that conversation to investors?
Yeah, I think the bottom line is we got a really great head start. That Inference acquisition, you know, some of our competitors have been kinda home growing, some of their AI solutions, and frankly, without naming names, they've tried to build their own engines, and that's, I think, a flawed strategy. We've always been engine agnostic. Think of, you know, generative AI or LLM engines, like, like GPT-3 and ChatGPT, they're engines, and they're always being enhanced by the Microsoft, Open AI of the world, the Googles of the world. We leverage those engines, the best-of-breed engines. We've been doing it this way for two and a half years since we bought Inference. They did it that way before the acquisition. It is the right strategy.
We're building applications and solutions that deliver value to customers on top of those engines, and we leverage the most powerful engine available. Guess what? They're getting better every day. Think of it as Five9 as kind of an airplane, the entire airplane, and LLMs or generative AI as the engine. Boeing doesn't make its jet engines, it purchases them. They get the best engines, and we're very similar to that. We purchase and integrate those engines. Whatever the best and greatest engines are, it just allows our airplane to fly further and faster.
Yeah
Do more for our customers.
Yeah. Let's transition kind of to a, a more broad conversation around competitive dynamics. I think. Look, the legacy guys aren't really doing much to, to kinda shore up losses. We get a sense of kind of where Avaya and Cisco and others stand there. I'd love to get your sense of kind of what you're seeing in the field from NICE inContact, Genesys, anyone getting stronger, anybody getting weaker? Like, how are you feeling about things?
You know, it's, it's still a three-horse race in terms of the cloud players. You mentioned a couple of them there. This is a market that, quite frankly, is very hard to get into. The barriers to entry are significant. We're, we're all benefiting from this massive shift to the cloud. You can see, you know, as you unpack some of the numbers from, from some of our direct competitors, we're all kind of in the same scale, size, and we're all having significant growth in this market. Our win rates are north of 75%, against our cloud competitors. We're winning, more and more, quite frankly, especially these mega deals, these large, large enterprise wins. It comes down to scalability, reliability, and, AI, and, and I would say fourth, our people.
We have the best professional services, people in the business, and a lot of that comes back to the culture at Five9, our ability to retain the best and brightest people in this industry. I will just say, our competitors have not benefited from high retention rates of employees.
Yeah.
Our go-to-market teams aren't shabby either.
That too, Barry. That, too. Yeah. But again, I, I do think our professional services organization is a huge differentiator for us.
Yeah. That's a great segue to a question I had for Barry. I, I occasionally get calls from investors that say, like, "Hey, why, why should I pay premium software multiple for a business that has low sixties gross margins, right?" There was a reason why gross margins went down, right? You built out your international points of presence with AWS, but your services business, and we could talk about usage, and that's-
Mm-hmm
somewhat of an anchor on, on gross margin. The services business historically has lost money. I, I don't know if you've updated us recently where that is in terms of profitable or not, but seems like you're building out capacity now on the services side to kind of get ahead of these Q2 wins that, that we talked about and the strength in the enterprise bookings. Talk about when we should expect to see gross margin leverage in the business, how that happens, and, and where we're going?
Yeah. I'm gonna be real quick over here, because I see we're starting to run out of time. On the services, yes, we saw negative single digits, but that's not where the action is. By the way, as we talked earlier, as more and more of the partners take over domestically and internationally, it's become a relevant, relevant part of the business. What really matters is software, which is approximately three quarters of the total of our business. That's currently in the low 70s, on its way to the 80s. Why do I say it's on its way to the 80s? It's governed by revenue growth versus the fixed and semi-fixed costs. As a proof statement, don't just take my words, and let's look at the facts.
The fact is, for the last 10 years, 9 of those 10, the exception was when we were investing in cloud and, and successfully internationally, the fourth quarter has seen the highest subscription gross margins, because that's always our strongest revenue quarter. That is going to continue as well. There's no reason why Five9 mission-critical enterprise software shouldn't have software margins in the 80s, which will take the overall company up from the current 62% up into the 70%+.
Maybe we'll just wrap up with kind of an opportunity to, for you to leave, like, parting thoughts with the, for the investors in the room. Like, what are you excited about as you look over the next 12 to 24 months?
Yeah, what I'm excited about, honestly, DJ, is the next, 10 to 15 years.
Yeah.
I, I hate to keep saying that, but it is true. This is a durable, long-term opportunity in this market that has never been better. What, what helps me sleep well at night is the fact that we're well positioned in this massive market for the next several years. Again, as soon as this macro backdrop gets back to normal, I, I think, you know, just look out.
Yeah. Yeah, I personally think investors are getting a pretty good bite at the apple here with the stock, on the pullback after Q2. We will leave it there. Mike, Barry, thank you guys very much for being here, and, keep, keep tabs on progress.
Thanks, DJ. Thank you. Thanks a lot.