Five9, Inc. Q3 FY2021 Earnings Call

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 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 the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon as well as in the appendix of our investors deck and available in the Investor Relations section of Five9's website at investors.five9.com. And now I'd like to turn the call over to Five9 CEO, Rowan Trollope. Please go ahead.

Thanks, Lauren, and thank you all for joining our call this afternoon. I am very excited to be here today, and I'm pleased to report strong results for the third quarter. As you'll see, our teams haven't skipped a beat on execution. Following the decision to terminate the proposed acquisition by Zoom, our leadership team and the entire Company are excited to continue the momentum we've built, driving industry-leading growth and transforming customer engagement. We are executing a great business strategy against a massive market opportunity. Under the numbers, I'm pleased to report third quarter revenue grew 38% year-over-year to a record $154.3 million. Revenue growth continues to be driven by our enterprise business, as demonstrated by LTM enterprise subscription revenue, which grew 51% year-over-year. Dan will highlight the tremendous bookings success we are enjoying both in new logos and in expansion deals later in the call. At the same time, our commercial business saw more than 30% growth this quarter, benefiting from targeting commercial buyers who are more focused on enhancing their customer experience, as well as leverage from our channel expansion. As these results illustrate, Five9's fundamentals remain strong and are driven by market momentum, continued product innovation, and our go-to-market machine. The contact center market continues to be driven by digital transformation. Enabled by the shift from on-premises to cloud, and by growing demand for AI and automation. We don't expect these immutable trends to abate for the foreseeable future. This is evidenced by our annual CX Summit, which was our largest to date with over 3,000 customers, partners, and prospects. AI and automation were central themes. We highlighted delivery of over 200 new features across our products, including WFO, digital channels, self-service, voice stream, hyperscale architecture, and enhancements to our IVA platform with the launch of Studio Seven. We've taken the lead in providing AI-powered solutions across live and digital agents with our agent assist and IVA technologies, enabling more than 750 customers to automate routine interactions. I believe automation is key to managing digital and human capital, especially with the tight labor market observed worldwide. In summary, our performance for the quarter underscores the strength of our platform and the value we deliver to customers seeking to modernize and transform their contact centers.

Thank you, Rowan. As mentioned, we continue our strong momentum executing successfully upmarket in larger enterprises, positioning our automation solutions and expanding our international presence while also leveraging our channels and partner ecosystem. This momentum is reflected in our bookings over the last two consecutive quarters, with Q2 being the largest in our history, and Q3 setting that record even higher. Our pipeline continues to grow to record levels, both in size and in quantity of opportunities. I'd like to share some key wins from new logos, as well as significant expansions from existing Five9 customers. The first new logo is a health insurance provider in the Southeast who is using Avaya with no self-service offerings. We partnered with a reseller who had previously maintained their systems and helped position Five9 to modernize and automate the customer experience. This initial order is anticipated to generate over $3.8 million in ARR for Five9. The second new logo is a medical logistics company that chose Five9 for its complete omni-channel solution and will bring in about $2.2 million of ARR. Lastly, an existing global parcel delivery service, initially ordering over $14 million in ARR, has since expanded to an expected total of over $23 million in ARR. Overall, these wins illustrate our continued ability to develop solutions that are forefront in achieving our customers' goals to provide innovative experiences. I will now hand it over to Barry.

Thank you, Dan. Before going further, I want to remind everyone that unless otherwise indicated, financial figures I will discuss are non-GAAP. We had a strong quarter with revenue growing 38% year-over-year, primarily driven by our enterprise business where our LTM subscription revenue increased 51% year-over-year. I'm pleased to report 7% sequential revenue growth, reflecting the ongoing durability of our underlying business. While we estimate that the previously disclosed mid-single-digit one-time COVID benefit extended through Q1 '21, we have retained virtually all of the pandemic benefit. Our enterprise revenue made up 84% of LTM revenue, with recurring revenue accounting for 92% of our total. Third quarter adjusted gross margins were 64.1%, a slight decrease year-over-year, primarily due to investments in professional services to support enterprise momentum. Regarding our adjusted EBITDA, we experienced a margin decrease driven by lower gross margins combined with increased investments in R&D initiatives. As we look to the future, we will detail our long-term targets aligned with our $2.4 billion revenue target and 23% EBITDA margin during our Financial Analyst Day on November 18th. We expect strong growth rates and will focus on capitalizing on market opportunities while continuing to enhance our product offerings.

Hey, guys. Great to see everyone and congrats on the results. Dan, maybe I could start with one for you on the go-to-market. It's great to see massive expansion on these mega deals that you guys have closed in Q4 and Q1. Can you just talk about the pipeline for the mega deals going forward? Are there more of them out there and has the narrative that your competitors are using against you changed?

Great. Thanks, DJ. I appreciate it. From a pipeline perspective, the mega deals continue to grow. Our strategic teams are handling the high-end enterprise accounts, which has around a 10X coverage over the anticipated quota. We feel very fortunate about the future and are optimistic about landing more mega deals.

Thanks, DJ. We are reaffirming our commitment to the 2026 long-term target. Our confidence stems from our past performance and the size of the market. While we expect fluctuations due to investment acceleration, we believe our strong management team can handle these challenges effectively.

Great, thanks. First, could you provide some clarity on why some of the 8-figure deals from earlier this year might take longer to roll out? Also, how have customer conversations evolved post-acquisition dissolution?

Sure, Meta. Some larger deals are indeed complex and involve numerous internal discussions before decisions are made. However, conversations have been relatively balanced without any negative implications from the dissolution.

Exactly. The delay is primarily due to complex decision-making processes within larger companies, not the loss of momentum.

Did the Zoom merger impact any deals or cause them to be put on hold? And if so, have we closed those since that deal has been terminated?

Nothing was put on hold. There were a few accounts that wanted to clarify support before proceeding, but ultimately, everything remained on track, and we’ve had two record bookings quarters.

The COVID-related effects have started to abate and while we'll face tough comparisons next year, the fundamental strength of our sequential growth rates will remain evident.

Are you seeing improved pricing for new enterprise wins with the addition of IVA?

We are starting to see an uptick in ARPU, primarily due to our suite of applications, which include delivery across multiple channels.

I wanted to revisit comments around partner traction. Is there potential for partners to help drive larger deals?

Yes, we've seen our resellers bringing in million-dollar opportunities, and our channel partners are capturing more high-end market deals, contributing to our overall growth.

How have your partners reacted after the announcement of moving forward independently?

We maintained our connections with our partners throughout, and post-announcement, we've seen additional engagement from some partners. This supports our strategy to work with various vendors.

Are you still seeing strong interest in bundled UC/CC offerings, and how do you plan to maintain relationships in that segment?

The LOB buyers remain the vast majority in our pipeline. The market interest is strong without a need for us to step into bundled offerings, allowing us to focus effectively on our core strengths. I just want to close by thanking all of our employees and partners. The real heroes of all of our execution and the crisp delivery that we have been so well-known for on Wall Street is as a result of our employee base. Thank you all very much. See you on financial analyst day. Bye bye now.