Five9, Inc. (NASDAQ:FIVN) Q2 2023 Earnings Call Transcript

Five9, Inc. (NASDAQ:FIVN) Q2 2023 Earnings Call Transcript August 7, 2023

Five9, Inc. beats earnings expectations. Reported EPS is $0.52, expectations were $0.39.

Operator: Thank you for joining us today. On the call are Mike Burkland, Chairman and CEO; Dan Burkland, President; and Barry Zwarenstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, customer growth, anticipated customer benefits, company growth, the anticipated benefits from and timing of the closing of our proposed acquisition of Aceyus, Inc., growth in our portfolio of products and features, industry size and trends, our expectations regarding macroeconomic conditions, company market position, initiatives, and expectations, technology, and product initiatives, and other future events are forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995.

Such statements are simply predictions, should not be unduly relied upon by investors, actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration and uncertainty, including increased inflation, increased interest rates, supply chain disruptions, decreased economic output, and fluctuations in currency exchange rates, lower growth rates within our installed base of customers and our ability to close the Aceyus acquisition and achieve the intended benefits from this acquisition and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the investor relations section on Five9's website at investors.five9.com. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP. And now, I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland.

Mike Burkland: Thanks, Emily, and thanks, everyone, for joining our call this afternoon. I'm pleased to report strong second quarter results with revenue growth of 18% year-over-year, primarily driven by our LTM Enterprise subscription revenue growing 28% year-over-year. Also, we enjoyed a particularly strong quarter for new logo bookings, demonstrating the value of our Intelligent CX Platform and our strong go-to-market execution. Adjusted EBITDA margin for the second quarter was 19% of revenue, helping drive a record Q2 for operating cash flow of $22 million or 10% of revenue. Turning now to the three key trends that continue to drive our confidence in our market opportunity. First, legacy vendors are retrenching, forcing enterprises to develop concrete plans with an even greater sense of urgency to replace their on-premise contact center solutions.

Remember, that in terms of cloud replacing on-premise, we believe the penetration is still less than 20%. Second, companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience, cut costs and increase revenue. Third, AI is becoming a significant catalyst for enterprises to shift to the cloud. Regarding this third trend, given all the recent focus on generative AI, I would like to recap our perspective on its impact on our industry and in particular Five9. We believe generative AI is the next wave of opportunity for Five9 with the potential to broaden our TAM. Five9 has been riding the wave of AI and automation for the past several years, and we feel we're well positioned to continue to push this industry forward.

Not only is the AI revolution a tailwind to our technology and innovation, but it's also a tailwind to our business. We provide software for enterprise clients to manage their customer interactions. As AI drives efficiency and productivity gains in the form of a mix shift toward more automation of interactions, that leads directly to an increase in revenue per customer and a TAM expansion for Five9. AI and automation is clearly an area of focus for enterprises as demonstrated by our nearly 80% attach rate on $1 million-plus ARR new logo wins in the quarter. Now I'd like to discuss what we view as the three main growth drivers for our business, namely our platform, our march upmarket and our continuing international expansion. Let's begin with our platform.

Today, I'm pleased to announce an important extension of our Intelligent CX Platform, as we have entered into a definitive agreement to acquire Aceyus, a market leader in advanced data integration and analytics. We believe Aceyus will uniquely accelerate our ability to capitalize on two large opportunities: first, streamlining the migration of large enterprise customers from on-prem to cloud; and second, leveraging contextual data to deliver personalized experiences throughout the customer journey, including using this contextual data in our AI and automation solutions. Let me elaborate on these one at a time. Let's start with streamlining cloud migrations. Using a robust catalog of pre-built integrations, Aceyus software ingests data from CRM, WEM, multiple ACDs, and many other systems.

Aceyus's ability to normalize the entire dataset allows the business to transition from legacy systems to Five9 while maintaining consistent reports, data visualization and dashboards. This enables customers to run their business smoothly and take advantage of the Five9 platform during migration and beyond. In short, the continuity of data and insight provided by Aceyus across complex environments allows for smoother large scale cloud migrations with faster time to value. Now let's talk about the second opportunity, which is to leverage contextual data to deliver personalized experiences throughout the customer journey. This contextual data often lives in dozens of disparate and siloed systems. As a market leader in advanced data integration and analytics for large enterprises, Aceyus will further differentiate the Five9 platform as we integrate their robust, pre-built data integrations to expand our platform's data lake.

Aceyus will enable Five9 to access this contextual data to optimize, predict and deliver the personalized journeys customers expect. This applies especially to our AI and automation solutions where the use of this contextual data is critical to the accuracy and efficacy required to deliver joyful customer experiences. Aceyus's customer base includes many Fortune 100 companies and joint accounts with Five9, including some of our largest prospects and customers, two of which Dan will talk about in a moment. And now I'd like to focus on our march upmarket and international expansion. We continue to see accelerating momentum upmarket with large enterprises adopting Five9 at an unprecedented rate. I'm pleased to report that we booked a Q2 record number of $1 million-plus ARR deals, and Dan will discuss four such new logos which alone represent approximately $42 million in anticipated ARR to Five9.

As a reminder, $1 million-plus ARR customers make up more than 50% of our recurring revenue. This march upmarket and our continued international expansion are accentuated by the strong performance from our ever growing network of global partners and their commitment to leading with Five9. This was reflected by an all-time record for channel bookings, 15 partners that achieved over $1 million in ACV bookings in the quarter, a record high channel pipeline and over 60% of international implementations now being done by partners. This global partner strategy is also paying dividends and helping us expand our international footprint. For example, in addition to the recently announced BT partnership, in Q2, we also signed Telus International as a strategic partner to Five9, which Dan will also elaborate on in a moment.

Lastly, in May, we held our EMEA CX Summit in Porto, Portugal, the location of our new international development hub. I was personally blown away by the energy and enthusiasm at this event by our partners, customers, industry analysts, and employees. Before I turn it over to Dan, I want to spend a moment to share with you our recently refreshed and re-energized mission and vision statements for Five9. Our mission is to enable our enterprise clients to reimagine their customer experience by providing our Intelligent CX Platform combined with passionate experts to deliver joyful customer experience and better business outcomes. Our vision is to bring joy to CX. We often refer to this as Five9 Joy, and it shows up in many forms for many stakeholders.

For consumers, it means effortless and fluid customer experience. For our enterprise clients, it means better business outcomes such as higher customer satisfaction, increased revenue, greater efficiency and lower costs. For agents using Five9, it means being armed with the knowledge, data, intelligence and automation to deliver great customer experiences. For supervisors and managers in the contact center, it means having the tools and applications to engage and manage their workforce. For our partners, it means providing technology and people that will drive success for our joint customers. And for our employees, it means living by our values every day, resulting in a unique and winning culture, filled with passion and purpose, and one where we enjoy the journey together.

In summary, our goal is to bring Five9 Joy to all involved in CX, as well as the entire Five9 community. And now, I will turn it over to our President and CRO, Dan Burkland. Dan, go ahead.

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Dan Burkland: Thank you, Mike, and good afternoon, everyone. As Mike mentioned, we are seeing a renewed momentum on the net new side of our business, but we're still facing some headwinds on our installed base. The new logo bookings were an all-time high for any quarter other than the quarter we booked the healthcare conglomerate, indicating the strength and persistence of the three key trends that Mike talked about earlier. In addition, our pipeline reached another all-time high. Now, I'd like to share some examples of key wins for the quarter. I normally discuss three key new logos. Today, I'm going to share a fourth given that we already disclosed the $8.4 million ARR regional bank Q2 win in last quarter's earnings call. The first is a Fortune 50 global healthcare insurance company providing coverage for medical, dental, disability, and life.

Over the years through M&A, they had accumulated several disparate systems, leading to tremendous inefficiency while also lacking the modern applications and automation. With Five9, they will enjoy a complete omnichannel experience that's fully integrated to the proprietary CRM and will integrate to their existing Verint solution using our voice stream API. They also chose Five9 due to our Aceyus integration to do precisely what Mike described earlier, helping them make the transition from their legacy existing platforms over to Five9 while maintaining consistent reports, data visualization and dashboards throughout that migration to Five9. We anticipate this initial order to result in over $20 million in ARR to Five9. The second key win I'd like to highlight is one we touched on last quarter, the regional bank, which booked at the beginning of Q2, they selected Five9 and will be enjoying a full omnichannel experience with deep integration to Salesforce, ServiceNow and Pega CRMs, and the full suite of Five9 WEM, powered by Verint.

We also sold Aceyus for analytics and real-time dashboarding to collect and display information from several different data sources. In addition, they purchased our voice and digital IVAs as well as Agent Assist, which will provide real-time agent coaching and automatic retrieval of information to create a personalized customer experience. We anticipate this initial order to result in approximately $8.4 million in ARR to Five9. The third key win is a healthcare company providing operations, staffing, tools and technology to primary care facilities throughout North America. They had embarked on implementing a competitive CCaaS solution when they made an acquisition of a company who had recently selected Five9. The easy decision for them would have been to cancel the acquired company's Five9 contract and continue implementing with our competitor.

Upon further evaluation, they realized Five9 was the superior solution, and will be using Five9 for the entire combined company. We will be integrating to their Salesforce, Epic, and Athena CRMs, as well as using Five9 WEM, powered by Verint. They also have purchased our IVA self-service solution for authenticating caller IDs, scheduling appointments, refilling prescriptions and paying invoices. We anticipate this initial order to result in approximately $8.3 million in ARR to Five9. The fourth example, which Mike mentioned earlier, is Telus International, where we entered into a reseller agreement. This agreement also included a replacement of their internal use legacy systems, which serve the BPO portion of their business. We anticipate this initial order to result in approximately $5.2 million of ARR to Five9.

And now, as I normally do, I'll share an example of a customer who has expanded their use of Five9. This customer who has been with us since 2017 is a network of independent healthcare providers focused on academic centers, acute care facilities and research hospitals. Separate from their use of Five9, they had an ambulatory support center that was using a competing CCaaS solution, which wasn't meeting their needs. They replaced it with Five9 and also added Five9 WEM, powered by Verint, and our IVAs. This will more than double their ARR spend with Five9 from approximately $1.2 million to approximately $2.5 million. So, as you can see, we're continuing to see strong momentum upmarket, replacing legacy systems, while enabling enterprises to deliver better experiences to their customers.

And with that, I now would like to hand it off to Barry to take us through the financials. Barry?

Barry Zwarenstein: Thank you, Dan. We are pleased with our performance with both top- and bottom-line results exceeding our expectations. Revenue grew 18% year-over-year, driven primarily by our enterprise business, which now makes up 87% of LTM revenue. Our LTM enterprise subscription revenue, which makes up more than 60% of total revenue, grew 28% year-over-year, in line with the high 20%-s outlook we have been communicating recently. We view the drop in the enterprise subscription revenue below 30% as transitory, driven by the subdued growth in our installed base. We believe we are well positioned to resume historic levels of growth in this part of our business when eventually macroeconomic conditions improve. Our commercial business, which represents the remaining 13% of LTM revenue grew year-over-year in the high-single digits on an LTM basis.

Recurring revenue made up 91% of total revenue in the second quarter. The other 9% of total revenue was comprised of professional services. I'll now give more color around revenue. As Mike mentioned, the new logo side of our business, which typically makes up approximately half of our year-over-year annual revenue growth, continue to grow at a strong rate. The deployment of our two mega deals remains on track. We continue to expect the international operations of the parcel delivery company to be substantially deployed by the end of 2023, and the healthcare conglomerate to continue ramping throughout 2023 with full deployment in early 2024. Additionally, our substantial backlog from other enterprise customers that are not yet generating revenue provide us with good visibility.

However, I would like to remind you that the four deals that Dan discussed earlier will not contribute meaningfully to revenue this year. Now, I'd like to turn to our installed base, which continue to be challenged by macro [cross guides] (ph) in the second quarter, with one vertical, in particular, facing the strongest headwinds, namely consumer. As a reminder, consumers are third largest vertical, and it declined sequentially this quarter by mid-single digits compared to mid-single digit sequential growth in the second quarter of last year. This was primarily driven by customers in used order sales, order parts, gifts, apparel, and home improvement. The remaining 16 verticals in our installed base, in aggregate, grew sequentially at a similar rate as in the second quarter of 2022.

Our LTM dollar-based retention rate was 112%, a decline of 2 percentage points sequentially, mainly due to the ongoing macro headwinds causing subdued growth in our installed base. You should expect further minor weakness in LTM dollar-based retention rate until macro conditions improve. Longer term, we continue to expect our retention rate to trend towards a high 120%-s by 2027 due to a higher mix of enterprise customers, especially larger ones, which have demonstrably higher retention rate and higher ARPU from our AI and automation and other offerings. Second quarter adjusted gross margins was 61.8%, an increase of approximately 140 basis points sequentially and 110 basis points year-over-year. This is the first year-over-year expansion in adjusted gross margins since the fourth quarter of 2020.

However, I would like to point out that given the record number of large new logo wins this last quarter, we are making upfront incremental investments to further scale professional services, which may hinder our ability to continue to report further year-over-year growth in adjusted gross margins in the near term. Second quarter adjusted EBITDA was $41.5 million, representing an 18.6% margin, an increase of approximately a 110 basis points year-over-year. Second quarter non-GAAP EPS was $0.52 per diluted share, a year-over-year increase of $0.18 per diluted share. Turning now to cash flow. We generated operating cash flow of $21.9 million, a Q2 record, driven in part by continued strength in DSO performance, which came in at 33 days. We have now delivered 28 consecutive quarters of positive LTM operating cash flow.

Second quarter free cash flow of $13.4 million was also a Q2 record. We remain optimistic about our potential for continuing cash flow generation given our long-term model, our substantial NOLs and our low DSO. Before turning to guidance, some comments on Aceyus. The acquisition is for $82 million in cash, subject to certain purchase price adjustments. We expect this transaction to close by the end of our third quarter. The ongoing acquired revenue and margin contribution will be immaterial to Five9, but as Mike described, Aceyus uniquely positions Five9 to streamline the migration of large enterprises and to leverage contextual data to deliver personalized experiences throughout the customer journey. I'd now like to finish today's prepared remarks with a discussion of our guidance for the third quarter and full year 2023.

For top-line, we're guiding Q3 revenue to a midpoint of $224 million, which represents a 1% sequential increase, in line with the typical guidance pattern heading into Q3. For the full year, we are increasing the midpoint of revenue guidance from $907.5 million to $909 million. As I mentioned earlier, the consumer vertical in our installed base faced macro headwinds in the second quarter. Given that consumer is typically our most seasonal vertical in the second half of the year, we have been prudent for now with our annual guidance of factoring in this uncertainty. As for the bottom-line, we are guiding Q3 non-GAAP EPS to come in at a midpoint of $0.43 per diluted share. For the full year, we're increasing the midpoint of our non-GAAP EPS guidance from $1.75 to $1.81 per diluted share.

Both the third quarter and the annual non-GAAP EPS guidance mirror the prudence in our revenue guidance. Please refer to the presentation posted in our Investor Relations website for additional estimates including share count, taxes and capital expenditures. In summary, we are pleased with our second quarter performance. While the current macro environment continues to temporarily challenge our installed base, we remain highly optimistic about our long-term growth prospects due to our significant momentum upmarket, as demonstrated by the new large logo wins, our ability to continue capitalizing on the AI and automation opportunity and international expansion. Operator, please go ahead.

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