Five9, Inc. Q1 FY2020 Earnings Call

Good day, and welcome to the Five9 Q1 Fiscal Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Lisa Laukkanen. Please go ahead, ma'am.

Thank you for joining us today. On today's conference 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 and 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 the COVID-19 pandemic and 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 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 Five9's website.

Thank you, Lisa, and thanks to everyone for joining our call this afternoon. Our thoughts today are with those affected by the coronavirus. In these unprecedented times, we've been laser-focused on taking care of our employees so that we're able to continue delivering for our existing and new customers. As a result, our company is fully operational with 100% of our employees working from home, and we're continuing to execute on our key priorities. First, a quick summary of the results we reported today. Q1 revenue was a record $95.1 million, up 28% year-over-year, a Q1 record growth rate as a public company. Enterprise subscription revenue grew 33% on an LTM basis, and our adjusted EBITDA margin was 14.9%. These record results demonstrate the team's discipline and execution during a challenging time and our focus and commitment to our balanced growth strategy. Whatever happens in the macro environment, we will relentlessly maintain this focus as we navigate through 2020. Now let me address the issue that's front and center in everyone's mind, the impact of COVID-19 on our business and how we've adapted. We are not immune to COVID-19 headwinds, and certain parts of our business have been adversely impacted. We've had increased levels of reductions and cancellations in our commercial business, although after an initial burst, they have slowed somewhat. In addition, some enterprise customers, most notably in travel, hospitality, and consumer discretionary, have also been reducing seats. At the same time, we've experienced a surge in demand to deliver the work-from-home model. In recent weeks, our customers have transitioned their agents to work from home across the globe without hitch. With Five9, the agent only needs a computer, the headset, and an internet connection. Customers now recognize the critical nature of business continuity plans for their contact centers, and there is dramatically increased appreciation for the fact that cloud solutions can address these needs far better than on-premise solutions. We believe that through this experience, cloud adoption will accelerate as companies seriously consider shifting to a more flexible model, allowing agents to work from home, realizing benefits such as: providing agents with more flexibility and better quality of life, which, in turn, improves customer experience; expanded coverage with remote agents across different time zones; and meaningful real estate cost savings from a reduction of office space. For enterprise customers, sales and implementations are continuing despite COVID-19. Almost overnight, meeting on video with tools like Zoom is now the expected way to interact, build relationships, and conduct business with customers of all sizes. With respect to enterprise implementations, our native cloud platform allows us to complete all work remotely. Now while on the subject of implementations, I'm particularly pleased with our FastTrack Program, which was launched in April in response to COVID-19 demand. This program enables accelerated onboarding with a 48-hour turnaround. Although in some cases, we've got emergency response hotlines running in as little as 3 hours. The FastTrack Program also features affordable monthly pricing and flexible contracts to accommodate the current uncertain business conditions. I'd like to turn now to expense control. In January and February, as business was strong and above plan, we stepped up our hiring in some areas, most notably in sales. However, as it became evident in March how serious the situation was becoming, we stopped all travel and postponed events. In addition, we slowed hiring during the course of the current quarter, and we'll continue to do so based upon our tried and true disciplined approach of managing expenses, which is to have evidence of revenue increases before increasing fixed costs. That said, we want to emerge from this crisis with our leadership position further enhanced. And so we've made and are making incremental investments in key strategic areas, most notably, channel, strengthening our WFO capability, and expanding into the public cloud. Now Dan and Barry will be providing additional comments on the effects of COVID-19 in a few moments. So let me turn now to sharing progress on some of our key initiatives. As you know, we've been intent on significantly expanding our channel presence. Our new leadership team has decades of experience and deep relationships with channel partners domestically and internationally. We've also made the associated investments in areas such as marketing, training, and systems for channel expansion and enablement. Now the timing here was good as we've been seeing channel interest in CCaaS dramatically increase, as the understanding of the importance of having a cloud offering has really sunk in. Let me illustrate the progress we are making with some data points. First, we did more business with global SIs in Q1 than in all of 2019 combined. Second, over the past 2 years, our channel business through master agents and resellers has more than doubled. So far this year, we have trained more than 2,000 people from our channel partners as compared to just a few hundred a year ago. So as you can see, we are making concrete progress on this channel investment, and that progress is best demonstrated by a brand-new strategic partnership we are sharing today. I am thrilled to announce that we have entered into an exclusive agreement with AT&T Business, in which the Five9 platform will underpin its new AT&T Cloud contact center. The AT&T cloud contact center launched today, and we are committed to helping AT&T business customers rapidly and cost-effectively transform their customer experience through a superior omnichannel solution. Although, you will have seen our joint press release with Zoom issued a short while ago, announcing the launch of an agent-expert consultation experience. This solution seamlessly enables contact center agents to identify Zoom users who are subject matter experts and engage with them one-on-one or connect them to a customer. As a result, agents are equipped to answer questions more quickly and accurately with the goal of resolving customer issues the first time, every time. We would also like to mention that Eric Yuan, CEO and founder of Zoom, and I will be hosting a webinar on Tuesday, May 12, at 11:00 a.m. Pacific Standard Time, where you can learn our thoughts on how COVID-19 will change the future of our work environment and accelerate the adoption of cloud communications. I'm incredibly proud of the progress and momentum with our partnership organization and the world-class companies like AT&T and Zoom who have chosen Five9. Before sharing my final takeaways, I'd like to return to where I opened and talk about our team. I couldn't be prouder of what we've accomplished. Here are 2 examples out of many of how our team has stepped up. As you know, reliability is critical in a contact center. Your platform can have all the features in the world, but if the system is down, none of that matters. It's so important that reliability is quite literally the name of our company, Five9. Delivering a service with that kind of uptime is no small feat, and it's something that makes a huge difference to our customers. I'm pleased to report that in Q1, we achieved the highest uptime in the history of the company, despite transitioning to work from home and onboarding record numbers of customers and agents. And for all those customers we onboarded, our PS and CS teams continue to receive unparalleled Net Promoter Scores, reflecting the reliability, attention, professionalism, and dedication these teams have delivered, no matter the external conditions. Now while on the subject of our team, I want to mention that we are paying a COVID-19 relief bonus, totaling $1.8 million to employees at the senior director level and below. I feel this is entirely warranted given the dedication and support in these very trying personal times for all. I'll leave you now with these final takeaways. As I mentioned before, we are maintaining a vigilant focus on balanced growth and continuing our disciplined approach of managing expenses. We're proceeding with the utmost prudence until we have a better sense of the puts and takes affecting our business. Remember that we operate in a duopoly in a huge market at the beginning of a transition to cloud. This transition of legacy on-premises systems to the cloud only stands to accelerate, given the crucial need for business continuity and the benefits associated with agents working from home. While Five9 is not immune to macroeconomic impacts, the contact center is mission-critical to business operations and customer retention, which gives an advantage in any environment, and especially one in which more and more interactions are done online rather than in person. At Five9, we've attracted some of the best talent in the industry who are aligned with the values and the vision of our company. We've built a world-class management team that has managed through downturns before and has demonstrated a long-term track record of value creation. With our teams and our leadership in place, I am confident we've got the right folks to navigate Five9 through these unprecedented times and support our long-term growth strategy. Now I'd like to turn the call over to our President, Dan Burkland.

Thank you, Rowan. Once again, we had record bookings for Q1, and our Q1 pipeline approximately doubled that of Q1 2019 due to the sustained sequential growth for the last 4 quarters. Additionally, over 60% of deals were influenced by our ecosystem of partners. Before I turn to key wins for the quarter, I wanted to share something that was truly remarkable at the end of Q1. While our customers were all in the process of moving their workforce to a work-from-home model, our teams were also adjusting to our own work-from-home transition. And as Rowan mentioned, they didn't miss a beat. This was reflected in our Q1 bookings performance as well as achieving our largest quarter ever for seat turnups by our world-class professional services team. And now, I'd like to share some key wins for the quarter. Starting with what you may have seen in a recent press release from us where we jumped into action and enabled the hotline for the SBA loan program. Some of those calls go directly to outsourcers using Five9, and others are routed to non-Five9 based outsourcers. We also set up hotlines for New York, Detroit, and Orlando to assist these cities and counties with their COVID inquiries. The second example is an online bank, which had been outsourcing the majority of its interactions to a BPO operating on Avaya, which gave them very limited visibility and control over their operation. They chose to bring all of their contact centers in-house, looked at all the various cloud contact center options, and they chose Five9, which now gives them complete visibility and control, while also giving them a comprehensive omnichannel solution, including chat, email, and deep integration to their CRM. We anticipate this initial order to result in over $2.6 million in annual recurring revenue to Five9. The next example is a children's hospital health system, which was using an on-premises legacy system from Cisco. They launched a digital transformation project, including a modernization of their contact centers. After evaluating various cloud contact center solutions, they chose Five9 due to our deep Salesforce integration, comprehensive WFO suite powered by a Virtual Observer, as well as the ability to create custom workflows to improve communication and outreach to the parents of the children being treated. We anticipate this initial order to result in over $1 million in annual recurring revenue to Five9. Another key win for the quarter is a global imaging and electronics company. They were using Avaya, nearing its end of life, along with a legacy premises-based WFO solution from NICE, and required a significant upgrade or replacement of both. They looked at several cloud options, immediately eliminated 2 of them as they did not have the staff, budget, or luxury of time to build much of the functionality themselves. And they chose Five9 for the full omnichannel solution, WFO suite with QM, screen recording, and speech analytics powered by Verint, and a deep integration with Oracle Sales Cloud CRM and our ability to customize it with our world-class professional services team. We anticipate this initial order to result in over $2.6 million in annual recurring revenue to Five9. And now as we typically do, I'll share an example of an existing customer expansion. It's a Fortune 100 health care provider who has been a Five9 customer since 2014 for their in-home care and telemedicine divisions. They launched a project to modernize 3 additional business units. They chose Five9 not only for the flexibility and innovation they could achieve with our solutions, including chat, SMS, and Salesforce integration, but also due to the high-touch services model and experience they had with Five9 in their other business units. We anticipate this add-on order to increase their annual spend with Five9 from approximately $1 million to $1.8 million. As you can see, we continue to win and successfully execute on delivering upmarket for larger, more complex, and more demanding enterprises. This is a testament to our product engineering teams as well as our customer-first culture from our go-to-market teams, who are always looking to provide services and programs to help our clients deliver great customer experiences. With that, I'll hand it over to you, Barry.

Thank you, Dan. Before going into specifics, a reminder that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliation from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. We had another strong quarter with both top and bottom-line results exceeding our expectations. Revenue grew 28% year-on-year, driven primarily by our Enterprise business, with subscription revenue increased 33% year-over-year on an LTM basis. Enterprise now makes up 81% of LTM revenue, and our commercial business, which represents the remaining 19%, grew in and around 10%. Recurring revenue accounted for 91% of our revenue; the other 9% of our revenue was comprised of Professional Services. As a reminder, our continued success in winning larger and larger enterprise customers has introduced more fluctuations as they come onto the platform at different times and ramp at different rates. This, again, was the primary driver of LTM Enterprise subscription revenue growth rate coming in at 33% versus 34% last quarter and LTM dollar-based retention rate coming in at 103% versus 105% last quarter. First quarter adjusted gross margins were 64.1%, an increase of approximately 70 basis points year-over-year. First quarter adjusted EBITDA was $14.1 million, representing a 14.9% margin. This is a decrease of approximately 100 basis points year-over-year, which reflects the continued investments we have been making in go-to-market and R&D initiatives. First quarter non-GAAP net income was $11.1 million, a year-over-year increase of $1.1 million. With regards to balance sheet and cash flow highlights, DSO were 34 days in Q1. First quarter operating cash flow was $10.4 million, and we remain optimistic about our potential for continuing cash generation given our long-term model, our substantial NOLs, and our low DSOs. Now to guidance. Rather than reading you the guidance numbers in the press release as I normally do, I will instead explain how we arrived at our guidance. Essentially, we have 2 guidance environments. The first is the current quarter, which is partially elapsed and is taking place in a well-understood macroeconomic environment. The other is, of course, the second half. In coming up with the second half guidance, we had to be cautious, not because of any inherent weakness in our business, but because of the extreme uncertainty about the second half macroeconomic conditions. These uncertainties are only partially mitigated by the following 4 advantages we enjoy in terms of predictability and visibility, namely that: almost all of our revenue is recurring; secondly, almost all of the recurring revenue in the near term is from existing customers; thirdly, we have high visibility into these existing customers through our direct relationships; and finally, we have minimal customer concentration. With this background, I'll now turn specifically to second quarter revenue guidance. To prepare the revenue guidance for this quarter, we did the following: First, we spoke directly with customers that account for over 90% of our recurring revenue and determine the specific near-term expansion and contraction plans. Additionally, to date, we have agreed to extend payment terms for subscription revenues totaling $2.2 million for 51 customers and based upon current trends and ongoing discussions with customers, we estimate that payment extensions will increase to approximately $3 million, in total, by June 30. Of these payment extensions, we are assuming that customers owning half the total will not be able to meet their revised terms, and therefore, we will need to reserve $1.5 million against second quarter revenue. Based upon our analysis and considering that the second quarter is seasonally our most challenging quarter, we are guiding revenue to come in at $91 million at the midpoint. This represents a 4% sequential decline and 18% year-over-year growth, closely following the pattern we have established over the last several years. Turning now to the second quarter bottom line guidance. We are guiding to a midpoint GAAP net loss of $16.2 million, and a non-GAAP net income of $10.3 million. I would like to remind you that for each of the last 5 years, we have guided to a sequential decline in second quarter GAAP and non-GAAP net income. This reflects that the second quarter is, as I mentioned, our seasonally toughest quarter. This year, we are guiding to a lower sequential decline than we would have normally guided despite the $1.5 million reserve I mentioned a few moments ago. This is primarily due to COVID-driven net expense savings mostly from P&E and events. Please refer to our GAAP to non-GAAP net income reconciliation for the details of the items making up the difference. Turning now to the second half. For this projection, we assumed an L-shaped recovery and took the following steps: first, we again projected expansions and contractions. However, customer input for the second half was of limited use since our customers themselves are unsure of the second half seasonality and the COVID impacts. So instead, we cut down customer by customer, for all of our larger customers and made projections, taking into account the business sector they operate in and a continuation of the historical seasonal uptick that takes place in the second half. Additionally, we are assuming that our customers under financial duress who are requesting payment extension in the current quarter will not snap back, which will lower the second half revenue by an additional $3 million, on top of the $1.5 million we are forecasting to reserve in the second quarter. Also, we have assumed that we would have incremental requests for concessions of various forms, totaling $1 million in the second half bringing the total revenue reduction estimate for the second half to $4 million and to $5.5 million for the last 3 quarters. On the new logo side, Dan and the team scrubbed the forecast especially hard. Taking into account factors such as customer distraction, budget constraints, and project delays, largely offset by acceleration in work-from-home scenarios. Net-net, as Dan mentioned earlier, pipeline has strengthened and is now at an all-time high. However, we estimate that only a small positive impact from the new logos to our second half revenue, given implementation and ramp cycles. As a result of this sale, we believe it is prudent for now to keep our annual 2020 revenue guidance at $382 million or 16% year-over-year midpoint growth, the same level as our prior guidance. With respect to net income, we took the following steps: first, we reduced our bottom line by $5.5 million for subscription revenue that we estimate will be lost from customers unable to meet their payment plans, or to obtain other concessions; second, we further reduced the bottom line by $3 million for the key strategic investments Rowan talked about earlier that we believe will position us to emerge even stronger from this crisis; third, interest income is projected to decline by $1.7 million for the next 3 quarters due to recent rate reductions; lastly, we are pleased by $1.9 million from expense savings and by flowing through the $1.1 million non-GAAP net income beat in Q1 to the annual guidance. In summary, the net reductions above for the last 3 quarters totaled $7.2 million against our prior guidance. Taking into account this reduction and various other items detailed in our GAAP to non-GAAP reconciliation, we are guiding to a 2020 midpoint GAAP net loss and a non-GAAP net income of $43.9 million and $49.8 million, respectively. A concluding comment on our guidance. Those of you who have been following Five9 for some time know full well that we've always been prudent with our guidance, primarily to allow for the difficult-to-forecast second half seasonality. To the best of our ability, we have firmly maintained this prudent approach when developing the current guidance, especially given now that there's huge added uncertainty surrounding the second half macroeconomic environment. Finally, here are the customary estimates for modeling purposes. For calculating EPS, we expect our diluted shares to be $67.4 million and our basic shares to be $62.5 million for the second quarter of 2020 and $67.5 million and $62.9 million, respectively, for the full year 2020. We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $90,000 for the second quarter of '20, and $365,000 for the full year 2020. Our capital expenditures for the second quarter of 2020 are expected to total approximately $8 million to $9 million, somewhat higher than normal as it includes spending for our public cloud infrastructure. For the full year 2020, we expect capital expenditures to be between $22 million and $25 million, lower than our prior guidance of $30 million to $33 million as our San Ramon headquarters build-out is more likely to take place at the beginning of next year. In conclusion, we remain prudent and vigilant as we navigate through these uncertain times. As Rowan mentioned, we are laser-focused on continuing our tried and true disciplined approach of managing expenses, which is to have evidence of revenue increases before increasing fixed costs. At the same time, we will continue investing in key strategic priorities to emerge from this crisis even stronger.

We'll take our first question from Sterling Auty with JPMorgan.

Here is our hopes for everyone staying healthy through this quarantine situation. Just in the surge in enterprise business that you talked about, can you give us a sense, what portion of that, perhaps, could be temporary? So things like special programs that the government might be rolling out that can go away versus what portion of it do you think are permanent sticky seats that stay with you well beyond the work from home situation?

Dan will answer that one.

Yes, Sterling. Thanks, and that's a great question. As we came through the end of Q1 and entered into Q2, we did see some very specific COVID projects, as we mentioned in the prepared comments. The SBA loan program, we jumped into action, and then we set up a few hotlines. And there were a handful of folks that came to us and said, 'Hey, stand up something quickly so that we can get through this.' We were very conservative in how we booked those and didn't book them as permanent anticipated revenue. So we booked those in the 2- to 3-month type of cycle that we expect them to stay online. And again, that was only a handful of opportunities. So Q1 was very, very strong, as we mentioned, from a bookings perspective, and we executed very well through the last few weeks as this impacted us. And that included some puts and takes, but we've seen a great build to the pipeline, as I mentioned, and we feel very strongly about the fundamentals of the business.

Our next question comes from Terry Tillman with SunTrust Robinson Humphrey.

Thank you for all the insights. They are very helpful to us. I will focus on AT&T, which is quite interesting to me. You are developing channel relationships and expanding the ecosystem, which seems like an additional advantage. Regarding AT&T, can you provide some background on whether they have had a contact center strategy with their customers in the past? How was that evaluated formally? And how should we consider this in terms of potential new growth opportunities? I realize I asked one question with three parts.

I'll start with the last part of your question. Yes, this is definitely going to be a growth driver for us. It's not included in the 2020 numbers, so that's an upside. Regarding the first part of your question, they have previously offered a cloud contact center solution. We have now been selected to help them launch a new product, but they have had other contact center solutions in the past as well. We will be powering their AT&T cloud contact center, which is their primary offering in the market and is targeted at customers of all sizes. We are genuinely excited to have established this relationship with them. They have signed an exclusive agreement with us, making this a significant opportunity. AT&T is a clear market leader in this space. They also have a Unified Communications as a Service offering powered by RingCentral, which will complement their CCaaS offering. This is very exciting for Five9.

And we'll take our next question from Meta Marshall with Morgan Stanley.

Just a couple of questions for me. Just in terms of usage as a percentage of revenue, how did that trend during the quarter? And were there any spikes that we should be mindful of as we head through the year? And then maybe, Rowan, just for you. How do you see kind of sales cycles post-COVID? Do you see them kind of shortening, that people are more aware or too early to tell?

Barry, you want to grab this part?

Sure. Could you repeat that first part of the question? I didn't hear it because I'm on a cell phone.

Okay. So just on usage as a percentage of revenue and whether there was any spike here that you should remind on.

Perfect. No, the usage revenue continues very steady in relation to our subscription. What's happening is that more and more of our business is enterprise, as you know, 81% now. And those enterprises are very effective in utilizing the agents efficiently throughout the day. And you can only speak so many hours a day. And so it stays reasonably constant. And Rowan?

Certainly. Here’s the rewritten Earnings Call remark: I'll address the second question you mentioned regarding sales cycles. There was a concern about whether enterprises would be open to making deals through Zoom meetings and virtually, or if in-person interactions were necessary. This concern has been definitively resolved; business continues through Zoom and other messaging platforms. We are successfully closing deals, and customers are actively engaging with us, particularly in the Enterprise sector. We've experienced this trend as recently as the end of Q1 and it's continuing into Q2. Our sales organization is functioning effectively, closing both large and small deals across all segments of our business, and it's encouraging to see that clients have adapted to this approach. Toward the end of Q1, we actually noted some acceleration in deal closures. Customers in our pipeline decided it was more straightforward to transition to the cloud now rather than postpone by trying to use their current on-premises solutions in a COVID environment where agents needed to work remotely. While we are cautious about the second half of the year, we have clear visibility into Q2 and have provided guidance accordingly. For the latter half of the year, we remain cautious in our forecasts and do not expect significant lengthening of sales cycles. However, given the uncertain macroeconomic environment and potential recovery trajectories, we are remaining prudent with our guidance. As of now, we do not see any significant impacts from COVID affecting our sales cycles or other aspects.

We'll take our next question from David Hynes with Canaccord.

Maybe dig in on the sales motion a bit, and maybe this is for Dan. Dan, how would you characterize the mix of expansion bookings versus new customer bookings that you've seen kind of post-COVID?

Yes, that's a great question, David. We've observed strong performance in both the commercial and enterprise sectors, especially with our existing customers. While some industries like travel, hospitality, and retail are facing challenges due to the COVID crisis, we fortunately have minimal exposure in those areas. On the other hand, sectors such as health care and financial services are actually seeing significant growth and increased business. Thanks to our direct support relationships with customers, we conducted a thorough analysis of our enterprise accounts. We not only categorized them by industry but also engaged with them directly to understand their expectations for business growth. This effort revealed that 50% of our revenue comes from the top three industries we serve: financial services, health care, and business services, all of which remain robust. Additionally, 15% of our income comes from food delivery, communications, technology, and education, which are also poised for growth. Only 15% of our business is tied to travel and consumer discretionary sectors, so we feel fortunate to have limited exposure to the broader negative impacts affecting other companies in our industry. Overall, we are performing well in terms of new customer acquisition, perhaps more successfully than expected, especially in the SMB and commercial sectors. As we implemented strategic initiatives in our go-to-market approach, we've segmented our enterprise team, which has proven effective. Our strategic team is performing exceptionally and exceeding expectations. We have also seen our pipeline double compared to last year. Changes to our commercial leadership have yielded positive results, and our channels and partnerships are thriving as well, with new collaborations bringing in substantial business. This positive momentum is reflected in the activity levels of our new channel partners and global system integrators, which have surpassed previous years' performances. Overall, our go-to-market strategy is functioning at a high level.

That's super helpful. Rowan, maybe one, just very quick one for you, if I could sneak it in. Does the current environment change the timeline or expectations for a second half rollout of your AI agent assist effort?

Yes. During this COVID crisis, we have been focused on the basics for our customers, primarily getting them set up to move their agents to work from home. To be honest, our hands are full and we are overwhelmed with this urgent task. Therefore, I don’t think this issue is at the forefront of customers' minds right now. However, we did meet our goal of having five customers actively signed up to use our AI technology by May, which we accomplished. We are not altering our release plan and will continue to launch the products we've discussed. These are entering the market, and we now have five customers who are piloting the technology. While we have achieved our milestones in that area, my focus will remain on the essentials for our customers, as there are many opportunities to address there. I believe interest will grow again, especially because of the potential ROI savings available. We have a significant enterprise customer we are speaking with tomorrow, and they are particularly interested in our AI technology. So, while it remains relevant, it isn't a major focus for customers during this crisis.

We'll take our next question from Raimo Lenschow with Barclays.

I hope you guys staying healthy as well. The quick question on the discussions with enterprises around moving towards the cloud. In theory, this should be like one of the main events that really triggered that, where we've been talking for a low level of adoption for cloud for a long time, but now, in theory, everyone should see like, look, you should be in the cloud. What are you hearing in terms of, like what is strategic, where it's tactical? And what do you see in terms of enterprises' willingness to go high up in terms of seat count and should be comfortable to run in the cloud now?

Raimo, this is Rowan. In response to the second part of your question, we've seen a consistent increase in larger customers, with enterprises that have many thousands of seats transitioning to the platform. We're experiencing that number continue to rise and are achieving significant success in that area. Can you please repeat the first part of your question?

I was wondering, when you speak with your clients currently, how much of the conversation is focused on strategic matters? Are we in that strategic phase yet, or are we still dealing with tactical issues?

I believe it's more strategic now, and there seems to be a growing recognition, especially following recent events, that the shift to cloud isn't something that can be postponed any longer. People are beginning to realize that the time to act is now. I've noticed this sentiment echoed by others in the industry, including Microsoft’s Satya who mentioned that we’ve seen two years’ worth of digital transformation happen almost overnight. Many IT leaders are making similar statements. This indicates a significant shift in how cloud is perceived, likely leading to greater acceptance and a possible acceleration in its adoption. However, it’s important to note that transitioning contact centers, unlike platforms such as Zoom Meetings or other cloud solutions, is not an overnight upgrade. The best indicator we can provide is our pipeline, which has doubled this quarter compared to the same quarter last year, representing twice the opportunity for us. AT&T, for instance, has positioned its cloud contact center as a leading offer, illustrating this trend. There are numerous signs pointing toward increased acceptance of cloud as the standard option, and we hope to see even more acceleration in the adoption of cloud contact centers.

Our next question comes from Matt VanVliet with BTIG.

I'm interested in exploring the channel further. It's a significant achievement to have global system integrators finally support the product. Could you explain what was happening at the end of 2019 that encouraged these companies to engage? Additionally, how has this process, which I assume has sped up in recent months, added value for them in choosing your platform?

Yes, Matt, this is Dan. I'm glad to address that. As you might remember from past earnings calls, we've talked about our partnership with Deloitte that's been ongoing for several years. This has come about in two main ways. First, the market has been moving towards larger enterprises asking global system integrators for assistance with digital transformation, cloud migration, and market assessment, while bringing in key players. Second, we made a focused effort to enhance our collaboration. We realized we achieved significant results with a small team working alongside Deloitte, and we thought about the potential if we strengthened our efforts with firms like EY, Slalom, Accenture, and others. Building these relationships takes time as they need to develop practices and refine their skills to effectively engage with the market and support their clients. We have actively supported the growth of these connections. Consequently, the performance we saw in Q1, which was significantly higher than the previous year, can be attributed to the maturation of these relationships. We are beginning to witness a consistent flow of business from multiple partners, transitioning from a heavy reliance on Deloitte to now including five or six others all actively closing deals, which has bolstered our momentum. I don't foresee any negative changes in this trend. In fact, it's likely that we'll see an increase in momentum, particularly in light of what Rowan mentioned. As businesses emerge from the current situation, they recognize the need for continuity and the importance of workforce flexibility to work from any location. Whether due to remote work or unexpected disruptions, having that flexibility provided by the cloud is essential. Our system integrator partners are leaning in and assisting us in positioning this with large enterprises, which is very positive for us.

We'll take our next question from Alex Kurtz with KeyBanc Capital Markets.

Yes. I hope everyone is safe and healthy. Ron, I want to revisit some of the earlier comments regarding your perspective on the current quarter and the second half of the year, especially the dynamics involved. There seems to be an assumption that the current work-from-home environment and the increased demand for customer service resources might lead to an increase in seats with some of your larger clients. Could you clarify this? There may be a belief that since everyone is working from home, companies are no longer limited by physical office space, allowing for more employees and therefore more seats per customer. Additionally, could you discuss how this compares to the retail and travel sectors, particularly the contrasting impacts they may have had as we updated our guidance for the remainder of 2020?

Sure. We are definitely noticing an increase due to the work-from-home trend and the growing recognition of cloud solutions as a viable option. Anecdotally speaking, we are observing significant strength in our commercial segment, suggesting that smaller businesses, which previously relied more on physical retail presence, now understand the importance of having agents working from home to effectively serve their customers. This has led to unexpected strength in that segment. In the enterprise segment, particularly in healthcare and certain areas of financial services, we've seen an increase in the number of seats being added. This could indicate either their business is performing relatively well or they need to adjust how they operate with contact center agents. We have also seen some reductions and payment term extensions, complicating the overall picture a bit. For the first and second quarters, it seems slightly positive for us, which is reflected in our guidance for Q2 and the performance in Q1. For the second half of the year, we are taking a cautious approach. Overall, we feel very confident in our strategy and our method. We believe this recent macro environment has raised awareness of the need for cloud solutions, which is showing in our bookings. However, we are being careful with our full-year projections to avoid overextending ourselves. We have always maintained this prudent stance, and as we gain more clarity, we will continue to push the business forward and make the necessary adjustments. That's our current situation.

We'll take our next question from Jeff Van Rhee with Craig-Hallum.

Great. I have a couple of questions. Rowan, to follow up on the last topic from a slightly different perspective, when considering a large enterprise that was using a legacy solution and had to shift to a work-from-home model during this crisis, I have two inquiries. First, do you have an estimate of what percentage of those employees might continue to work from home? And secondly, in the transition from a centralized premise solution to remote work, what opportunities did you see to attract such customers, perhaps at an accelerated pace? You've been replacing legacy systems for some time now, so what does the conversation look like with those customers transitioning away from their legacy premise solutions from your perspective?

Yes, let me start with the first point. What we've observed regarding on-premises setups and the shift to remote work is that companies that had their systems already configured for remote access found it easier for their agents to transition to working from home. There have been reports from on-premises vendors claiming they have moved hundreds of thousands of agents to remote work. While it is definitely feasible to set up remote work using an on-premises environment, it is quite challenging. Enterprises must manage all the necessary infrastructure for their agents. For instance, if an on-premises agent was already using a soft client, that situation is manageable. However, many on-premises agents rely on physical desk phones, complicating the transition. This situation requires either switching them to soft phones or relocating the hard phones, which adds complexity and necessitates additional hardware for VPN connections for voice over IP services. Moreover, maintaining robust VPN infrastructure and security becomes increasingly difficult as the organization expands. While it is not impossible to enable remote work for agents, it certainly isn't easy. For on-prem customers solely planning to relocate their agents, this could be inadequate to convince them to abandon their on-prem solutions for cloud alternatives. However, if they were already contemplating switching to the cloud or listening to industry discussions about the ease of that transition, they would likely realize that moving to the cloud simplifies things significantly, with vendors handling infrastructure and built-in security. We’ve effectively demonstrated this. For example, some customers in our pipeline who were considering cloud solutions opted for us when they needed to set up hotlines for COVID-19, accelerating their deals and enabling them to deploy dozens or even hundreds of agents before finalizing larger contracts. We've also engaged with large enterprises that have shared positive experiences regarding our services. Recently, during a call with one of our customers, they relayed that agents transitioned to remote work by simply logging in, without encountering any complexities. Regarding the percentage of agents who might continue working from home, I believe this trend will persist. One of our biggest customers is a gig economy contact center BPO called NexRep, which employs thousands of agents who benefit from flexible working hours, allowing them to choose when to log in and take calls. I am confident a proportion of these work-from-home agents will continue this arrangement because it offers advantages. Given that contact centers typically occupy large spaces with close quarters, I don't foresee a return to that model for at least the next couple of years until a vaccine is available. Therefore, I believe this shift will endure and transform how contact centers are structured. The benefits of remote work are significant and hard to overlook, likely driving further cloud adoption. This is a crucial consideration and aligns with our strategy indicating we are moving in the right direction.

We'll take our next question from Scott Berg with Needham.

Congrats on a good quarter. I guess, I wanted to focus on the incremental investments that Rowan called out. And Barry, I think you said was about a $3 million incremental expense for the bulk of the rest of the year. I guess, the question there is, can you give us a little bit more color on what those additional kind of areas investment are? And then secondly, why make the investment today? I think you're specifically calling it out, which means to me, probably seeing something that's an opportunity that might be unique versus embedding this into the guidance just three months ago for the year?

Thank you, Scott. The majority of that investment was made in the first quarter and the beginning of the second quarter, primarily focused on staffing. This includes our channel organization with AT&T and our sales organization, where Dan outlined the three pillars of his transformation. On the enterprise side, we have been bringing in new enterprise sales representatives. Most of the hiring occurred as we gained momentum in the first quarter, with many of those hires starting on April 1. The bulk of the $3 million expense has already been accounted for. As the COVID pandemic progressed, we significantly reduced our hiring efforts. Currently, we are not in a position to continue hiring large numbers of new representatives, and the pace has slowed to a minimal level since the situation unfolded. However, the full effect of the majority of this hiring will contribute to nearly $3 million for the entire year, which is reflected in our current figures. Does that clarify things?

We'll take our next question from Will Power with Baird.

Okay. Great. Yes. I want to actually circle back on AT&T. It seems like it could be a really significant opportunity over time. I recognize it will take some time to ramp up. I know this could, might in some respects, be a better question for them. But I'd love to get your perspective. I guess, what I'm trying to understand is, what really kind of set you apart from the previous cloud contact center solutions, I think they were offering? What was more unique? Or what kind of I guess, want the deal for you, so to speak, on that front? And then, b, I mean, how do we get a sense for confidence of how broadly this will be pushed within AT&T's different units across SMB, enterprise, et cetera?

Yes, you're absolutely right. It's a significant opportunity for us and a huge validation of our technology and innovation. AT&T provided feedback on our ability to execute, which has outperformed everyone else. This is largely due to our go-to-market and professional services organizations. Andy Dignan, who Dan hired to lead his channels in the professional services team, and his team have excelled in execution compared to our competitors. Our ability to execute quickly was crucial, alongside what I believe is the best technology available. It's not just about the technology; execution matters too. Dan has done a fantastic job building a team with experience in the service provider space. Staffing a channel organization to work with service providers requires a unique skill set that differs from working with other types of resellers. It may take longer to establish these large-scale partnerships, but once they do gain momentum, the potential is vast. We're really excited about this, and Dan and his team, together with Andy, have performed exceptionally well. Thank you for the question.

And that's all the time we have for questions today. I'd like to turn it back to management for additional or closing remarks.

Well, thanks, operator, and thanks to everyone for joining us today, and trust you're all staying safe and healthy. In closing, look, I'm really pleased with our strong first quarter performance. And our number one priority right now is to take care of our employees so that we can continue to serve our customers to the best of our abilities. And while we're taking a prudent stance on the impacts of the macro on our business in the second half, we wanted, today, to make sure that we gave you incremental transparency into the business. I think Dan and Barry have done a great job of giving you some of the underlying metrics around bookings and orders and the strength that we're seeing there. Longer term, the fundamentals of our business are strong, and we are going to continue to execute in the disciplined way that we always have at Five9. So with that, I'd just like to say stay safe and stay healthy. Thank you all very, very much.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.