Five9, Inc. Q4 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 investor 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 thanks to all of you for joining our call this afternoon. I’m pleased to report that we closed out the year with excellent results for both the fourth quarter and 2021. As you’ll hear, the market momentum remains very strong, especially up market driven by the transition to cloud and digital transformation as well as our differentiated AI and automation offerings. There’s no question our world-class team has continued to execute like clockwork. Now, fourth quarter revenue grew to $174 million, up 36% year-over-year against the prior-year quarter that was raised by one-time COVID benefits. For the full year 2021, revenue grew to $610 million, an increase of 40% year-over-year driven by the continuing strength of our enterprise business where LTM subscription revenue grew 51% year-over-year. Continuing our commitment to balanced growth, I’m pleased to report that despite the increased investments in a number of areas, including professional services and public cloud, our fourth quarter adjusted EBITDA came in strong at 21%. These results clearly demonstrate that not only do we continue to be a leader in delivering on this massive and barely penetrated opportunity, but also that our business model supports a very attractive combination of high growth and strong margins. Today I’m going to focus my comments on three of our key growth drivers: AI and automation, our march up market, and our global expansion. So let me begin with AI and automation. Our intelligent virtual agent or IVA has captured the market’s attention as illustrated by the following statistics: in 2021, IVAs accounted for approximately 10% of enterprise bookings to new logos. At the same time, IVA usage tripled year-over-year. Now while it’s still very early days, these are encouraging signs. And let’s step back for a minute and talk about the opportunity. It’s estimated that the incremental TAM from automating contact center labor is $34 billion. And we believe that there are two macro factors which will ultimately, but inevitably lead to widespread automation of labor. The first is the increasing acceptance by customers that technology has reached maturation and works, resulting in tangible ROI for our customers by automating repeatable tasks and realizing labor cost savings. The second is that contact center leaders face labor shortages and high turnover rates making automation a necessity for operating a contact center efficiently while continuing to improve customer experience. We are laser-focused on further increasing IVA cross-sell rates for our new customer bookings and into our installed base, and we plan to achieve that along three vectors. The first is continuing to step up the rate of innovation. We recently launched Studio Seven, which is our new conversational AI orchestration interface. This platform helps customers get started faster and allows them to implement increasingly complex automations, as well as enabling entirely new technologies such as virtual voiceover, which makes Five9 IVAs sound incredibly lifelike. Second, we’re ramping up go-to-market spending to meaningfully accelerate our IVA sales momentum. Most notably, we’ll be increasing the size of our dedicated AI and automation sales team, expanding professional services and customer support, and stepping up our marketing campaigns. Finally, we will increase our focus on selling IVA standalone into non-contact center opportunities with unified communications, CRM, and service providers. We had success with this motion last year with a $1.7 million European IVA booking from an internationally recognized hotel chain where we didn’t sell the Five9 virtual contact center at all. And we believe this is a large untapped opportunity for us. Also bear in mind that on occasion, these standalone IVA opportunities morph into full RFPs for the entire contact center. While IVA is our most scaled AI solution, we continue to invest in making our total offering the industry-leading AI engagement platform. Here's a brief update on our other AI investments. First, we continue to see growing customer adoption of agent assist with deals in the double digits across various industry verticals. We expect continued strong adoption as customers realize improvements in KPIs such as customer satisfaction, average handle time, first call resolution, and so on. We will soon be launching new capabilities to continue to improve our agent assist offering, including agent script adherence through real-time guided checklists that coach the agent on what to do next, and then automatically verify that they do it. Second, to help us scale our IVA and agent assist to every customer globally, we’re investing in a technology we call conversation architect. This technology provides a central hub for building and managing AI applications such as IVA and agent assist in the contact center. Conversation architect provides a no-code solution that enables customers to train AI models off of their own data without needing machine learning or AI expertise, just business expertise. Now, traditionally, this training process has required machine learning experts that are hired as part of a lengthy and expensive consulting arrangement. But with conversation architect, these costs are dramatically reduced, opening up a larger market opportunity for AI in the contact center. Finally, in addition to investing in our own AI products, we’re investing in our AI platform with technologies like Voice Stream, which is a groundbreaking and developer-friendly cloud to cloud real-time streaming API. Partners are building products on this platform with use cases ranging from customer authentication via biometrics, agent assistance, agent coaching, training, real-time speech analytics, and sentiment analysis. When customers turn to Five9, they can use our products or choose from a range of third-party products built on top of our platform. So that’s AI. Now let me turn to our next growth driver, namely, our march up market. Enterprise accounted for 84% of fourth quarter LTM revenue. We continue seeing especially strong growth in the high end of enterprise, and in a moment Dan will elaborate upon the tremendous booking success that he and his team delivered in the fourth quarter. But in the meantime, let me simply mention that we ended 2021 with 134 customers generating more than a million dollars in ARR, up from 91 a year ago. These larger customers are the fastest growing part of our business with a CAGR of 93% since inception, and have meaningfully higher retention rates. So while AI and automation have emerged as the latest driver behind our success, the market builds upon our strengths such as reliability, channel, and trust. Let’s start with reliability. Reliability, as you know, is simply non-negotiable. A seek-as provider can offer all the features in the world, but these features don’t matter at all if the system is down and supporting customers is impossible. The investments we’ve made and are making in our cloud operations team have allowed us to successfully build out our public cloud operations and mature our operational disciplines through tooling and automation. These investments have also allowed us to achieve what may be industry-leading uptime and velocity. We’re doing that globally. I couldn’t be happier with the results we’re achieving in this very important area. Next, we continue to develop our channel including systems integrators, service providers, technology solutions brokers, and ISV partners, and I’m extremely proud of how far we’ve come in this area and the potential that still remains. Our strong bookings growth continued with channel bookings increasing 66% year-over-year in 2021. The channel loves how easy Five9 is to work with, and this continues to be a differentiator for us in the market. One of our marquee partners, AT&T, is building momentum across a wide array of verticals. We now have over 50 customers sold, and these wins range from large enterprises to small and include public sector successes as well. Agents through the AT&T partnership are servicing customers in over 60 countries, indicating the full reach of this partnership. Additionally, the recent launch of the AT&T IVA is based on the Five9 IVA we talked about earlier. Our relationship with AT&T continues to grow from strength to strength, and we’re also pleased to support them in their latest campaign, the CX Revolution, which is focused on helping customers migrate from their legacy on-premises contact centers to the AT&T Cloud Contact Center powered by Five9. Take a look at CX-revolution.com. Finally, and perhaps most importantly, is the trust we’ve built up over the years with our customers. We’ve made sustained and significant investments in professional services and customer support, allowing us to commit to and deliver lightning-fast implementations worldwide. The result of this is our industry-leading net promoter scores of 85 and higher for both professional services and customer support. We’re seeing even stronger growth outside the U.S., where most agents are located. First, some statistics: International revenue from companies headquartered outside the U.S. in the fourth quarter grew 57% year-over-year and marked the fifth of six quarters where the growth rate exceeded 40%. The investments we’ve made in expanding our international business are clearly paying off in these results. We are focused on continuing this growth and achieving our objective of having the international business be a mid-teens part of overall revenue by 2026. Quite simply, 2022 will be an exciting year with more international headcount, more channel partnerships, more marketing, more public cloud instances, more languages, and so on. In conclusion, we’ve made significant progress and executed strongly on all fronts this past year, while solidifying Five9 as a market leader, with an even greater opportunity ahead. Before turning it over to our President, Dan Burkland, I’d like to give a huge thanks to all of our employees across the world. You’ve delivered consistently and exceptionally despite the difficulties and the worst of COVID-19. None of this would have been possible without you, so thank you. With that, let me turn it over to Dan. Dan, go ahead.

Thank you, Rowan. As mentioned, our go-to-market machine continues to accelerate up market, and we not only set records for bookings and pipeline but also shattered the record for the number of new logo bookings over a million dollars in ARR. Now I’d like to share four examples of these record wins, all of which are well north of a million dollars in ARR. The first example is a Fortune 25 company and one of the largest retailers operating over 2,500 stores, with dozens of retail brands along with manufacturing and distribution. They chose Five9 to provide IVA for self-service and call steering, as well as various WFO for speech and desktop analytics. They’re also leveraging our connectivity solution for Citrix VDI for the remote workforce. We anticipate this initial order along with a follow-on order, which booked in early January, to result in over $4.7 million of ARR to Five9. The next example is a global health insurance company based in the U.S. with over 80 million members worldwide. Their contact centers were based on Cisco and did not support their future vision for delivering customer experience. They chose Five9 to enable their digital-first strategy, including email, chat, SMS, visual IVR, and our industry-leading IVA to replace Nuance in addition to all the traditional voice applications. We’re providing a deep integration with Salesforce, our WFO solution, and Five9 performance management and dashboards. We anticipate this initial order to result in over $3.7 million in ARR to Five9. The third example is a traditional peer-to-peer lending company whose contact centers service individual borrowers, banking clients, and collections efforts for past due loan payments. They were using a combination of Cisco for inbound and LiveBox for outbound in the collections department. They chose Five9 for our single blended platform for both inbound and outbound. We are also delivering a holistic experience for their agents by integrating with Oracle, Zendesk, and a homegrown CRM system, consolidating it all onto one single desktop. For their inbound business, they will also be using our chat, email, and SMS for a complete omnichannel experience, making it as easy as possible for borrowers to make payments. They will also use our IVAs for processing and providing status updates on loan applications. We anticipate this initial order to also result in over $3.7 million in ARR to Five9. The last example is a fast-food chain with nearly 3,000 restaurants across the U.S. They have been outsourcing their contact center operations, which wasn’t giving them the visibility and control to deliver an exceptional customer experience. They began the process to bring the entire operation in-house and chose Five9 to help them deliver on their CX vision. They now have the ability to leverage an omnichannel solution from Five9, including chat, email, and SMS, along with voice to give customer convenience and choice for all of their interactions. They are using our IVAs for customers to place orders, check status of deliveries, check on rewards points, and access standard FAQs. We are fully integrated with their Salesforce CRM and will provide the full WFO suite from Variance. We anticipate this initial order to result in approximately $2.5 million in ARR to Five9. As you can see, our move up market is significant and accelerating, and we’re seeing more enterprises embracing our AI and automation solutions to deliver a completely reimagined customer experience. And now I hand it over to Barry. Barry?

Thank you, Dan. Before going into specifics, I remind you that unless otherwise indicated, financial figures I will discuss are non-GAAP. Reconciliations of GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. As Rowan mentioned earlier, we had another excellent quarter with revenue growing 36% year-over-year. Reportedly, fourth quarter sequential revenue growth was 12%, the highest pre-pandemic sequential growth rate ever. This gives us even more confidence that, as we have been saying, we have retained most of the benefits we saw from COVID. In terms of revenue composition, enterprise made up 84% of LTM revenue, and our commercial business represented the remaining 16%. Our commercial business grew in the 20s on an LTM basis. 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 up market. Recurring revenue accounted for 93% of our total revenue in the fourth quarter, and the other 7% was comprised of professional services. Our LTM database retention rate was 122%. Despite inevitable COVID fluctuations, we expect the retention rate to trend towards the high 120s by 2026 due to the higher mix of enterprise customers, especially larger ones, which have demonstrated higher retention rates and higher ARPU from our automation and other offerings. Fourth quarter adjusted gross margins were 62.8%, a decrease of approximately 360 basis points year-over-year. As we have been communicating, we continue to invest aggressively in two key areas, namely professional services and, to a lesser but still appreciable extent, public cloud. The increased investment to ramp professional services has been significant. Let me illustrate by discussing the pattern of our professional services headcount growth. We accelerated year-over-year PS headcount growth to over 60% in the second half of 2021, and we plan to continue at the 60% plus rate in the first half of 2022 before starting to normalize it in the second half. We have been increasing professional services to support the growing number of significantly larger customer deployments, including new territories, and enhancing training and other certification programs to help our partners ramp more quickly. Regarding public cloud, we are investing to build out new instances globally, including Western Europe, Latin America, and India over the next year. Fourth quarter adjusted EBITDA was $36.9 million, representing a 21.3% margin, approximately 150 basis points below the COVID-assisted Q4, 2020 margin and in line with the Q4, 2019 margin. Fourth quarter non-GAAP EPS was $0.42 per diluted share, a year-over-year increase of $0.08 per diluted share. Before turning to our full year performance, I’d like to report that our average concurrency count for the fourth quarter grew to 246,712 seats, up 34% year-over-year. Note that we estimate our concurrency to be equivalent to approximately 370,000 seats on a named seat basis, a unit of measure that many others in the industry cite. As a reminder, we provide the CAGR metric only on an annual basis. Now for a closer look at the key full year 2021 income statement metrics. 2021 revenue was $610 million, up a record 40% year-over-year. 2021 gross margins were 63.5%, a decrease of approximately 200 basis points year-over-year driven by the same factors that impacted the fourth quarter gross margin, namely our ongoing investments in professional services and public cloud. 2021 adjusted EBITDA margin was 18.1%, a decrease of 160 basis points year-over-year also driven by the professional services and public cloud investments, partially offset by continuing operating leverage. 2021 non-GAAP EPS was $1.16 per diluted share, a year-over-year increase of $0.17 per diluted share. Finally, before turning to guidance, some balance sheet and cash flow highlights. I would like to begin my comments on cash flow by pointing out that during the fourth quarter we implemented a new billing system to allow us to scale as we continue to move up market and expand internationally. As a result, invoices, all of which were individually checked and validated, went out days, and in some cases even weeks later than normal, driving our DSO higher than normal at 36 days. Thus our operating cash flow was $8.1 million versus the high teens operating cash flow we would normally generate if our DSO had been in the low 30s as they have been for the past three years. The normal cadence of invoicing is resuming this quarter. We expect DSO to normalize back to the low 30s in the next two to three months. We’ve always expected LTM operating cash flow margin currently at 5% to increase meaningfully in the longer term, given our demonstrated ability to expand EBITDA margins, substantial NOLs and our typically low DSOs. I’d like to finish today’s prepared remarks with a discussion of our guidance for the full year 2022 and for the first quarter. For the full year 2022, we are guiding revenue at the midpoint to grow at 24% year-over-year to $756 million. For those of you who have been following Five9 for some time, you know that we start each new year with prudent revenue guidance. For six consecutive years, we started the year with guidance of 16% year-over-year growth. Last year, we raised it to 20%. Now we are raising it to 24%. This step-up in guidance reflects the strength of our business as we continue to win larger and larger customers that Rowan and Dan talked about and as we realize gains from AI and automation initiatives. Before providing 2022 EPS guidance, I would like to make high-level comments on margins. We expect both 2022 adjusted gross margin and adjusted EBITDA margin to decrease year-over-year by approximately two to three percentage points as we capitalize on our massive market opportunity by accelerating investments to continue our move up market, to drive automation initiatives, and to expand globally. It would be irresponsible for us not to do so given our differentiated offering and such favorable market conditions. We are fully committed to maintaining a balanced growth approach and gaining leverage longer term to reach a 23% plus adjusted EBITDA margin target by 2026. For 2022, non-GAAP EPS, we are guiding to a midpoint of $1.14 per diluted share, above the $1.09 per diluted share outlook we provided during our last earnings call, underscoring our complete confidence in our operating plan. For the first quarter, we are guiding revenue to a midpoint of $170.5 million, which represents a 2% sequential lead time better than the 3% to 4% quarter-over-quarter decreases we’ve been guiding to in the first quarter in the past three years. Also, the first quarter year-over-year growth at the midpoint is 24%, which is the highest growth rate we have ever guided to when compared to pre-pandemic first quarters. We expect first quarter non-GAAP EPS to come in at $0.13 per diluted share at the midpoint, a decline of $0.29 per diluted share sequentially. I’d like to point out that the first quarter non-GAAP EPS is always the weakest of the year because of the seasonal revenue headwind and the FICO reset. For the first quarter of this year, however, we are guiding to a somewhat larger than normal sequential decline entirely due to the decision to accelerate hiring, especially in professional services, as I detailed earlier. Additionally, I would like to provide more color on the quarterly profile of both the top and bottom lines for the remainder of 2022. For revenue, consistent with guidance in past years, we do not expect sequential growth in the second quarter. However, following seasonal business patterns, we do expect revenue to again increase sequentially in the third quarter and more strongly in the fourth quarter as is typical in our business. Given the shape of this revenue curve, and the transitory first-half gross margin headwinds on the two factors I mentioned earlier, professional services and public cloud, we expect our second quarter non-GAAP EPS to be in line with our first quarter guidance of $0.13 per diluted share, but it should improve modestly in the third quarter and more significantly in the fourth quarter. One final guidance comment—this one concerning operating cash flow in the current quarter. The success we have had with IVA has resulted in the inference that shareholders are entitled to their full earnout. We will be making the payment this quarter. The amount will be $24 million, of which approximately $6 million will be reflected in operating cash flow and another $18 million will be reflected in financing cash flow. Let me just add that we couldn’t be happier to make such a well-deserved payment. Please refer to the presentation posted in our investor relations website for additional estimates, including share count, taxes, and capital expenditures. In summary, we are very pleased with our fourth-quarter performance as we continue to execute like clockwork. We remain laser-focused on investing in key strategic initiatives to continue driving LTM enterprise subscription growth in the 30s to achieve our long-term targets.

Thank you. Our first question will come from Ryan MacWilliams at Barclays. Please go ahead.

Just trying to get the video on, there we go. Communications analysts, we can figure it out. Okay, guys, so Barry, I know you did a really good job at the Investor Day kind of outlining how to think about your go-forward guidance in tandem with some of the proxy numbers that were released during the potential Zoom acquisition. As we look at the guidance for this year, and investors really thinking about kind of that gap or that delta between this full year guide, and those proxy numbers can just kind of remind us how you’re thinking about guidance in light of that, and then maybe if there was any change from the Investor Day? Thanks.

That’s great. So let me take Ryan, the very last part of that first, which is essentially no change at all versus the Financial Analyst Day of November 19. In terms of the proxy, that $2.4 billion in 2026, as we’ve explained, that was a 50:50 type projection down the fairway as a way we describe it—equal chance of making it or not making it. For those of you that have been with Five9 for the last many years, you’ll know that we start the year always and generally throughout the year with a very prudent guiding philosophy, which we then, as the year unfolds, and we see the revenue materializing based upon seasonal and other factors, we continuously raise it. Two different approaches, two different outcomes. I’ll conclude by saying Ryan that even though that 2026 $2.4 billion—which by the way would imply a 34% compound annual growth rate between our guidance for 2022 and the $2.4 billion—is something that we’ve done very often well, consistently. We’ve said the same for a long time that we have durable 30s type growth. The point of what is it, we seldom put out numbers that we do not believe in and we believe in those as well.

I just want to add one thing to that answer, which is just look at the last two quarters—two different approaches from a guidance, and obviously, it tops down proxy that we shared. But ultimately, we still came in beating the proxy in both quarters. So I think it’s two different approaches and we’re going to continue to be consistent on our guidance philosophy.

Moving on now to a question from Sterling Auty at JPMorgan.

Yes. Thanks. Hi guys. So I’ll take the other side of that in terms of the margin question, which is you gave us some nice color in terms of the gross margin and gross margin impact. But how should we think about that 2% to 3% decline in EBITDA margin? How much of that is going to come in sales and marketing with some initiatives you pointed out versus R&D to further build out IVA and other capabilities? And then just kind of, if you could extrapolate when should we hit kind of the bottom and begin more of that steady climb towards the ultimate targets?

Great question. Thank you. In terms of where the two to three percentage point hit will occur, it will occur primarily in the gross margin area. And let me just answer the second part. I’d like to come back to that gross margin, if you don’t mind, Sterling. In terms of the trough, it’ll probably be somewhere around the second and third quarter before inflecting out. I do though want to talk about those gross margins. The first thing is, and this is important, we want to disabuse anybody about pricing pressure. Let me be concrete on that. We give you each year in the fourth quarter the seat count. We give you obviously each year in the fourth quarter our revenue, and you can do a calculation and you’ll see that depending upon exactly what the percentage is that we up again this year by over two percentage points year-over-year. And by the way, a fair amount of that we can go into a separate discussion due to AI and automation.

Thanks, Sterling.

Moving on now to a question from DJ Hynes at Canaccord.

Hi, guys, I’m going to give Barry a break. Rowan, one for you. You spent a lot of time talking about IVAs in the prepared remarks. For the customers that have adopted your IVAs, the data suggests that the number of requests that can be handled by the bots just continues to increase as the algorithms get better, or are there signals that like, at some point, IVA productivity just kind of starts to plateau? I’m trying to think about how that might impact the economics that you can demand from some customers long-term?

Yes. No really, we’re at the beginning here. I’ll give you one example of a company that implemented this in the healthcare space. They were able to drive $185,000 of savings per month in their labor costs based on the IVA. That was just really scratching the surface of their labor costs. They implemented the high volume, low value kind of work that we had talked about. But I think that’s going to be the gift that keeps on giving for them because as we get more data and more learning, they’ll be able to drive more automation. Now it’s too early yet to be able to see that, for example, in a DVRR because we’re just getting these implementations started across various industry verticals. I believe we’re going to see an initial tranche of implementations and then a set of growth metrics as we get more data and as the companies learn the tools and as our own PS teams learn those businesses to be able to help those customers. By the way, this is not a voyage of discovery; this is very much a replay of what we had seen in the past just with more of the legacy technology approaches. It tends to start small and then grows too big. But we’re already—and when I say small, that’s relative with scare quotes, because these are already quite significant savings: $185,000 per month as just one example. I think I’ve previously mentioned that our largest customer by agent count had actually done the math and said that they would save many, many millions of dollars, double-digit millions of dollars over a long period of time by implementing this. The numbers, especially in the larger accounts, where we’re seeing the most traction, are very, very material, and we think that they’re going to go up over time.

Got it super helpful. Maybe just very quick one—and I’m breaking the rules here, I know—but just given how the stock's reacting, maybe it’s some of the guidance stuff. But Barry, just you laid out how you typically guide conservatively. I think we all get that. When was the last time you actually reported a sequentially down Q1 revenue period? I look back on my model, I can’t find one.

Yes. DJ, with that directed question any way I can answer is that you’d have to go back very far to find one. Very fine detail.

Moving on now to a question from Meta Marshall at Morgan Stanley.

Great. Thanks, guys. Wondering maybe a question for you, Dan, on just what you’re seeing with the pacing of some of these seven and eight figure deals that you’ve got brought on over the past couple of quarters. And just maybe building upon that for Barry, if there’s just any financial impact we should see kind of quarter-on-quarter lumpiness of some of those customers come on. Thanks.

Yes, thanks, Meta. To address the question, we’ve been onboarding those mega customers, if you will, beginning in Q4 and they’ll continue to ramp through 2022 and into 2023, in addition to the significant number that we booked just in Q4 alone. I talked in the prepared remarks about shattering our record for million-dollar ARR customers. And we did just that; we brought in around double the most we’ve ever brought in a previous quarter.

If I could just build on that, Dan, because you made reference, Matter, to DVRR. As Dan just said, those are ramping. We’ll see quite—not yet seasoned in terms of the DVRR calculation because they need to be there the year before. So when they start ramping in the second half especially and in 2023, you’ll see the improvement as they season into the DVRR calculation. More generally though, and this is really key, one of the important arrows in the quiver to that $2.4 billion in 2020 is the expansion of the DVRR into the high 120s. One of the key drivers is those bigger customers. Those bigger customers are growing, as Rowan mentioned, at a CAGR of 93%. They will inevitably have a positive impact on the DVRR calculation. It makes intuitive sense—the bigger the customer, the more they can expand. They are the ones that can best afford and have the imperative to be able to invest in AI and automation. So while there’s very few things in business you can be sure about, we believe it’s an article of faith within the company that the DVRR will expand with all the beneficial impacts on the top and bottom line. But we also want to stress, and I’ll repeat this really clearly, that there will be fluctuations—as they have been in the past—in the future on DVRR, including in the near term.

Great. Thank you guys.

Next up from Needham, Scott Berg.

Hey, guys, this is John on for Scott. I appreciate you taking my question. Just curious if you could provide a little bit of additional color on the partner channel? How is that continuing to ramp up and what type of impact our partners having outselling kind of AI and automation capabilities?

Yes, sure. I’ll take that one. Thanks, John. Regarding the channels, we are hitting on all cylinders. As you may recall, if you flashback four or five years ago, we were just getting started with partners almost leaning into them, trying to get them to carry the product. They had alternatives in the premises-based solutions. But they really didn’t have the appetite to carry cloud until the market opened up. Customers started demanding it and they came running and they’ve leaned in. We brought in several folks, Andy Dignan, Jake Butterbaugh, to really head up that effort. We’ve seen a rapid expansion. In fact, as Rowan mentioned in the prepared remarks, I think it was 61% year-over-year for 2021 over 2020 across the channels. But keep in mind, not in that equation are the channels that refer business to us like the SIs. When I say refer, they’re managing those large scale digital transformation migration to the cloud projects for big clients. We see a great deal of traction and success with them. We’re also seeing internationally that our channels play a much bigger role because in many markets companies want to buy from a local known entity. We’ve signed up more and more service providers, including the AT&Ts of the world. The partnerships we’ve established are across all five categories when you look at it from the technology solution brokers to the local VARs, to the referral partners to the SI, and then big global asset, the big global service providers—so hitting on all cylinders. They make a great entree into many accounts. Your point about automation is that they’re bringing us in because they have a customer that has a pain point or a need. The beauty is right now, we’re at the early stages of the AI and automation game where we’re grabbing very low hanging fruit. When you think about it, the easy business case is those that have highly repetitive, mundane questions. Agents don’t want to answer them either. They’re dealing with the labor dilemma and trying to keep their folks employed, and this is a way to offload those mundane, repetitive questions with automation and let their agents focus on the customer and the empathy and the ones where they really need human interaction. So the channel is helping us participate and capitalize on that opportunity.

Sure. Thanks, guys.

Moving on to Samad Samana at Jefferies.

Hi, good afternoon. Thanks for taking my question. So I wanted to ask a follow-up on the IVA standalone selling. Maybe just how we should think about the ramp of that sales team and what have you seen already in terms of success out of what sounds like an existing small unit? Then I guess Barry, is it embedded into guidance that that’ll be contributing on a standalone basis in 2022, or is that something we should think about more in the forward years? That’s a multi-part question but all on the same subject.

Thanks, Samad. I’ll let Barry take the second part. But let me start out with the IVA standalone selling. They are excited about that team. We put actually the leader of that team—it's the same gentleman who helped us with the commercial business back in the day, if you remember that kind of was doing this and continues to be a nice contributor to our growth. We’ve got really incredible leadership there. That’s reporting into Andy Dignan’s organization. We’re seeing the results already. I mean, you can—we’ve obviously shared that. But as we look to 2022, that ramp, I mean, we’re looking for them to double or possibly quadruple the sales from the previous year. So there are very, very big expectations on that team. They haven’t agreed to quadruple, by the way, but we certainly have some big numbers. It’s not just focused on IVA standalone selling, by the way. They are focused on helping customers adopt AI and bring AI into the sort of the fold for each of these companies. That’s not just IVA, it’s also agent assist. It’s also the rest of our technologies that help our customers optimize their labor. It’s more about kind of value selling and helping customers look at their labor spend and figure out how to be much more efficient with that while at the same time improving customer experience. They’re bringing in specialists who have done that for other kinds of companies before, and so far, so good. Barry, maybe you can come on the second part of the question.

Yes, Samad. So obviously, the early signs, as Rowan has just described, are very encouraging, a 10% attach rate on enterprise new bookings, the energy around it, the popularity with the sales team, etc. At the same time, these are early innings. We know that the curve is up, but we just don’t know what the gradient is and when it really starts inflecting. We’ve taken a conservative approach.

We’ll take a question from Taylor McGinnis at UBS now.

Yes. Hi. Thanks so much for taking my question. If I look at sequential growth for 4Q revenue, I believe it was around 12.5%, and if you go back pre-pandemic growth was sequentially normally like in the 10%, 11% range. So can you just talk about what you’re seeing in the demand environment that led to some of that performance? As we look ahead, how durable are some of those trends as we think about the potential for sequential growth in future quarters?

Great. Yes, that’s exactly right; we grew more at the 12%—the 12.x% was higher than we’ve ever had pre-pandemic. It was higher in the pandemic itself. A couple of things contextually: the fourth quarter is always the seasonally strongest quarter. Just seasons vary, some are stronger than others. This was a good season. We also had some benefit in the quarter from the fact that one of those mega customers started ramping and helped the quarter as well. With respect to the future quarters, it’s really important to look at the sequential growth rates as we put COVID further in the rearview mirror and get past those very difficult compares. But what we’re encouraged by is that we have been growing in not just the fourth quarter but in the prior two quarters as well by rates that were very similar to the pre-pandemic rates of growth: 4% to 7%, and you should expect those sorts of things at a high level going forward as well. At the end of the day, the big driver over here is enterprise business rolling out for a number of years now, committed to durable many years of LTM enterprise with different growth in the 30s. That’s now over 60% of our revenue, excluding peers, which gives us a lot of confidence, and the exact sequential nonce data will depend on the particular year.

Great, thank you so much.

Moving on now to Piper Sandler, James Fish.

Hi guys, great to see you. Congrats on the quarter. Maybe working off of Barry, actually, your last comment—we’re hearing a large amount of seats are up for grabs in the next few years in the financial services vertical specifically, and that’s not historically been a vertical you get heard kind of called out. You even heard one of your competitors talk about an initial 20,000 seat going to 40,000. Now, while underneath sounds like you guys have some very exciting deals to announce in the next few quarters as I don’t think Dan can stop smiling on some of these up-market wins. Is there anything post these investments you’re making that really will prevent Five9 from competing for those size deals, given the infrastructure sits on public cloud now that provides really unlimited scale on theory? Look, I know you guys historically have participated well south of 10,000 seats. But you know, what prevents us from now going after these big Titan kind of opportunities?

Yes. I’ll take that one. Thanks, Jim. Nothing. We are absolutely moving in on every opportunity that comes up. We know confidently we can serve the largest companies in the world. We’re already doing that. That’s a new opportunity for us. The good thing is that the market is opening up at the time that our investments have paid off. All those investments we’ve made over the last three years around public cloud, scale, professional services organization, coverage, and go-to-market model are all really paying off at a time when the market demand, as you said, whether it’s Fencer, Frankie, or many other industries, but definitely Fencer will be one of them. We are seeing those already, and that’s what’s got Dan smiling year-to-year. Stay tuned on that front, but there’s nothing stopping us.

Moving on to a question from Terry Tillman at Truist.

Yes. Thanks for taking my question. I’ll be disciplined to keep it to one question. A lot of my questions have been answered. But maybe I’ll focus on AT&T. I think you talked, Rowan, about 50 deals now and a variety of verticals, and having good progress there. I think you’ve mentioned public sector. But I’m curious if you could just add a little bit more color about how that relationship’s continuing to ramp into 2022. Anything that stands out from that just as you all have more seasoning with that relationship? And how impactful that could be a 2022 versus maybe 2023? Thank you.

Yes, absolutely. Dan, feel free to add to this since you’re on the ground with this one. But we’re still very positive, and we had a really solid QBR—our most recent QBR—where we met with their leadership team at our sales kickoff that we held in person in Las Vegas. The executive-level commitment from that meeting was very clear. I think I shared just in my prepared remarks earlier Cxrevolution.com, which is a marketing campaign that is being driven by AT&T, but it’s really backed by the Five9 Cloud Contact Center. They also have now adopted IVA for their—they’ve taken that IVA, and they’re going to be using the Five9 IVA there. So AT&T has really gone all in with Five9, and we’re seeing deals across the spectrum, from large to small, and include public sector successes as well. Agents through the AT&T partnership are servicing customers in over 60 countries, indicating the full reach of this partnership. Additionally, the recent launch of the AT&T IVA is based on the Five9 IVA we talked about earlier. Our relationship with AT&T continues to grow from strength to strength, and we’re also pleased to support them in their latest campaign, the CX Revolution, which is focused on helping customers migrate from their legacy on-premises contact centers to the AT&T Cloud Contact Center powered by Five9.

Sure. Yes, and Terry, you can imagine, a large service provider like AT&T who’s OEMing the product, there’s a ton of work behind the scenes. They want to get it integrated into their billing system. They got to get everything done, and so they take time to get going. But once that momentum starts, especially in the field, once they get educated and understand what they can do with these products and how they can sell them, it does catch on and spread like wildfire and gives validation. That same holds true for Jim’s last question too. The reason we were able to do more million-dollar ARR deals double roughly than we had in any past quarter is because those mega deals are going in successfully. Everyone wants to see that we can successfully implement. In fact, we’re working on more mega deals as Rowan just mentioned. The best validation we have is they know each other. They talk to each other. Having them reference and turn to someone who does well north of 10,000 seats and say they’re doing 10,000 seats highly successfully—the best vendor relationship you’ve had in years, if not ever—and that validation says more than we could ever say as a sales team. Nobody wants to go first. We spent years-and-years kind of knocking at the door of larger enterprises. Now that the floodgates have opened, they’ve really opened due to the incremental value they can achieve from AI and automation. That was the real difference—the real linchpin to say, ‘Aha, enterprises should disrupt their whole enterprise and make this massive change,’ whereas before they were like, 'Well, what’s really the incremental value I’m going to get?' It really wasn’t hard. It was hard to put their finger on it, other than cloud, and yes, it’s easier and more convenient; I pay as a subscription and don’t have to maintain servers. But until we came out with AI and automation, that’s what really opened things up in the large enterprise. They’re now turning to each other to say, 'Is this true? Is it working?' We’re getting a resounding yes.

Great insight. Thank you.

From Wells Fargo, Michael Turrin.

Hey there, thanks for taking the question. Barry mentioned the price proceeding is moving up in the model very clearly earlier on. Dan, can you talk about the in-the-field view towards bundling? Where you are with any efforts there, and how that impacts maybe both price proceeds and some of the product adoption patterns? You’re driving towards with some of the supplementary areas you piloted as well?

Yes, awesome question, Michael. We came up with our bundling at the beginning of 2021 and built four bundles designed around making it simpler and easier, primarily for the channel, but also for our internal sellers. As you can imagine, with a laundry list of all the different SKUs and capabilities, it can become cumbersome. We were looking at that, and there’s always the risk factors of does that reduce dollars per seat and bring people into a lower bundle? It actually did the opposite because it’s like if you want that one thing, you got to jump to the next level of the bundle. You’ll get some things that you may not need or want or use, but guess what, that one thing is there. It gets people hyped up into the next highest bundle area. So it’s actually helped us from a cost per seat and it’s also made it very, very simple from a billing perspective and from our channels training perspective. So all goodness on the bundle side.

Thank you.

The question now from Matt VanVliet, BTIG.

Thanks for taking the question, guys. Barry talked and gave lots of details around professional services, investments, and what you’re scaling. We’re continuing to hear a lot more projects that are going to have the high-touch services component Five9. But I guess on the flip side, you’ve also been building out a lot of these global SI partnerships. Maybe Dan can help us think about where the demand for the Five9 employees on the services side is coming from. Why do you feel the need to increase headcount 60-plus percent versus trying to get more of those partners in the door so that you create that flywheel of recommendations for new projects?

That’s a great question. Thank you, Matt, for raising it. One of the things to keep in mind: when we sell those mega deals that have sometimes a rollout schedule from the time of placing the order for a year or even more, what we have had to apply is the consulting resources, the design resources. It’s a lot of internal meetings on their side, on the customer side that we need to participate in and coach them through what’s capable and what’s possible. There’s a ton of work that’s done with no revenue coming in the door. Look at the margin hit; it’s because we’re putting in the cost, and we don’t yet see the revenue to offset it. When you look at the backlog of projects we’ve sold, we’re moving ahead of schedule. We’re moving as fast as the customers can move. It’s on the customer side. We’re progressing along those lines. If you look at the partnerships that we’ve established and built, it takes time for them to learn and get the skill set to be on par with what we deliver from our world-class professional services organization. Our NPS scores are off the charts compared to others. We’re not going to sacrifice quality to push that cost out to the channel. We’re helping them onboard and enable their resources to get skilled to keep the level of quality where we want it and that’s happening. We have several customers or several partners that are picking up the services component, but it does take time. It’s something we’ve taken great pride in perfecting over the years.

Just to reiterate the strategy: on every one of these deals, we have partners by our side, but they are learning, so we have to help with that process. That’s an investment we’re making in them. But once you see that happen, that begins that flywheel effect of the next deal—they’ve been trained, and they can train themselves going forward. But to be very clear on the strategy, absolutely is to leverage partners on the services front. In these early stages, especially with these larger and larger customers that we’re landing, we want to make sure we get it right out of the gate and that we invest in it and don’t leave it to chance at this point. We want to make sure those are wildly successful because of the impacts of DVRR and all the additional stuff that they will add as we make them successful. That’s fundamentally just want to reiterate that.

The reflection, as I mentioned earlier, of the success of those projects gets communicated to other prospective customers. It’s very important that we maintain that high level of quality and it’s critical in that those stages. So I’ve seen and we’ve seen firsthand others in our space that have pushed it out too early to the partner and the partners weren’t ready and it created a negative impact that we don’t want to experience.

And now we will take our last question from Matt Stotler at William Blair.

Hi guys, good to see you. Thanks for taking the question. Maybe one in terms of the buyer that you’re addressing. Obviously, historically you’ve been a lot of business buyer. But as you move up market, you’ve seen this digital transformation spending turning into kind of enterprise-wide rationalization or broader projects in terms of rationalizing contact interpretations or communication stacks. Are you still seeing that throughput being the line of business buyer? Is that, I guess, drifting more towards centralized procurement decisions? And if so, how do you get visibility? There’s no internal advocates that were like, partners come, we’d love to get some more color.

Yes, there’s been a consistent trend towards the increasing influence of the LLB executives within these companies, whether or not they’re the buyers. What we have seen as we move especially into the largest enterprises and where you see larger digitization initiatives going on, those do tend to come back together with IT. But what happens from our go-to-market motion is really landing that internal LLB champion, and we built our entire sales motion around that. That gives us more friends in the room when there’s ultimately is an IT conversation. We do see it involved in—of course, there’s centralized procurement that other things mean that these are not LLB folks generally writing checks themselves, especially in these larger enterprises. We are incredible at managing these larger enterprises and the complex buying processes that they have. Frank and Dan’s team is just the best in the business at that.

Okay, that was our last question. I’d like to thank everybody for joining our call today and for all of your terrific questions. We look forward to an amazing 2022. Our business did great in 2021 and in Q4. We’ve got an incredible 2022 lined up. Our employees are fired up. Our customers are happy. Dan is grinning ear to ear, so stay tuned for a lot more from Five9. With that, I’d like to thank you all for joining and we’ll see you on the follow-up calls. Thank you very much.