FIVE9, INC.

FIVN
Temps réel estimé Cboe BZX - 20:28:32 01/02/2023
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Transcript : Five9, Inc. Presents at 6th Annual Wells Fargo TMT Summit, Nov-29-2022 09:20 AM

29/11/2022 | 18:20

Presenter Speech
Michael Turrin (Analysts)

Thanks, everyone, for joining for day 1 of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. Very pleased to have with us today, Barry Zwarenstein, CFO of Five9 since 2012 pre-IPO, that sound in the right vicinity? And then...

Presenter Speech
Barry Zwarenstein (Executives)

That sounds spot on.

Presenter Speech
Michael Turrin (Analysts)

Excellent. And Dan Burkland, President of the company, have been with Five9 even longer since 2009. Good continuity is what I'm highlighting here, good continuity with the management team and across the company. Before we get started with questions, I think Barry just had a brief safe harbor statement to go over.

Presenter Speech
Barry Zwarenstein (Executives)

Thanks, Michael. So we will be making forward-looking statements today about events and trends that can affect the company and the industry. Actual results may be materially different, and I refer you to our filings with the Securities and Exchange Commission for factors which would cause such a difference. Thanks, Michael.

Question
Michael Turrin (Analysts)

Happy to. Well, there's obviously plenty to talk about given the time of the year, and just what's been happening across the markets. But I think the most natural place to start is just with recent earnings results. Q3 results and guidance, there's a little bit of a difference between the 2 and that Q3 looked very consistent relative to what we've seen. Expansion rates we've been talking about held in consistently with what we saw last quarter.

But Barry, maybe you can start with just the high-level takeaways for investors who maybe aren't as close to the story or just the key metrics you're focused on coming out of Q3 earnings, and then we can go through some of the puts and takes in terms of what's ahead.

Answer
Barry Zwarenstein (Executives)

Yes, absolutely. Thanks, Michael.

So yes, Q3 itself came in pretty strong. We have -- when you understand about Five9, you need look at 2 parts of the business. Our annual year-over-year growth in revenue has got 2 separate -- quite distinct buckets. The revenue that comes in from new logos, and then the revenue that comes in from expansion in the installed base, either through receipts or additional applications per seat.

We saw in the -- and Dan can go into more details on this separately. I'm sure there will be follow-up questions on this. In terms of the new logo growth, the market is opening up at the upper end. We had a record number of million dollar-plus customers. It now accounts for -- excuse me, the total number is about 50% of our total revenue. And it's got -- it's very sticky, great expansion rates. So that part of the business is fine.

In terms of the expansion, though, we did see headwinds from the macro. And we identified on the call 5 verticals that accounted for 61% of the revenue, where last year from Q2 to Q3, it grew approximately 6%. This year is flat. Verticals like health care, financial services, consumer, real estate, BPOs. And we do give our customers the flexibility to -- within limits up to about 20% to flex the number of seats.

They're not going to keep the agent sitting idle. It's one of the attractiveness of the business model. And we compensated to some extent with another very strong quarter of increased applications per seat, but it's still something that our customers have the right to do. And we took that then into our guidance for Q4, where we said that we expect sequential growth, 3%, which is between the 2 and the 4 that we traditionally did before the COVID period.

And that's a balance between the fact that the new business is stronger, but the expansion business is certainly somewhat weaker. And if I could just mention one last thing and then let you get on with the other stuff. You mentioned the dollar-based expansion rate staying sequentially at 118%, I do want to be clear on this. This should an square circling in mind, how can if the expansion in the -- is contracting, how could it stay flat 118%, Q2, on 118%, Q3? And the answer is that those million dollar-plus customers are ramping once they stay in the base for 12 months, that's the rule. That is what offset the fact that manage -- and we managed to keep the 118 very last comment, I promise.

If you're looking forward, there's this dynamic continuing. The smart money is betting that -- in the near-term, though, that the dollar-based retention rate will actually go down, in the long-term, though, because the -- that million dollar-plus customers have expansion rates as massively above the 118% that, that mix effect will benefit. I talked about it being a first part of strong part of our business.

Question
Michael Turrin (Analysts)

Very comprehensive. Why am I not surprised?

So I think the follow-on question is just around guidance. You mentioned Q4, you also framed an initial target for next year as well that's very consistent with historical patterns, maybe outside of what we've seen in recent periods. But can you just expand on the visibility you have into both the fourth quarter and the targets into next year?

And just what's assumed there relative to what you're seeing in the macro, and just some of the factors that you pointed out just in the intro?

Answer
Barry Zwarenstein (Executives)

Yes. I will start with that at a high level. And then, Dan, if you wouldn't mind jumping in, in terms of the visibility.

So in Q4, we've given the guidance, Michael. I explained the tradeoff between the 2. We have the seasonality impact that we take into account when we do that to the best availability. What's important, though, is looking forward into 2023, and there's an interesting story here.

Pre the pandemic for 6 years in a row, Five9 guided to 16% year-over-year growth. Recognizing in fact, the difficulties sometimes we're seeing just how strong the macro -- not the macro, sorry, the seasonality would be. And we ended up in each of those 6 years, reporting revenue growth somewhere in the 20s. So the 16% is starting point, and we're happy to revise it each quarter as we see what's coming in.

This year, we again are starting with 16% as a starting point. And you're thinking to yourself, yes, but the macro is weaker than it was back then for those 6 years, and that's true. On the other side, the company is a much stronger company than it was back then. It's -- the product has hybrid has been re-architected, it's been hybridized, the channel is much stronger. We are now a truly ambidextrous company, whereas before, the go-to-market was to be perfectly blunt under Dan's leadership, the some part of the equation.

Question
Michael Turrin (Analysts)

Do you want to follow on to that, Dan, just with your impression?

Answer
Daniel Burkland (Executives)

Sure. I mean if you look at the market that we're going after, it's massive, and we're very early. Some would say around 20% penetrated, meaning those companies that have moved from on-premises solutions to the cloud. And if you go upmarket, which is just opening up for CCaaS in general, arguably that's in the single digit.

They had to wait for a few things for the solutions to become resilient and reliable, secure, scalable and go through a disruption period where they saw incremental value being delivered. We're now, to Barry's point about being ambidextrous, we had a go-to-market machine doing very effectively and just saying, "Hey, like-for-like, for many years, it was let us move you to the cloud, start paying on a subscription model you can get the servers out of your data centers, and we'll take care of it for you."

And that was a good enough value proposition for the smaller and midsized enterprises. For large enterprises, they wanted to see a compelling ROI. And so now we have the introduction of AI and automation into contact center. And what that's done is it's caused the very large, all the way up to the largest, most demanding contact centers and companies in the world to recognize that there are compelling reasons for them to move to the cloud because the only way they can implement the AI and automation solutions is to get to the cloud.

Examples of that, we had an announcement of the parcel delivery service $50 million annual recurring revenue commitment from them. They're paying for the entire Five9 spend $50 million a year, just with the labor savings that they'll gain from using our IVA. And what that does is it allows them to deflect a certain percentage of calls over to the solution that lets the customer self-serve rather than sitting queue for 20 minutes, talk to a live agent, take up their expensive time, which, by the way, the labor is 10x more expensive for that agent than the software that is used to serve them from Five9.

So if you think about this, by deflecting a certain percentage of calls over to self-service, rather than wait 20 minutes in queue, talk to a live agent, ask where is my package, I can now just call straight into a number, speak in my tracking number. It tells me where the package is, and I'm done with the transaction.

Simple mundane repetitive tasks like that can now be automated very easily and oftentimes pay for the entire solution, many times over. So having that compelling ROI has allowed the high end of the market to open up for the first time. And that's why we see the record number that Barry alluded to earlier, the record number of million-dollar ARR customers. We sold more in Q3 than we had in any other quarter in our history, and we anticipate that, that number will continue to rise.

So it's a great market. We're in the early innings, so to speak. And we see the migration from premises to cloud not only continuing for those inherent benefits. But we also see it and we're finding that the premises-based vendors are in many cases end-of-life in those solutions or causing it to be a massive capital expenditure in order to upgrade and get to some of the technologies that are currently available.

Question
Michael Turrin (Analysts)

Can you just expand on what's driving the unlock in the upmarket? How much of it is Five9 specifically the investments you've made into the platform versus just the openness, the awareness of those large contact center environments to evaluate a cloud solution for the first time?

Answer
Daniel Burkland (Executives)

Yes, Michael, great question. And for years and years, we tried to go upmarket and we -- I'll say, banged our head against the wall in some respects, because companies would say, well, just to give me cloud and subscription and give me exactly what I have on-prem, wasn't good enough.

And so, a, we needed the AI and automation to be compelling. But really, we needed them to understand and be convinced that the platform was ready to take on the scale and the global coverage that they have. So most large enterprises are global in nature. They have contact centers all over the world. They needed to make sure that we could handle their particular not only use cases, but really their scale and complexity.

And that came -- and so I will say that's not really just an industry thing because there's very few that can do this. It's a Five9 differentiator. When you look at the large parcel delivery service, and then the health care conglomerate, Fortune 10 company, they recognized that we were the only ones that could scale. And we put a re-architecture effort under Rowan's leadership into the platform to not only allow us to scale to 10x, we had a single tenant or a single company could provide up to a few thousand agents.

We more than 10x that capacity, so we can put a single company stable tenant on our platform. And we're able to now stretch that around the globe and be present in countries, as you can imagine, that parcel delivery service gets into corners of the world that most of us will never see.

Question
Michael Turrin (Analysts)

One more on just the upmarket traction because I think it's very important for the growth drivers for the foreseeable future for the business.

The competitive environment, how different is the competitive environment? How have you had to regear the go-to-market Dan to make sure you're to be able to reach those largest contact center environments on the planet?

And then the referenceability, is there a repeatable motion that once you land a large parcel delivery company and a referenceable that there's a knock-on ripple effect from that?

Answer
Daniel Burkland (Executives)

Yes. And one last point on those large mega global customers that are moving forward with Five9. Another reason is the -- not only did we scale the platform, but at the same time, we increased the reliability to Five9. I mean in the last 12 months, we have delivered Five9's of reliability of availability on the platform. And that's something personally in the 13 years I've been with the company, we always strive to get there.

I honestly 5 years ago, never thought we could or would get there, and it surprised me. And that's what's unlocked and allowed us too now be very successful further upmarket. If you look at the -- and I'm sorry, your question about...

Answer
Barry Zwarenstein (Executives)

Just the competition of the market.

Answer
Daniel Burkland (Executives)

Right. If you look at the competitive landscape, there really has been very little change. There are natural barriers to entry here that have taken decades for us to build and for our key closest competitors to build solutions that can serve the high end of the enterprise with the reliability, scale, security and so forth that goes into this.

This is not trivial. When you look at the mission criticality of a contact center, seconds and minutes of downtime costs millions of dollars for their business. So it has to always be on, and it has to have that resiliency built in and that takes a ton of effort to be able to accomplish.

Examples, we have competitors that have been in the space for many, many years that tried to make the transition from premises to cloud and even they had a difficult time building and perfecting and then scaling that platform for 7 or 8 years just to be able to come the market.

So we continue to compete with NICE inContact or NICE CXone. We continue to compete with Genesis, who has a large installed base of premises-based providers. I mentioned earlier that some of them have discontinued our end-of-life those solutions. A lot of the installed base both Avaya, Cisco, Genesys, all 3 of those have been waiting in some cases, for those companies to deliver a scalable, reliable cloud-based solution.

And they really -- Genesis now has and they've said, hey, cloud is now ready. It's okay for you to go look at cloud. They're going to get some of their customers to upgrade on to their cloud, but that's a complete forklift. It's a complete change, different UI, different look and feel, different feature set. And so it's giving customers the ability to go shop. And they'll get some of those, but we believe we'll get a vast array and big share from those customers that have been waiting for their cloud to be ready.

Question
Michael Turrin (Analysts)

I feel like you've done that before, Dan? The other, I think, important point of news that's come up in recent periods is just a change in CEO. There's a continuity factor here that I think is unique. So Mike was CEO of the company, helped take the company public, stepping back from the Board to resume that role. What can you say about the continuity that you're aiming for? And just any change in focus or priorities with the transition from Rowan to Mike?

Answer
Daniel Burkland (Executives)

Yes, I'll start and then, Barry, you can add to it. But Mike, he is my brother, same last name. He had been CEO for 10 years with the business and had to step away with his cancer diagnosis in 2017. He remained on and very active as Chairman, and has worked through that period.

And so just as the transition from Mike over to Rowan 5 years ago was very smooth, didn't miss a beat. And actually, we added like Barry had mentioned, the second half of that ambidextrous approach, which is the product. Rowan brought in that prowess and the leadership to really take the product and the platform to the next level. So now we've got the best of both worlds.

Mike is an absolute execution machine and his focus on operational excellence is something that cannot be underestimated. And he also established the culture of this company. That should not be underestimated. When it was announced that Mike was going to come back as CEO, he's revered at this company in more ways, and I'm speaking from bias. I have a bit there.

But you can go across the Board to our leadership teams, they were ecstatic to see that change made that Mike was coming back because he knows the business, he knows most of the people, he knows over 50% of the leadership team was hired under Mike's CEO -- while Mike was CEO over 5 years ago. So the VPs and above. And it's over 80% of my leadership in the go-to-market side of thing.

So we're feeling like this is a great thing and the best is yet ahead of us. And I think he adds a great deal. And the beauty there is it's not a big adjustment. It's not somebody coming in where we have to teach them the business and show them the business and it takes a while for them to get their feet under them. We can hit the ground running. Barry?

Answer
Barry Zwarenstein (Executives)

Dan, you said what I wanted to say, but only better and more comprehensively. It's an exciting future with Mike at helm.

Question
Michael Turrin (Analysts)

We've touched on the move-up market often throughout the conversation already. I want to move to another key growth driver that informs the longer-term targets. So that's the international presence. I think you've tripled the go-to-market headcount versus end of 2020. There are some proof points aligning around our ability to reach global environment. So can you just walk us through the international opportunity, how important that is for the business?

Answer
Daniel Burkland (Executives)

Yes. And that's great, because there is lots of puts and takes in the business right now. If you take the macro side of thing and we've talked about some pressure in the mid-market because those companies are nimble enough to kind of hold on and slow down budgets and the elongate sales cycles. We've talked about the installed base where there's less growth in just the pure seat counts, but those are being offset by opening up of upmarket as we just talked about; and secondly, the international expansion.

Our international markets, historically, it was tough because I can put -- I could put headcount and dollars into international and it would be a much longer runway before we'd see revenue from it than just putting them in the U.S. Today, that's not the case. We're putting resources into these international markets, and we're not returning in a much quicker period of time. And we're seeing productivity come from throughout not only our U.K.-based headquarters there in Europe, but also surrounding various EU countries.

And then we're getting a lot from Latin America as well and have yet to go expand into Asia Pac from a go-to-market perspective, but lots of momentum, we saw a 78% year-over-year increase in our international revenue, and we see that continuing to contribute more of a percentage. And as we've guided to over the next several years, it should contribute in the mid-teens here over the next 5 years.

Question
Michael Turrin (Analysts)

I think what's often lost, we spent a lot of time talking about the expansion rates. There are a couple of things that you're talking about that just suggests that the net new business activity is very healthy. And I think there's somewhat of a misperception that there was pull forward from COVID-related impacts that came into this market that meant that 5 years of acceleration got pulled into a couple of years. And now you have to kind of step over that.

It sounds like based on what you're saying both upmarket and internationally, there's just plenty of net new business still to go after. Is that a fair characterization?

Answer
Daniel Burkland (Executives)

Absolutely. Like we said, we're in the early stages of having that conversion from premise to cloud. If you look at, I would pose it closer to there was strong momentum COVID aside for a moment, and we saw that momentum before COVID hit. And I think that has slowed a bit because of the macro conditions, not because, oh, we had this COVID benefit. I think it was more that, okay, we've got some macro conditions that are causing people to slow down, hunker down and perhaps slow their IT spending on something like this, but there's still plenty of business out there, and that's why we're capitalizing on it.

Question
Michael Turrin (Analysts)

Barry, can we talk a little bit about just a CFO perspective in the current macro environment. You have a business that is profitable, the EBITDA margins are not far away from your long-term targets. When you're looking at the market opportunity and some of the inputs Dan is providing, and assessing growth versus margin trade-offs just in the current macro environment, what informs your framework, what would cause you to shift towards a more -- more of an emphasis on the bottom line versus the top?

Answer
Barry Zwarenstein (Executives)

Yes. Five9 has very consistently had a philosophy, Michael, of balanced growth -- even in the summer of '21 when [ Square ] is on growth was -- excuse me, the rule of 40 were it close to 0. We didn't waiver. You don't get a 47% improvement in EBITDA margins from negative 28% to positive 19% in 8 years just by chance.

And we're continuing that. We've been very judicious in our hiring, and we wait to see the bookings and the revenue before we release any new headcounts. It's allowed us to say to our employees, and it's an important part of that culture that Dan talked about earlier that you can never say never in business, but the chances of a layoff at Five9 are extremely remote. And they take that into account.

So in terms of our trade-off between revenue growth and the profitability is more of the same. We've said that we foresee that the enterprise subscription business on an LTM basis, we'll grow with a 3 handle typically, although we did concede as a result of the macro that it may dip into the high-20s for a while. But that part of our business that Dan was just describing remains very, very strong. And so that's it.

Question
Michael Turrin (Analysts)

Anything in just from the CFO perspective, that's changing with your planning cycle for next year, not necessarily specific to Five9's business, but just how you're evaluating. I think as a software analyst, we're just constantly wondering where your head's at with where you could cut costs or if there are certain things that are -- you're giving more scrutiny towards just from the CFO perspective? And this is more just big picture understanding, how you're approaching spend? And if software is at all a part of that discussion.

Answer
Barry Zwarenstein (Executives)

And when we look -- we are in the throes of our 2023 planning, our biggest challenge by far, is that we've got extremely high ROI opportunities that we have to choose between. We know -- I think we've demonstrated; I'd submit with some clarity that the big decisions we've made have typically paid off.

And we are -- we've got so many of those opportunities. Our biggest part of the planning process is deciding which ones to do when in the midst of the macro because that clearly has a headwind on the expansion rate.

Question
Michael Turrin (Analysts)

Dan, just in terms of your focus areas for 2023, I mean, Barry mentioned a number of high ROI opportunities and trade-offs there. What are your points of focus? What are you emphasizing? What do you expect we'll be talking about next year at the same type of session?

Answer
Daniel Burkland (Executives)

Yes. So from my side, on the go-to-market side, it's really expanding and investing in those areas where the growth is coming. Upmarket, high end of the enterprise and strategic accounts, international expansion and channels. And really, when we say channels, the big systems integrators are starting to control a lot of the decisions and implementations of these digital transformation projects.

And so the closer we are with the Deloitte's and EY's and Accenture's and Slalom's and IBM's and Kyndry across the world, the better position they can represent and endorse Five9. And so we're working very heavily on investing in service enablement, being able to enable those partners to be able to do more services for us. It will be margin accretive in the long-term, and it gives them what they want, which is the services business.

Question
Michael Turrin (Analysts)

Where would you say you are on that today? It sounds like the list of partners that you're rattling off is little larger than it was maybe 6 months ago.

Answer
Daniel Burkland (Executives)

Yes. I mean we've kind of had 4 to 5 now, you'd say, 6% to 7%, and it's really been up to them to lean in and create a business practice around cloud contact center. For several years, Deloitte led the way. They -- we've done business with them for 6 or 7 years now, and they were the first ones to really jump in and build a practice around it. And others were still trying to live off the legacy solutions.

And now they've all leaned in and said, "Okay, how do we make money off this?" How do we get services business, and they see the future just like we do? And so leaning in there right away, not only and it's more than just applying resources and people to it.

It's giving them the tools and equip them to be successful with their clients so that they can be profitable in that endeavor, and building the tooling and the tools into the product, so that they can be effective with it. So that it's not all our professional services team, but it's also augmenting and using their services teams.

Question
Michael Turrin (Analysts)

Is there something in terms of what everyone is looking for currently, which is quick ROI things that drive efficiency gains? Are there elements of that, that are leading to these partner conversations?

Answer
Daniel Burkland (Executives)

Yes. If you get down into the real details and the weeds of, okay, how do you help a third party or even our professional services, for that matter, help migrate customers off of Cisco, Avaya, Genesys, legacy platforms into the cloud. The key there is being able to build the tooling to emulate. Oh, if you had these programmable capabilities, let us transfer those over in an automated way without having to start from scratch and rebuild.

So a lot of it is templatizing all the analytics, the reporting to look and feel like those manufacturers' products so that you can make that transition easy and smooth and the customer is comfortable when they make the transition, but they're not looking at something completely different. And so part of it is that just building those migration tools and playbooks.

Question
Michael Turrin (Analysts)

We're almost up on time, believe it or not, I know it goes quickly. But any parting words for investors, Barry, we've talked about a lot. But as far as the key takeaways, the points of focus, where you'd like investors to takeaway heading into next year, where Five9 currently sits?

Answer
Barry Zwarenstein (Executives)

Yes. The key over here is the market. On the net new side, we see the strength that Dan talked about earlier. That's not about to change in 2023 or beyond to 2027, where we have the $2.4 billion target at a 23% EBITDA, implying by the way, a 25% CAGR from 2022.

On the expansion side, it will depend very much upon what happens with the macro. We don't sell seats. Our customers tell us over time what they want, we can sell additional apps per seat. So we feel pretty confident that we will continue growing. They're not talking about contraction. We're talking about what rate we will grow at.

Question
Matthew Stotler (Analysts)

Dan, Barry, this is great. Please come back and see us next year. Thanks for the time.

Answer
Daniel Burkland (Executives)

Great. Thank you, Michael. Thanks all.

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