Five9, Inc.
Q1 2022 Earnings Call Transcript
Published:
- Lauren Sloane:
- Thank you for joining us today. On the call are Rowan Trollope, 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, industry trends, Company initiatives, and other future events are forward-looking statements within the meaning of the 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 Five9βs future result and cause these forward-looking statements to be inaccurate, including the impact of the COVID-19 pandemic and the other risks discussed under the caption Risk Factors and elsewhere in Five9βs 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 is currently available in our press release issued earlier this afternoon, as well as in the appendix of our investor deck and available in the Investor Relations section of Five9βs website at investors.five9.com. And now Iβd like to turn the call over to Five9 CEO, Rowan Trollope. Please, go ahead.
- Rowan Trollope:
- Thanks, Lauren, and thanks to all of you for joining our call this afternoon. I'm extremely pleased to report a strong start to the year. First quarter revenue grew 33% year-over-year. This growth continues to be driven primarily by the strength of our Enterprise business. Enterprise subscription revenue, which accounts for approximately 60% of total corporate revenue, increased 46% on an LTM basis. Additionally, our quarter-over-quarter growth rate of 5% continued to outpace pre-pandemic levels of sequential growth, demonstrating the ongoing retention of the COVID benefit we experienced through Q1 2021. We continue to see many more years of LTM enterprise subscription growth in the 30s, as we tap into the barely penetrated $58 billion TAM in the contact center space. The penetration of this TAM, I remind you, is being driven by three immutable trends
- Dan Burkland:
- Thank you, Rowan. Once again we continue to execute upmarket with unprecedented success, by bringing unique innovation to help customers across the globe differentiate how they deliver customer experience. We've proven this with record performances in Q1 in bookings as well as pipeline growth and channel contributions while also setting bookings records for our AI and automation solutions. And now for some key wins for the quarter. The first example, I'd like to share is an HR and payroll software company. Their previous solution had no ability to provide AI automation and the analytics to improve and optimize the customer experience. They chose Five9 and have opted in for our full omnichannel offering as well as our IVAs Agent Assist, WFO, workflow automation and performance dashboards. This will all be integrated with salesforce and several other CRMs and we anticipate this initial order to result in over $3.7 million in ARR to Five9. The second example I'd like to share is a European insurance company, based in the U.K. with over 38 million members and taking inquiries from patients', medical care providers, claims and collections. They looked at all the CCaaS providers and chose Five9 for our full suite of solutions including omnichannel, our IVAs and our full suite of WFO powered by Verint for QM, speech analytics, WFM and performance management. We are integrated to their Microsoft Dynamics CRM along with eGain for Knowledge Management. We anticipate this initial order to result in over $3.1 million in ARR to Five9. And now as we normally do, I'll share an expansion example win from one of our installed base of customers. This is a true example of a land-and-expand story. The insurance broker started with Five9 three years ago with less than 10 seats and recognize the value we had brought to that one department and the potential to transform and automate their customer experience. So in 2021, they expanded and added several hundred seats. Now, in Q1 of 2022 they added our WFO suite powered by Verint for QM WFM and speech analytics. They also added our performance dashboards, IVAs, and Agent Assist, adding over $700000 in ARR, bringing them to well above $1 million of anticipated ARR to Five9. This is a great example of truly bringing automation and AI into an environment and raising the ARPU significantly due to its compelling value and ROI. To wrap it up, I'd like to share our most significant win for the quarter. You may recall just a few quarters ago, we shared a record win for the global parcel delivery service company who is now ramping towards an anticipated ARR of over $30 million with Five9. Knowing the sheer size and scope of this customer, I was reluctant to say that this record would ever be broken. Well, today, I'm very pleased to announce that that record has been broke. After competing with all of the players in our industry, we signed one of the largest companies in the world, a health care conglomerate with retail, pharmacy, health insurance along with many other divisions and brands. This customer will be rolling out tens of thousands of seats with Five9 starting towards the latter part of this year and throughout next year, bringing their anticipated ARR to Five9 to over $40 million in software subscription alone. They were very siloed through many years of acquisitions and expansions and are now replacing all of their legacy on-premises solutions from Avaya, Cisco, Genesys, and NICE with Five9. Five9 was chosen for five key areas of expertise; our ability to help them transform and deliver a reimagined consistent and highly differentiated customer experience; two, our ability to provide valuable insights and analytics allowing them to continuously evolve and optimize their contact center operations; third, our deep and proven integration with Salesforce; fourth, our complete WFO suite powered by Verint; and fifth, we were the only provider they felt could service them effectively across all of their subsidiaries and businesses. We believe this to be one of the largest if not the largest CCaaS deployments in the world. As you can see we continue to execute successfully with companies of all sizes with all of our products and in all geographies. And with that I'll hand it over to Barry to share our financials. Barry?
- Barry Zwarenstein:
- Thank you, Dan. First, a reminder that unless otherwise indicated, financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. We had another strong quarter with our top and bottom-line results exceeding our expectations. As Rowan mentioned, revenue grew 33% year-over-year on top of the all-time record growth of 45% we reported in Q1 of last year, driven primarily by the strength of our enterprise business. Additionally, our quarter-over-quarter growth rate of 5% continued to outpace pre-pandemic levels or sequential growth of 3%, we reported for both Q1 2020 and Q1 2019, demonstrating the ongoing retention of the COVID benefit we experienced through Q1 2021. In terms of revenue composition, enterprise made up 85% of our LTM revenue and our commercial business represented the remaining 15%. Our commercial business grew in the 20s on an LTM basis. As a reminder, we expect our commercial business to grow in the teens for the next several years as we continue to focus the majority of our investments on moving upmarket. Recurring revenue accounted for 91% of our total revenue in the first quarter and the other 9% was comprised of professional services. Our LTM dollar-based retention rate was 120%. Quarterly fluctuations are inevitable as mega customers come onto the platform at different times and ramp at different rates and particularly, in the near-term as we lap the one-time COVID benefit. I'd like to remind you that our dollar-based retention rate is an LTM figure, which means that we will only fully lap the onetime COVID benefit once Q1 2021 is out of the denominator which will not happen until Q1 2023. Over time, however, we expect the retention rate to trend towards the high 120s by 2026 due to a higher mix of Enterprise customers, especially larger ones, which have demonstratively higher retention rates and higher ARPU from our automation and other offerings. First quarter adjusted gross margins were 60.5%, a decrease of approximately 350 basis points year-over-year, due to the ongoing investments we have mentioned previously. These investments are in two areas
- Operator:
- Barry, thank you very much. We will begin our question-and-answer session by going first to DJ Hynes.
- DJ Hynes:
- Hey guys, congrats on the great quarter. Awesome to see that $40 million customer. That's awesome. Rowan, I want to ask a question for you on AI. Like how would you characterize your lead there versus direct competition in the space? Like what do you look for? How do you measure that? Just curious like what kind of data you can use in a sales pitch?
- Rowan Trollope:
- Well, it's tough DJ, thanks for the question. Because our -- if you were asking me -- maybe I misunderstood the question, but if you're asking how we stand up to the competition, nobody reports this as a separate line item in terms of the revenue or anything like that. So competitively we don't really know how that stands. It's not broken on a separate category. But when we do get into that, I think the framing of your question at the end was more around customer, when we engage with the customer, how do we compete and how do we win and how do we standβ¦
- DJ Hynes:
- Yeah like the technical differentiation. Yeah.
- Rowan Trollope:
- Yeah. Look, number one we bought what we thought was the best company in the world and that was sort of backed up by analysts top right in the Magic Quadrant and all that that was Inference Systems. And they β so I think, we started with the best technology in the world as the starting place. And we've continued to invest in that. So they have been working on for several years, a completely brand-new release called Studio 7. That is now launching to our customer base, which is a massive leap forward. That's a big part of it is just innovation on the technology side. And then I think fundamentally, why are they number one is because the approach is very different than any of our competitors. I'm not aware of any of our competitors, who are built the way that we built. We have a different perspective and Inference had a different perspective on this which is to sort of stand on the shoulders of giants leverage the underlying technologies that were being built by the Googles and Amazons, and the hyperscalers of the world, so that customers can make their own choice and then we build that layer that sits above all those technologies. And you can reflect back on many conversations DJ that, we've had which is exactly this point. This was our strategy also was to say, let's not use our R&D resources trying to spend a lot of money keeping up with the competition on automatic speech recognition and natural language processing, or text to speech are the two big ones β ASR and text to speech. And as a result, we've been able to apply those resources to take those kind of commodity technologies and apply them to the contact center in unique and different ways. And that's giving us our technology lead. So look the product just stands up extremely well in demonstrations and proof of concepts with customers. It's clearly the leader. It's demonstrated in the success that we're having. And we're now starting to generate real customer references and use cases. One of our largest customers in the health care space drove a 10% labor savings by implementing our solution completely replaced their IVR, and had β I think they had $2.2 million savings per year, which represented 10% of their total labor costs, or 36 agents just by implementing this technology. So it's those kinds of references in the large enterprise that, our customers are going, wow you guys clearly do have the best technology and we want to get a piece of it.
- DJ Hynes:
- Great color. A follow-up along those lines kind of a crystal ball question. But you take a contact center today that say has 1,000 seats manned by people today. In five years like, how many of these seats do you think that same contact center has manned by people?
- Rowan Trollope:
- Well, doing what they're doing today? Much less. How much less? It's hard to say. Right out of the gate, we're seeing numbers like I just shared with you 10%. I'd anticipate that number goes up fairly dramatically. When you look at the average contact center and look at what are their low volume, but very β the high volume, but very low-value kinds of calls, I mean, that could be 50%, 60%, 70% of the volume into a contact center. And it depends on your industry. It's hard to give a kind of a general answer. But I'd say, the contact center in five years looks radically different than it looks today, in terms of like think about the sea of cubicles, and the people on like we're replacing that with automation and putting those humans to work at what they're really, really good at. So I couldn't give you an exact number crystal ball-wise, like you asked, but it's going to be β I think it's going to be fairly dramatic in the next 5 to 10 years.
- DJ Hynes:
- Yeah, yeah. Super helpful. Thanks, guys. Congrats.
- Rowan Trollope:
- Thanks, DJ.
- Operator:
- We'll move on to a question now from Ryan MacWilliams at Barclays.
- Ryan MacWilliams:
- Thanks, guys. It feels like this time last year, we were talking about could Five9 win a mega customer? And now after some of these deals the kind of question is like, how many mega customers could Five9 win? So now congrats on the move up-market. Rowan I'd love to just hear your perspective on these mega deals kind of like why now right? Like are they ready for it from a technology standpoint, or is it the shift to work-from-home is really driving larger cloud adoption to contact center? And then for Barry just as these larger deals maybe make revenue a little lumpier just in terms of your guide where could we see a little more upside from these deals turning on like second quarter, second half start of next year? Just would love some insight.
- Rowan Trollope:
- Yeah, I'll take the first part. It's a perfect storm, I think of four factors. One is our readiness. So four years ago, we weren't ready to take on the size of the $44 million customer that Dan just talked about. Our technology wasn't ready four years ago. We're now ready. So we're able to land those customers. And as we land them, we get those customer references like Dan mentioned in this particular one. I mean they called the parcel delivery service back channel and got a great reference. So that's the second thing is success breeds success. Number three, I think customers are ready. The market is β and I don't know if this is post-pandemic. I don't know if this is β what exactly is driving it but the pipeline on the mega deals is really there in the way that it hasn't been over the last few years. So I think it's just market becoming ready to move. And then the fourth thing and I wouldn't β I think this is really important is the breadth of our portfolio. And the fact that we now have technologies that you can get in the cloud that you cannot get on premises. So if you're an on-premises customer today, you can't get an IVA. They don't work on premises. You must go to the cloud. And so that factor that there is now some extremely compelling reason beyond the normal cloud stuff for a large enterprise to move to the cloud it's another good reason. So I think it's a combination of those four factors. They're all kind of hitting at once and it's creating this again a perfect storm scenario. And look we invested ahead of it. Dan β we started Dan's team started this two years ago restructuring or creating the team in anticipation of these investments all paying off and they are paying off now. And you see that in the $44 million ARR customer we just landed.
- Barry Zwarenstein:
- And Ryan I'm going to respond to your question in four parts if you don't mind. The first part is the parcel delivery service, that is currently the biggest contributor of the megas and that is still continuing to ramp this year. The second one is the SI that was spun out. That too is also contributing currently and is also ramping for the rest of the year. The third one, which is the British insurance company that we announced almost 18 months ago now that is going live this quarter and will ramp throughout the rest of the year. And then finally the latest one that Dan talked about earlier on, that will ramp probably starting in the fourth quarter and there will be a small contribution from it but the majority of that will be next year.
- Ryan MacWilliams:
- I'll squeeze one more in maybe for Rowan or Dan. But Rowan just on the IVA on the standpoint we're hearing about inference wins in some Avaya and Cisco deployments. How does like that new logo growth seed future contact center wins for Five9? Like is it a no-brainer to go with Five9 for the rest of the contact center after that, or is it still kind of up for grabs after the inference?
- Rowan Trollope:
- It's always a no-brainer to go with Five9 but I'll give it to Dan to answer that directly. That was a softball Ryan sorry.
- Dan Burkland:
- Yes. So Ryan thanks for the question. It's a great way to get your foot in the door. Not all companies are ready to make their transition to the cloud right now but they can do so with the IVAs. And if you're in there at the front end with the IVAs it's a natural β you're in the pole position when they do come around to transform and migrate to the cloud. So we think it puts us in a very advantageous position.
- Ryan MacWilliams:
- All right. Thanks guys.
- Dan Burkland:
- Thanks, Ryan.
- Operator:
- And we'll take our next question from Meta Marshall at Morgan Stanley.
- Meta Marshall:
- Great. Thanks. A couple of questions for me. Maybe first just some differentiation or kind of additional color you could give on the partner traction. Clearly, you were seeing a lot of β you've noted kind of the 68% growth. But just any differentiation between maybe some of the newer partners that you've brought on versus some of the ones that you've had for a while. And then just kind of given the difficulty of the hiring environment just where you're kind of finding the professional services add, or are you able to add as many professional services people as you would like? Thanks.
- Dan Burkland:
- Yes. I'll take the first part Meta. Thank you for that. When you look across our channel partners as Rowan mentioned in the prepared remarks, we've got five or six categories that are all β we're not only hitting on all cylinders and signing up new ones which are great for the long term but maturing the ones that we've signed up over the last several years. And that should not be underestimated. At the beginning with complex solutions like we offer they can introduce us into those opportunities when they're in their infancy as a partner. But as they get smarter and smarter and certified from a professional services standpoint and even on the presale side get more knowledgeable and have reference accounts of their own, we can leverage them to take on more and more responsibility and that only helps us from a productivity standpoint on our side. As far as the hiring piece professional services-wise, we have no problem finding labor. There's certainly no shortage in that sense. If you think about all the legacy on-prem providers that have had professional services organizations typically with platforms that require a whole lot more services than ours, those folks are looking to make that same move over to the cloud because they see the future. And so we've been able to handpick some very not only senior high-performing leaders, but that they can hand pick and select the best of the best to come over to Five9. So it's -- we have no issue in hiring whatsoever. And that goes both on professional services and on the sales side.
- Meta Marshall:
- Great. Thanks.
- Operator:
- [Operator Instructions] Having said that, I'd like to move on to our next question from -- I'm sorry that's Scott Berg at Needham.
- Scott Berg:
- Hi everyone, Congrats on the fantastic quarter. I'm going to throw out a 36-part single question. So better get ready. No, I wanted to follow-up on some of Barry's commentary around the costs to move some of your Russian employees out, but pivot that maybe to a general sales question within Europe. I know you all made a big push into the European theater over the last couple of years heavy partner sales over there. But from what you're seeing right now in that environment is there any I guess headwinds to either sales cycles or demand for apps in the Five9 platform over there because it's still kind of business as usual?
- Rowan Trollope:
- Okay. Well that was multipart wasn't it? I'll let Barry comment on the Russian operations and from a cost perspective. But I'll kind of give the high level here. Number one, our European business is doing great. We invested there. We've said that's a big focus for us. We've made some really good hires including in the mainland continent in Germany we've been going after that. So Europe's doing great. And this is actually going to bolster that even further. So we're going to use a good chunk of the Russian employees, as a seed team to establish an R&D center in Portugal. And so we're going right into Portugal establishing a large R&D center, a low-cost R&D center for Five9. And there's as you know a local base of talent there that we plan to go after aggressively and move into the Five9 culture. And we think that that's going to really help from an ability to expand and having local resources in Europe is going to be very helpful. So that's -- we're kind of using this as a jump start if you will and a great opportunity. Financially, I'll let Barry comment on that.
- Barry Zwarenstein:
- Yeah. Real briefly Scott that $8 million to $12 million we don't quite know yet, exactly how many people are going to come over. This is a major life decision for these people that are caught in the middle of this hence the range of $8 million to $12 million, the major components in that are the severance, because we're actually shutting down an office and that comes with severance cost. And then the cost to move, and attract, and retain the people in a new country and also mundane things that add up like immigration costs and legal fees and so on. But this has been extremely well run and we're very optimistic that we will be able to get the majority -- well a meaningful number to come over.
- Rowan Trollope:
- Yeah. And just to be clear that $8 million to $12 million of onetime expense associated with restructuring, that's somewhere in the $45,000 to $68,000 per employee. So it's a small -- it's a very small number when you think about it. And when you just think about establishing a new R&D center right, hiring and ramping and training new employees, we actually couldn't have done this at this level in this successful of a way before the sort of conflict in Ukraine broke out and the war broke out, because our employees in Russia wouldn't have been as willing to move. But given this current situation we've got a lot more interest in actually relocating out of Russia, so we're using that to our advantage.
- Barry Zwarenstein:
- And also just to emphasize what I said on the call Scott, there is a slightly higher cost in Portugal. And we've absorbed that in our bottom line guidance.
- Rowan Trollope:
- Yeah.
- Barry Zwarenstein:
- You are on mute.
- Rowan Trollope:
- You are on mute.
- Scott Berg:
- Congrats. Thanks again everyone.
- Barry Zwarenstein:
- All right.
- Rowan Trollope:
- Thank you, Scott.
- Operator:
- Moving on to the next question this is from Taylor McGinnis at UBS.
- Taylor McGinnis:
- Yeah. Hi. Thanks so much for taking my question. If I look at the implied recurring revenue growth in the quarter, it looks like sequential growth of 3% was actually in line with the pre-pandemic levels. So Barry is it fair to assume that the quarter might not have -- or might have been a little bit light in terms of some of those larger deals ramping and falling into place? And I guess, as we look ahead, how should we think about sequential growth relative to the pre-pandemic levels in recurring revenue as some of these mega deals really start to ramp?
- Barry Zwarenstein:
- Yeah. So the first part clearly we benefited from the ramping of these mega deals, as I described in the earlier question. Taylor, in terms of the future growth rate sequentially, we've given a guidance, which I emphasize is prudent guidance as we customarily provide. But if you want to do some scenarios with basically arithmetic in terms of sequential growth, on the one hand, you could assume that everything goes extremely well and these megas all come on stream, on time, and et cetera, et cetera. And you have 5%, 12%, 14% sequential growth in the next three quarters. And that then I'll save you the arithmetic gets you to 37% growth year-over-year. On another example though, and remember that 5%, 12%, 14% is from 2020 where with COVID benefited. On the other hand if you use growth rates that are not COVID benefited like in 2021, 2019, 2018, you get instead 4%, 7.5% and 11%, and then that gives you a 32% growth. So we're sticking with our prudent guidance, and we'll update it so early in the year as the quarters unfold. But in the meantime, you're going to need to make your own conclusions beyond our guidance.
- Taylor McGinnis:
- Perfect. Thanks. That's helpful. Congrats on the quarter.
- Barry Zwarenstein:
- Thank you.
- Operator:
- Moving on to Jefferies, and Samad Samana.
- Samad Samana:
- Great. Hey, good evening. I'll echo the congrats on the strong results. Maybe this one is for Dan. Just as I -- it sounds like the quarter itself was very strong. The guidance reflects that sustaining, but just -- can you help us understand what you're seeing in terms of deal cycles? Are they getting longer, shorter, staying the same? Versus maybe the last couple of years as we've all been at home and then maybe also comparing that to pre-pandemic time frames and same close rates as well around deals?
- Dan Burkland:
- Yes. Thanks for that. Regarding sales cycles, they're continuing and actually getting condensed slightly as time goes through. Whether COVID or not, it's -- we're not evangelizing cloud any longer. We're also working with more channel-driven opportunities, where they bring us in and they've already set the tone and perhaps had the first several meetings. So we tend to be brought in more midstream of a processor, not trying to engage and create a process and create the ROI to begin a process. So that overall means a reduction in the cycle. At the high end of the market, which is where we're really seeing the biggest, the largest momentum up in those mega deals and even the higher end of the enterprise and the strategic deals, in that case those are starting to condense slightly as well. The very first time you go into that market, you do have to start and evangelize and be able to position all the technologies, prove to them why we believe CCaaS and Five9 in particular is a viable alternative for their large enterprise. Should they go disrupt their enterprise for in some cases over a year in order to get these benefits? They scratch their head. Rowan alluded to it earlier that, there's all the benefits of moving to the cloud, but if you're going to disrupt your environment for a year, where is the incremental value? So, we've got to really position and set forth the business case and the ROI for them. Once they start seeing that, and once they start seeing other enterprises go first, success breeds success, and we see that momentum continuing if not accelerating.
- Samad Samana:
- Great. I appreciate the color. Thanks guys.
- Dan Burkland:
- Yes.
- Operator:
- We'll take a question now from Jim Fish at Piper Sandler.
- Jim Fish:
- Hey, guys. Congrats on the quarter. Last quarter Rowan we were talking about you guys unlocking the team from these larger deals and it's clear you guys have. Just how should we think about the competitive environment for these larger deals, especially as obviously you've had AWS Connect that really hasn't been part of the bake-offs that you guys have been part of. Microsoft and Google now entering the space. And just secondly, Dan, you've mentioned $40 million ARR on just the software subscription. What could the usage element of that contract be given a typical contract is 75-25, let's call it, or is this kind of pricing in usage already? Thanks.
- Rowan Trollope:
- Maybe I'll take the first part, around competitive. And they're -- we're not seeing the Amazon or Google -- certainly not Google. I mean they just have a partnership with a very small start-up in this space and Microsoft have announced a product. So it really -- it's us and Genesys and NICE that are in these deals. And Dan said previously and I'll reiterate, where Amazon does show up like if we're in the last stage where we're fighting against Amazon something has gone horribly wrong. That doesn't happen, because the companies make a decision early on. Do they want to buy a product or they want to go try to build their own sort of platform using Amazon. And we're not -- we're just not seeing that very much to be honest. But we are seeing Genesys and NICE in terms of cloud competitors. Realistically in these very large, it's Genesys and Five9 in terms of ability to potentially serve the customer. And obviously we think we're winning more than our fair share of these deals. Dan?
- Dan Burkland:
- Yes. No I think you said it spot on. I mean if you take the competition it's -- all those mega deals do evaluate and look at Amazon Connect but they either have the appetite and the wherewithal and the R&D IT shop to go -- to build and create and customize for years before they're ready to go into production or they recognize that we have a finished product that they can enhance with all of our AI and automation on top of it. And that's really what they're eager to get their hands on. And so they can hit the ground running with us much sooner and much quicker.
- Rowan Trollope:
- I also think the investments in the scale and the platform that we built, we really rearchitected our platform over the last few years. That's been a big focus on the R&D side. That's what's paying off right now. That investment in R&D, we rearchitected the entire platform and that's allowing us to land these mega deals. And frankly, I think we've jumped ahead of the competitors in terms of ability to execute here and ability to scale with these largest of the large customers. So that's also helping as well.
- Jim Fish:
- Makes sense. Dan, just following up on that large customer on the usage side.
- Dan Burkland:
- Oh the usage, sorry. Yes that customer is not going to put usage through Five9. So sometimes these large companies have long distance calling contracts for multiyear with large carriers, some of whom may be a partner of ours. So we're very careful to make sure we honor that. And the good news there at the end of the day is over $40 million in subscription revenue alone and that's margin accretive because we don't have that the lower-margin usage pulling that down.
- Jim Fish:
- Makes sense. Congrats, guys. Thanks
- Dan Burkland:
- Thank you, Jim
- Operator:
- Taking our next question now from Terry Tillman at Truist.
- Terry Tillman:
- Yes. thanks for taking my question as well. I'm not going to ask Dan if there's a $50 million ARR deal this upcoming quarter. That's not one of my prepared questions. I'll go with my prepared question. It's a slight two-parter. So on IVA where do you think you are in terms of like innings in terms of traction with the installed base going back to them and just the attach rate on new deals? I'm just kind of curious, how long of a tail we have because it seems like it's a real new key product cycle. And then the second part of it is, how will Agent Assist compare to IVA in terms of impacting ARR in general? Thank you.
- Dan Burkland:
- Yes. So great question. We are in the very very early innings. We're just getting started with IVA. If you really look at the market, we talked about attach rate of 10% to our Enterprise business at the last quarterly meeting. And if you think about it that's the folks that are saying great we love the story. We're going with Five9 and we're going to start with probably an initial use case, which is kind of the obvious high-volume low-complexity let's bring that on to the platform. But as we've talked about over the years those customers are going to start adding use cases. What else can we automate? What else are customers getting comfortable with, speaking to a voice interface that's not a human being. And I think that comfort level, we've already seen it in our own behaviors talking to Siri and Alexa and other voice interfaces. It's getting more and more comfortable for people. I think if we introduce the same technology five, six years ago before those interfaces were prevalent throughout our homes, people would have kind of been scared off by them. So I think timing was critical. The accuracy is getting better and better. And so as we can implement these in more streamline and bring it down market in many cases to be kind of the standard you'll see more adoption. So that's one. And then if you look at our installed base, yes just the opportunity is there in spades. And we have yet to really penetrate that to any meaningful level to where it starts being truly incremental revenue coming in. So, stay tuned. I think this is an industry -- particularly the automation whether it's IVA or Agent Assist, that's just getting started and that's probably a decade or more of adoption that's going to continue to increase as companies -- as individuals get more comfortable with it. As far as Agent Assist versus the IVA contribution on revenue, I think Agent Assist is one where you can apply -- if you think about the automation, we're listening to conversations and transcribing into text then the question is that's the base level. And as Rowan said, we're leveraging other companies to do those functions. Then the question is what do you do with that data? And there are so many new opportunities and use cases that can leverage that data whether it's in real-time to coach agents whether it's historical to pull out insights and deliver to management to say, hey these are the most common things being either asked for and unaddressed on your phone calls or just being asked for that are mundane and repeatable questions. Well, wait a minute why don't we prescribe automation? 26% of your calls are asking this question and it's the same answer every time. Let's go apply IVA to automate that. So, a lot of this is consultation and it's a combination of Agent Assist. I think they both feed each other. The Agent Assist will help us feed more IVA opportunities.
- Terry Tillman:
- Thank you. Congrats.
- Operator:
- Moving on now to Will Power R.W. Baird.
- Will Power:
- Great. Thanks for taking the question. I know you all referenced record bookings again in the quarter. I'd love to just understand -- better understand how you view the key drivers there the key components of that. Any way to further break out IVA and virtual observer. I mean obviously those are some like very strong growers. How important now are those to bookings? So, any more color on that front would be great.
- Rowan Trollope:
- I don't know Barry if you want to take the financial outside of that one?
- Barry Zwarenstein:
- On the bookings side, well, it is pretty much, however, you cut and dice it reasonably strong or very strong. In the case of enterprise, as Dan mentioned in the prepared remarks, the bookings were just a record. The installed base is not seeing the likes of what they had obviously during COVID -- and -- but so the momentum is there. And in terms of IVAs, as we mentioned, well, those were doing very well and the prepared remarks, say they were the record bookings.
- Rowan Trollope:
- I'm sorry. Well, you had asked about bookings. I thought you had asked about the revenue, but Dan's probably comment on the booking side. Sorry about that. That's a Director problem.
- Dan Burkland:
- All right. Yes, looking at the bookings, what are the drivers you asked for the bookings -- the record bookings? And I think the key here is we talk about hitting on all cylinders, clichΓ©, but when you think about the drivers having the automation technology being brought into the contact center for the very first time in the 20-plus years, almost 30 years I've been in this space really is driving decisions. And the fact that you can only get these from the cloud is driving folks to make that transition to the cloud. And so that's number one absolutely is having this technology available, whether they implement it day one or not. And I say that because when we talk about our 10% attach rate and folks are trying the Agent Assist, what we're finding is the majority of the decisions though are being made because they hear the story, they see the demonstrations, and they say this is fabulous. Okay, first step is let's get everything off of our premises into the cloud and then we'll start adding this automation. So, it's helping Five9 win deals because of the story as well as the technology itself. And then I think to dovetail that it's what you do with technology right? There's -- I talked to a customer just this morning and we shared the fact that what the vendors that they were looking at, the suppliers, all three of us had way more technology than they would ever exploit or take advantage of. It's overkill for what they need. The question is which one is going to optimize and implement to extract the most value from what they're trying to accomplish? And that's where the partnership -- not just the technology, but the partnership. So, do we have a professional services team that will consult and come out and optimize it? And do we have an ongoing support model that allows them to take advantage of the changes that they're going to have in their business and how they can tailor the solution to that? And that's an area that oftentimes gets overlooked or neglected in the selling process. But we emphasize it heavily because we believe we're the best at it.
- Will Power:
- Thatβs great. Thank you.
- Operator:
- Next is Mike Latimore, Northland Capital Markets.
- Mike Latimore:
- Great. Great. Thanks. Just on the IVA pricing, is that still kind of consistent with what you've been thinking in the past? And given just the strength in IVA bookings, should we think about ARPU continuing to grow this year?
- Barry Zwarenstein:
- Yes, I'm going to hand it to -- go ahead Daniel.
- Dan Burkland:
- So, IVA pricing what we've got, if you think about -- we've come out with roughly a $450 per IVA. Think about that as the software and the virtual agent itself versus applying $200 to a human agent, plus the -- probably 10 times that for the human cost. So what we have found the ROI is extremely compelling. Rowan alluded to the example earlier the health care company that just basically were offsetting 36 humans roughly 10% of their workforce with the IVA. And so that becomes a very compelling new dynamic in our industry that we just haven't had in the past. And so, having that contribute to the new -- to the ARPU, we talk about attach rates. Oftentimes though, we'll get a 500-seat customer that might say, you know what, I don't know what my adoption rate is going to be. We talked about, well, what's the adoption rate? What percentage can you really deflect over to IVAs? It totally depends on so many factors. One is the industry you're in the types of questions you're handling in your contact center, the comfort level of your customers and the type of demographic you're dealing with there. So there's all these factors that weigh into it. So a lot of the big customers that have hundreds of seats of human, may just try it and see how it takes and then decide will it expand from there? So when you look at the ARPU, it's starting to contribute an incremental increase to that. But again, the volumes aren't high enough across the entire base, until we start really penetrating that base. That's when you'll start to see increase. Will it go up? Sure. To what degree? Hard to say at this point.
- Mike Latimore:
- All right. Got it. Thank you.
- Operator:
- And ladies and gentlemen, that is all the time we have for questions today. I'll turn it back to our speakers.
- Rowan Trollope:
- Thank you very much. We really appreciate the time that -- and you joining us today. Another great quarter for Five9 behind us. Again, the strength continues, strength to strength. We are in this sort of perfect storm of growth opportunities with the strategic enterprise and you can see that in our numbers. And we're looking forward to a fantastic rest of the year. Thank you all very much.
Other Five9, Inc. earnings call transcripts:
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- Q3 (2023) FIVN earnings call transcript
- Q2 (2023) FIVN earnings call transcript
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- Q4 (2022) FIVN earnings call transcript
- Q3 (2022) FIVN earnings call transcript
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- Q3 (2021) FIVN earnings call transcript