FIVE9, INC.

FIVN
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Transcript : Five9, Inc. Presents at UBS 50th Annual Global TMT Conference, Dec-06-2022 11:40 AM

06/12/2022 | 17:40

Presenter Speech
Taylor McGinnis (Analysts)

Okay, awesome. Well, perfect. Thank you, everyone, for attending UBS' 2022 Global TMT Conference. My name is Taylor McGinnis, sorry about that. And I'm the lead covering analyst of this mid-cap application SaaS and communication space. And for this session, we have Five9. So we have Mike Burkland, who's returning CEO back again then we have Barry Zwarenstein, who is the Chief Financial Officer; and then we have President, Dan Burkland, as well too. So going to be a good event.

And just do you guys know, I'll take questions from the audience with like 10 or 5 minutes or so left. And you can submit a question by using the QR code that's on the sheet in front of you, and so it'll save time for that. So perfect. So let's kick it off. I think we will open with safe harbor statement, yes.

Presenter Speech
Barry Zwarenstein (Executives)

So today, we'll be making comments events and trends that affect the company and the industry. Our actual results may differ materially from those comments. I refer you to our SEC filings, 10-K, 10-Q, to see the factors that might cause such a difference. Thank you.

Question
Taylor McGinnis (Analysts)

Perfect. Awesome. Well, Mike, we'll start with you. So welcome back as the CEO, maybe you can just talk about -- you've obviously like still remain close to the business but now being in the seat, where does your focus lie? Maybe you can talk about -- maybe you can also give a little bit of a history for the group for those that were close to the story at the time that you were there, what has been some of the differences between you and Rowan, maybe you can talk -- start on that.

Answer
Michael Burkland (Executives)

Yes, a little history for everyone. As you may know, I was CEO for 10 years, from 2008 to 2017 and unfortunately got diagnosed with cancer in 2017. I hired Rowan, and it was a wonderful hire. In the last 5 years, I've been Chairman of the Board, very close to the business, remained extremely involved. And it's an exciting time for our industry.

If you think about what's going to change? The answer is nothing. This is a story that is -- I've been involved with for 15 years. These 2 gentlemen have been with us for the majority of those 15 years. This is a market that is absolutely opening up in the large enterprise. And if you look at our strategy, Rowan, myself, the rest of the Board over the last few years have aligned on that strategy. That strategy won't change. There's 3 growth vectors that are driving our business. It's march up market into the large enterprise market.

We're living proof of that's happening. This last quarter, we announced a record number of $1 million plus ARR deals. In fact, Dan highlighted 3 different deals. They were all in that the $4.7 million range in terms of ARR on the last earnings call. Our march up market is -- has been occurring over years, but it's actually opening up in terms of cloud adoption by large enterprises.

The second part is international expansion. We reported 78% growth in bookings in Q3 and internationally. It is a relatively new venture for us in terms of the last few years, but we're starting to, I would say, hit our stride internationally in terms of channels as well as direct sales and their productivity, resulting in that 78% number I just mentioned.

And then third is AI and automation, and there's a unique opportunity in the contact center market. We acquired a company called Inference which is the market-leading IVA, Intelligent Virtual Agent solution. And our large enterprise customers are choosing Five9 in many respects because of that AI and automation innovation that we're able to provide and the ROI that we're able to provide them with that automation solution.

Question
Taylor McGinnis (Analysts)

Perfect. We're going to touch on several of the things that you mentioned. But one of the most topical areas is obviously the macro, right? So maybe you could give a little bit of an update on what you guys are seeing in terms of the demand environment today. And then Barry, maybe you can provide a little bit more context on the guide for next year, the 16%, the type of scenario that's embedded in that.

Answer
Barry Zwarenstein (Executives)

Yes. So let me touch on the macro first. And we talked about this on the earnings call. We are seeing some headwinds in our installed base in terms of seat adds. And think about this as these are call centers and contact centers around the world. They add agents when their call queues fill up and their wait times get too long and their customer experience is not a good one, that will drive them to hire more agents, which drives them to put more seats on to our platform.

We definitely saw in Q3 that seat-add volume, it's growing, but it's growing slower than it has historically in some very difficult comps, by the way, great economic times a year ago, for example, especially for e-commerce and transactions and so forth. But it's -- also, the other side of that coin is while this macro backdrop might be providing some uncertainty and a little bit of headwind in certain parts like the installed base, seat add part of our business, there's the other side of the coin, which is this large enterprise market opening up to cloud. And cloud adoption has absolutely never been better in terms of large enterprise.

I talked about those $1 million-plus deals. Those are good data points for everyone. We've talked about our -- a few mega deals that we've closed in the last few quarters. This is a market that is still, call it, high single-digit penetration in terms of cloud replacing on-premise in a massive TAM. We size the entire TAM for contact center, core contact center, a $24 billion in annual recurring revenue. And on top of that, the AI and automation, labor arbitrage opportunity is a market that's even a little bigger than that. So massive TAM, just opening up to cloud. And again, on the net new side of our business, we're not seeing any impacts from a macro -- from a macro perspective at the large enterprise part of it.

And in terms of the 16% that Taylor was referring to, on our third quarter earnings conference call, we gave a back to the future outlook on 2023, which is for the 6 years ended 2019 before the pandemic, each year, we would give a 16% guide and then end up somewhere in the 20s. And part of that was due to the inherent uncertainty regarding the seasonality in the business. Typically, we have of 52%, 53%, 54% of the sales in the second half. And we -- our customers don't know it's going to -- how strong or weak the season is going to be, and we certainly don't know until it actually gets closed up.

So we gave the familiar 16% as a starting point, reflecting a balance of 2 opposite forces. As Mike alluded to, we have the macro headwinds, which impacts a part of our business in the installed base, where it turns to revenue pretty quickly if our customers are not going to have idle agents. They will -- they have the right to cut back up to, in some cases, 20%, and we're aligned for that.

On the other side, the net new logos, that business remain strong, and we have these mega deals, a big backlog of seats to implement in the course of the upcoming year. We gave details of that on the call. And so on balance, weaker macro, but stronger, clearer visibility and confidence on the net new side gives us the feeling that the 16% is the right way to start again. The company overall is much stronger. As Mike was mentioning, in the march up market, the international, the Intelligent Virtual Agents or the automation. And yes, so that's it.

Question
Taylor McGinnis (Analysts)

Perfect. So let's dive in maybe to some of those growth drivers. So you talked first about the large deal activity right in the $1 million plus deals that you guys have in the pipeline. So I think what's interesting about your guys' model relative to other SaaS models is that you your rev rec is based on when those seats are implemented, right? So there tends to be a little bit of like a lagging impact as well, too. So can you talk about the level of visibility that gives? I think you guys specifically mentioned the ramp time frames of 2 of your largest deals that you are citing. And if you even just look at those deal sizes alone and use the math that we've played with. It's not hard to even see like those ramp to the degree that you say. Why that couldn't add 5 points to growth next year? So maybe you can just talk about, one, like the visibility there and provide any color on how that gives you guys comfort in the near-term growth profile.

Answer
Michael Burkland (Executives)

Yes, I'll start and you guys feel free to chime in. But I think the good news is, as you said, Taylor, it's the backlog of business that we've been booking over the last several quarters is great visibility in terms of seat turnups as we call them, which will turn to revenue. And again, as Barry alluded to, the 16% is a good starting point. But you can also see how we feel about this business absent that macro backdrop.

So we're assuming, and we'll get into this later, I'm sure, but we're assuming that this macro backdrop that we're in today lasts through 2023. And we've talked about our 2027 $2.4 billion in revenue. You kind of do the math on what that means from a growth perspective going forward. We're very, very bullish on the long-term opportunity in this market.

Answer
Daniel Burkland (Executives)

And I think you said it well. And if you look at the number of million dollar plus ARR deals, they tend to have little quicker implementation ramp-ups or cycles than would be the mega deals, the 2 large deals that we spoke of. Those 2 large deals, by the way, we're about 50% of the way through ramping up the $55 million parcel delivery service company. So that will continue to grow.

And then we've got the health care conglomerate, which is just starting to roll out those seats, and those will ramp over the next 18 months or so. And so that gives us great line of sight and confidence that there's kind of the built-in visibility to what's coming, and that helps offset some of the uncertainty in the macro.

Question
Taylor McGinnis (Analysts)

Yes, perfect. And then as a follow-on question to that, two-parter. The first one, so is with these existing deals, right, that are ramping, is there any risk, right? Or in your conversations with customers that given the weakening macro, you might see customers pause on that, right, and say, "Hey, we want to push this off to the side, maybe we'll pick it up, right, when the macro improves." So one, are you hearing anything from customers on the front? Any risk there? And then two, for these new large 1 million-plus deals coming in, maybe you can talk about what you're seeing on that front, right? And I know you talked earlier about the potential for some of these on-premise end-of-life cycles that are coming up. So maybe you can touch on that, too.

Answer
Daniel Burkland (Executives)

Yes. I'll touch on first, when you look at the ramping of those customers and you look at the customers that are coming on board, they're not hesitating at all on implementation. I mean, if anything, there's the opposite, which is we need to get this in and start recognizing that ROI, especially on the labor arbitrage play that we have with the IVAs.

The Intelligent Virtual Agent, as Mike alluded to earlier, allows us to deflect calls over and give the ability to self-serve without ever having to interact with a human agent. The human agent is the most expensive part of the contact center, often 10x what the technology costs. So the more we can provide self-service to their customer's customer, the better off they are and it helps pay in the case of the parcel delivery service, a $55 million annual spend with us. They're planning to more than pay for that $55 million just on the labor savings alone from the IVA. So that makes the compelling argument. The other is once they've contracted with us, it's in their best interest for whatever reason they've done it either that compel [Indiscernible] or they had either -- there are so many releases behind the -- they didn't want to upgrade with their existing on-prem solutions. So they have milestones and time frames in which they want to move and get on to our platform as well.

So -- and the $1 million plus ARR deals, yes, that's a market that's just really opened up for us recently. They had not really leaned in and pushed to move to the cloud for a couple of reasons. One was the CCaaS providers like ourselves, had to demonstrate the increased reliability that they could achieve over what they have today. We had to show scale. We've 10x the scale of our product to handle us in a single tenant into the tens of thousands of seats, which wasn't always the case.

We were far below that beforehand. The reliability, we're now delivering Five9's on a regular basis of reliability and uptime, and we had to show that compelling ROI to get them to want to go, "Oh, now is the time to make the migration to the cloud." And that's what they needed to see. And that's starting to come out. And so we -- as Mike said, sold a record number of $1 million ARR deals, and we see the pipeline extremely healthy for not only those reasons I just mentioned, but also because of the end-of-life and the difficulties that some of the legacy on-premise providers are having.

Question
Taylor McGinnis (Analysts)

And maybe as another follow-on to what you just said. Is there any way to quantify, right, that opportunity? So from some of the financial struggles, right, as one of the on-prem vendors and the end-of-life of another, right? So when you think about those seats, right, that could potentially now be coming to market any way to think about, one, I guess, quantify that opportunity and anything that you guys are hearing from customers now want you to actually migrate.

Answer
Daniel Burkland (Executives)

It's not an immediate land grab, like, oh, this is happening. So therefore, all those seats come up for grabs. Just to put it in context, we're at the very early innings of this. We hear industry analysts will estimate that 20% penetration, meaning the conversion from prem to cloud.

To get into the high end of the market, it's far less and it's single digits still. To give you the context, we talk about 250,000 concurrent seats on our platform as we exited last year. We provide that annual number. If you think about that number compared to the number of on-premise legacy contact center seats, there's 2 million to 3 million of those seats available that are on the leading 3 on-prem providers from each. So 2 million to 3 million from Avaya, which has their financial struggles, as mentioned, 2 million to 3 million from Cisco, which tends to not necessarily focus, it's 1% of their revenue. And then the legacy on-prem Genesis solution.

They do have a cloud solution. They'll get a fair share of those that will upgrade to their cloud. but it also gives customers an opportunity to shop and to see what else is available, and we feel very bullish on our ability to capture a big portion of those.

Question
Taylor McGinnis (Analysts)

Perfect. And Barry, a question on some of the enterprise math that you laid out. So you talked about for next year, the potential for enterprise subscription revenue growth to grow in the high 20s next year from mid-30s currently this year. Can you just talk about some of the assumptions embedded in that outlook? And what type of scenario would have to happen for it to see, I guess, that type of decel?

Answer
Barry Zwarenstein (Executives)

Yes. Thanks, Taylor. So given the millions of seats that are still out there and given the fact that there is a fairly benign competitive landscape with the 3 key leading vendors in this area. For years, as far back as Mike's original incarnation as CEO, we've been saying that a LTM Enterprise subscription growth, which is now 60% of the total, would grow with a 3 handle. And that's exactly what we proceeded to do quarter in, quarter out, year in, year out.

On the third quarter call, we did say, though, that given the fact that we would not be immune from the macro weakness that we're clearly seeing around us. That could dip in the course of next year into the high 120s. And the assumption we're making is that the macro stays relatively like it is, not a disaster and not a real hard recession, but sort of going back and forth rather weekly.

And we're assuming in 2024, as Mike alluded to earlier, that will become more robust. And we would recover back into the 30s, which we think is a healthy growth rate in this market and one that we can avoid any high-speed wobbles. There's not a land grab as Dan said. So we don't -- we're gaining market share at that rate, and that would be our intention.

Question
Taylor McGinnis (Analysts)

Perfect. And then so the second part of that equation, so you talked about that enterprise subscription being a little bit over 60% of the mix. So then you can do the math to say, okay, to get to the 16% guide next year, right? What does everything else have to grow out, which would be more of the mid-market business and professional services growth.

And by our math, I think that means going from mid-20s growth roughly currently to declining next year. So Barry, do you mind just unpacking that a little bit more and some of the drivers in there?

Answer
Barry Zwarenstein (Executives)

Yes, your math is correct, but it's based on a slowed starting point. And the slowed starting point is that the 16% that we're talking about is just that. It's a starting point. We fully expect that we will, as the quarters go by, be able to improve upon that. So no, we're expecting continued growth just that at this stage, given the -- especially the macro uncertainty, we are not in a position to start talking about these other growth rates.

Question
Taylor McGinnis (Analysts)

Perfect. And then moving on to maybe more of like the expansion part. You talked about how expansion activity drives 50% of the business, right? It sounded like that there was 5 verticals in particular that were a little bit soft this last quarter. And I think one thing investors are broadly trying to understand is on the expansion side, how much of this is macro versus tougher compares from COVID. And I know, Mike, you talked a little bit about this earlier. So I think some of the weakness you talked about on the expansion side was really seat expansion driven, right? So any way to think about or quantify how much of the slowdown that you're seeing is really macro versus maybe just slower agent growth rate coming or slower contact center volumes coming out of some of the surges we saw in the pandemic.

Answer
Michael Burkland (Executives)

Anecdotally, it is definitely macro. It is definitely macro in terms of what our customers are telling us. And again, these are existing customers that have decided, again, not to increase their seat counts, their agents, hire new agents as fast as they did last year. And again, it is much more around macro than any other factor. Any other color you guys want to add to that?

Answer
Barry Zwarenstein (Executives)

Yes. Just a few things. It's important to remind you that our year-over revenue growth is split into 2 halves approximately. What we've just been talking about is the installed base where the seats are added as the activity picks up. That will continue. It's just not -- it's against a macro environment that's not as good. But we're not talking about contraction there. We're talking about a slower rate of growth. And we can emulate that as well if there's fewer seats by what Dan and the team have done successfully to add additional sales or applications on the seats. In fact, the last 2 quarters have been the record and the second best Q2 and Q3 on that score.

Bear in mind, though, that the other half of the business, which is the new logos coming into the platform for the first time. And the mega deals, the smaller deals, the record number of those that was there in the third quarter. These all recall, $1 million-plus deals, which account for half of our total revenue right now are the fastest-growing part of our business. Those, as Mike and Dan both alluded to remain strong, especially at the upper end where it's opening up.

Question
Taylor McGinnis (Analysts)

Perfect. And then sticking on point with a number of contact center seats out there. Maybe you can talk a little bit more about the opportunity. So when you think near term and long term, if you look at industry analysts estimates going out. They basically have, hey, this is the number of agent seats today, and that's just going to stay similar for the rest of time. And I know that you guys have been in the industry for a long time. So I'd love to get your thoughts, one, on your thought about just the total installed base of agents in general, right? There's concerns that you might even can see that contract over time, right? What are your thoughts on that?

And then two, is there anything that people should keep in mind that when the environment starts to get a little bit iffier, like is there any risk of layoffs, right? Scaling of seats up and down. Maybe you can just talk about that.

Answer
Michael Burkland (Executives)

Yes, Taylor. I'll take that one. And again, it's important to understand the big picture here. This is a massive TAM. If you look at the number of agents, we already talked about 2 million to 3 million from the 3 top legacy providers. Analysts have estimated anywhere from 11 million to 16 million agents worldwide. We have 250,000 of those as of the end of the year last year. This is a massive replacement market opportunity. If that agent -- and by the way, that agent population hasn't grown in years. That has never been the opportunity here.

The opportunity is that, that's a pretty stagnant population in terms of size, but it is a massive population of legacy. Again, when we talk about the large enterprise, it's arguably 90% to 95%, somewhere probably more like 90% to 92%, 93% on-premise still. And that is our opportunity. And again, it's a $24 billion TAM in recurring revenue. And we're sitting here today as a $800 million-ish sized company on an annual revenue basis. So these are early days, early innings in terms of cloud replacing on-premise. It's a 3-horse race. We're ahead in that race. We're winning in that race.

And that's the opportunity. That is -- it's all about the fact that large enterprises are now looking at contact center as strategic in driving a better customer experience for their customers. 10 years ago when I was running the company then, and I'm still here today, but it was much more of a cost center when it comes to these large enterprises.

Today, they're viewing this as a strategic initiative. They're moving and have been in a digital transformation for -- in many cases, a few years. They're moving CRM to the cloud; they're moving contact center to the cloud in order to deliver that better customer experience. And we have a long way to go in terms of customer experience. I'm sure you've all still experienced not so great contact center interactions. That's because these companies, these enterprises are still running these legacy solutions that don't provide the agent that's on the other end of that interaction with the right information to help you and know who you are, know what products you have, know who you've been interacting with recently, what types of interaction you've had, what products you have. I mean there's so many integration points that we're providing that its an intelligent contact center solution in the cloud.

Answer
Daniel Burkland (Executives)

And if I may, just to touch on the overall aggregate number of contact center agents. And there's been some talk about, gee, is it going to decline? Is it going to change? And I would argue that no, it's not. In the sense that we all hear about more and more transactions being handled in digital formats, right? Consumers choosing to interact digitally, whether it's chat or e-mail or social, those still require agents to log in and handle those transactions.

They may not be speaking on the phone call with voice, but they're answering and responding digitally. The other is, if we are going to automate and completely replace agents for some small percentage of calls, we often talk about, gee, you won't need as many human agents because you've got IVAs to handle those for you. Well, the IVAs replaced the humans one for one, meaning I've got to have 10 IVAs to handle the work of what 10 human agents used to do in, let's say, a 1,000-seat contact or 100-seat contact center.

The interesting thing there is we get $400 per IVA seat. We get $200 per human seat where we provide the software. So as that migration happens and if we were to see a reduction in the number of human agents, we're actually picking up the digital agents or the IVA agents at twice the price. So we're actually -- the TAM increases as we make that compelling ROI and start shifting over to more self-service.

Question
Taylor McGinnis (Analysts)

Yes, that was going to be my next question because I think the other part of the equation -- no, it's good. It was a good leading because I think the other part that people forget about sometimes is also this TAM expanding opportunity that you guys have, right, aside from just seats since that's good things like IVA. So maybe you can talk about the demand that you're seeing for IVA. Anything you're sharing on what contribution that has to the business today? And then also the other adjacent areas, right, or what even might look interesting in the future?

Answer
Daniel Burkland (Executives)

Yes. I'll take the first part of the IVA and feel free to chime in. We're at the very beginnings of IVA. I call it, its infancy or adolescents maybe its a better word. Organizations are dipping their toe in the water and starting with very basic straightforward use cases where they get highly repetitive questions into the contact center, why waste the time of these human agents to answer a very basic, straightforward response. How do I change my password? Where is my package? When is my appointment scheduled? To get confirmation that kind of thing.

So those are the types of things that were in these early days of IVAs. We're able to automate those. But over time, we see those use cases getting to be more and more complex. And so customers often ask, well, how -- what percentage of my calls am I going to deflect to the IVA? And it's like, well, we don't know. You have to put it in and see because a part of it is the appetite for the consumer to want to use and speak to a machine interface.

And part of it is that it comes down to a demographic of the caller it comes down to, are they used to waiting in queue for 20 minutes before they can speak to an agent. Think about your airline costs. We all sit and wait in queue for far too long to speak to the airline. The more self-service we can do with those airlines the better most of us are going to be if we're frequent flyers because we don't necessarily need to talk to the human. We just want to get our transaction handled. So you start looking at the adoption rate. That will go up and to the right over time. It's just a question of how steep that curve is, and we're prepared to take it on as it comes.

Question
Taylor McGinnis (Analysts)

Perfect. And then I'd love to ask a question on how you think about the seat growth right, ARPU dynamics trending over time, right? So is there any shifts that we could see as that IVA part of the story becomes bigger? Any way to think about those 2 variables in the growth outlook and how that might evolve?

Answer
Daniel Burkland (Executives)

We talk about IVA a lot. It's the most popular and exciting innovation that we're having. But we also have AI in the form of agent assist where we're listening to the conversation and assisting the agent to be more effective and efficient. We have workforce optimization, the WFO or WEM space as it's now going to add -- and a number of other adjacencies that we'll continue to look for those to add to the platform, whether it's resell or acquire or build looking for those tuck-ins to be able to add to our portfolio and sell more because our customers are coming to us.

We pride ourselves in having a very close service organization with our customers to not only consult but optimize the solutions for them. And I've had several conversations recently where they've said, what else can we buy from you. They want to build out the portfolio and add to it. So we're very mindful of what are immediate either ISV partners that we can resell into our base or potentially look for technology tuck-ins. Mike?

Answer
Michael Burkland (Executives)

And to quantify that, Q2 and Q3 were our 2 largest quarters ever in terms of upsell, cross-sell to the base in terms of new SKUs. So it's happening and it's nice to see, quite frankly. And that has resulted over the years in a single -- mid-single-digit increase in our ARPU, and that continues.

Question
Taylor McGinnis (Analysts)

Perfect. Maybe turning to margins, and we actually have one from the audience as well, and I'll kind of put it into like a two-parter. So the one from the audience is, how realistic are your long-term margin aspirations and what would cause to -- and what would cause to accelerate your margin expansion? And Barry, maybe even you can talk about some of the near-term dynamics with the environment, too.

Answer
Barry Zwarenstein (Executives)

Perfect. So in order to understand the Five9's gross margins, you have to disaggregate the corresponding revenue stream. So we have 9% currently of our revenue that comes from onetime implementation. Of the complementary 91% recurring, its split 80-20 between subscription and usage agents speaking on the minutes or a digital transaction.

The -- starting with the onetime professional services that's currently at approximately breakeven. We certainly see ourselves being able through various initiatives that our leadership are putting in place to get that like many other B2B SaaS companies up into the high single digits, even low double digits. And we've had -- we've actually been higher before we've made quite big investments for these mega worldwide customers that we needed to be able to implement on time. So that's the one avenue. But frankly, that's a fairly small part. It's only 9% of the total current revenue.

Turning now to the recurring revenue. On the usage that is in the 50s and is unlikely to change. It's been there for a while. We have general price declines, but also general cost declines, but not a whole lot of upside there. On the subscription, which is the big kahuna, being 80% of that 91%, there we've gone -- we've had our margins go down deliberately, and I think, very wisely in the interest of our shareholders in making a big investment in our [ client ] operations to expand our capacity to go globally and to enable Infrastructure as a Service, which can lead to cost reductions.

Those now are largely over, and we expect to resume doing what we did before we did this detour, which is to slowly, so no big jumps to answer that part of the question, improve our gross margins by leveraging against our fixed and semi-fixed costs and go from the current 60s up into the 70s, even the 80s. And therefore, we feel pretty serene about by 2027 having our margins be 70% plus versus the 61% we are at right now.

Question
Taylor McGinnis (Analysts)

Perfect. And then, Barry, just translating that, I guess, to your adjusted EBITDA margins and even cash flow. So is it really a function of the improvement that we'll see over time is really a function of gross margin leverage, and that's one.

And then two, is there anything to keep in mind near term, right, with the environment, I know you've talked about potential tailwinds to cash flow? Maybe you can just talk about how that all tied together to the longer-term outlook.

Answer
Barry Zwarenstein (Executives)

So in the 2027, $2.4 billion long-term model that we have, what Taylor was just referring to was the EBITDA margin, which is 23%. And yes, the biggest driver, by far, 9 percentage points to it is the gross margin improvement. We do have a potential tail breeze in the sense that in the operating expenses, that assumes a total of 47%. We're currently at 43%. So we could theoretically go up at 4 percentage points or not use all of it and obviously get to the 23%.

In terms of cash flow, as Mike has constantly pointed out, Five9 through thick and thin has always had a balanced profitability approach at both the top line and the bottom line and by implication, then on the cash flow. We didn't -- back in the summer of 2021, you might remember this, the [ ask rate ] was showing that the -- its all about revenue growth, and we didn't waiver. We continue to say we want to do both. And we now have a situation where when we get to that -- well, first, let me talk about what's been happening on cash flow. We've had record -- this last quarter record operating and record free cash flow as volatile go around, but it's been very consistent on the operating side. We've had now 25 consecutive quarters of LTM operating cash flow advances.

In 2023, just to jump ahead to that, we traditionally have had a 5 percentage point spread free cash flow. And traditionally, we've had a little bit of a detour in terms of CapEx for the capacity expansions I referred to earlier. But we had typically about 6% of CapEx. So combined 11%, which would yield from that 23% EBITDA, a 12% free cash flow, which we submit is quite reasonable for a company that will be -- is forecast to be growing in the 20s.

Question
Taylor McGinnis (Analysts)

Perfect. And then one more from the audience is just on the large deals, whether those ramp linearly -- linear?

Answer
Daniel Burkland (Executives)

Whether the what?

Question
Taylor McGinnis (Analysts)

Whether the large deals ramp linear or not? Yes.

Answer
Daniel Burkland (Executives)

No. And they're all different, right? They -- depending on their ability to plan for and be prepared for a rollout is one. And then oftentimes, during that rollout, like we talk about the parcel delivery service ramping over the year plus very lumpy. They actually asked us to accelerate and get prepared last year for the holiday season, and we went faster than we would have normally done and they did too.

And then they bring on another region or another department. The health care conglomerate has 12 different companies, 12 brands, they're doing those each at a different pace. So some of them went all at once flash -- take us off the old system onto Five9, other departments are ramping up as the go. So it really runs the gamut.

Question
Taylor McGinnis (Analysts)

Perfect. And then the last question from the audience is, in hindsight, what is your view of the Zoom acquisition offer made last year? Do you have any of your own plan/how do you think about scaled acquisitions yourself in 2023?

Answer
Daniel Burkland (Executives)

Yes. So I'll take that. I'd rather not comment too much on the Zoom situation. But I will tell you this, we will continue to be opportunistic in terms of downstream opportunities, as we call it, technology tuck-ins.

The Inference deal is a perfect example of a great acquisition, expanded our portfolio, put us in a leadership position in AI and automation, allowing us, quite frankly, to deliver on a very unique ROI for these large enterprises that historically, moving to the cloud has a lot of benefits in terms of customer experience. But when you add that AI and automation ROI, that labor arbitrage ROI, which is a no-brainer to the equation, it's game changing. And so we'll look to do more of those types of opportunistic acquisitions.

Question
Taylor McGinnis (Analysts)

Perfect. Awesome. Well, that is all we have time for today. Thank you to everyone in the audience for joining. And thank you to the Five9 team for attending. This was great.

Answer
Daniel Burkland (Executives)

Thanks, Taylor.

Answer
Barry Zwarenstein (Executives)

Thanks. Appreciate it.

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