Five9, Inc. Q2 FY2022 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 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, macroeconomic factors 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 the 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 on Five9’s website at investors.five9.com. And now, I’d like to turn the call over to Rowan Trollope. Please go ahead.

Thanks, Lauren, and thanks to everyone for joining our call this afternoon. I am excited to report strong second quarter results, with revenue growth of 32% year-over-year. Our enterprise business continues to drive this increase, with LTM enterprise subscription revenue, which accounts for over 60% of total revenue, growing at 41%. Adjusted EBITDA for the second quarter was 17.5% of revenue. We expect margins to continue improving in the second half and beyond as we gain share in a large underpenetrated market while simultaneously consistently generating operating cash flow and maintaining a strong balance sheet. In a moment, I will talk about the drivers of our business. But before I do that, I’d like to address a topic that’s probably uppermost in your minds, namely the impact of the macro environment on our business. To do this, let me break it into two parts: growth from new logos and growth in the installed base, each of which contributes roughly half of our total annual revenue growth. So I will start with new logos. For five reasons, we remain optimistic that despite the macro headwinds causing customers to be more cautious and deliberate, we will continue to enjoy strong growth in new logos. First, prospective customers are faced with the imperative of moving to the cloud as their premise-based systems either reach end-of-life or require expensive upgrades. Two out of every three RFPs, 68%, received this year site moving to the cloud as a primary motivator to issue the RFP. And independent data from Forrester and others consistently show that making the move to the cloud results in triple-digit ROIs and payback periods measured in months. Second is the need to automate manual tasks, particularly in a time when budgets are tight and labor is scarce. Automation was the primary motivator for a further 20% of the major RFPs. Third, the upper end of the market is accelerating their transition to the cloud. The largest customers, while not impervious to the economic environment, often can afford to continue to invest in critical systems even during downturns. Fourth, we have a massive opportunity internationally. Despite macro weakness in Europe, our bookings there more than doubled year-over-year in the second quarter. And finally, we have a remarkably efficient and disciplined go-to-market machine alongside the trusted reputation that we have built up amongst customers with our services. So for these five reasons and as Dan will elaborate, we enjoyed a second quarter record in net new bookings despite the economic turbulence. Now, let me turn to the other half of the annual revenue growth, namely the installed base. As we have repeatedly stressed, our installed base bookings will not be immune from an economic downturn. However, keep in mind the following three points. First, we believe contact centers are mission-critical and arguably become even more critical in a downturn. Thus, when CFOs look for areas to cut back on spending, they will focus on optional spend areas rather than ones where they can productively interact with customers, reduce costs, and increase revenues. Second, we have a very diverse customer base spread across all industry sectors. This lack of concentration will likely lessen the impact on our installed base business, absent a severe downturn that spreads across the entire economy. And finally, third, we enjoy strong retention rates and there are significant untapped opportunities to sell new products and services into our installed base, most notably automation and IVAs. So for these three reasons, we enjoyed a second quarter record in bookings from our installed base, again, despite the economic turbulence underway. Now, stepping back and looking at both net new and installed base combined and considering our belief in the mission-criticality of contact centers, the huge, barely penetrated $58 billion total addressable market and our proven ability to execute, we remain cautiously optimistic that despite the macro crosscurrents, there will be no interruption to our continued delivery of LTM enterprise subscription revenue in the 30s for the foreseeable future. Finally, mindful of the macro environment, we are being even more cautious than normal in controlling costs and expenses so that we can continue to deliver not just durable growth but profitable growth. Now, I will dive into the three main drivers of our business, specifically, the strength of our platform, our continued focus upmarket, and the acceleration of our international presence. Taking each in turn, I am going to start with our platform. The decision we made a few years back to significantly increase R&D spending to redesign and rearchitect our platform to support enterprise-grade deployments is clearly paying massive dividends. These large companies need the scale and performance, which we have delivered. They want extensive and deep integrations, which we have delivered. They want a global solution, which we have delivered. And they want the assurance that we can support successful large-scale implementations, which we have demonstrated. Today though, I want to comment on the single most important thing to our customers, and that’s the reliability of our platform. As a result of the rearchitecture, improved processes and disciplines, and importantly, disciplined execution, over the last two plus years, we have made tremendous strides to cement ourselves as a leader, if not the leader, in enterprise-grade CCaaS reliability. In this regard, I am very pleased to report that in the second quarter, we further improved LTM uptime sequentially from 99.995% to 99.998%. As a reminder, and to put things into perspective, 99.998% means that our service was unavailable for just 53 seconds in a given month on average in the last year, 53 seconds per month on average for the last year, amazing. Now, another key dividend resulting from our rearchitecture is the increased pace of innovation, and this is best exemplified by the success we are enjoying on the automation front. So, let me dig into that. During the last quarter, we met with many of our customers that have been using our automation solutions. The overwhelming response from these customers is that the implementation of automation solutions is typically resulting in significant ROIs while improving customer and agent experience. And customers achieve these ROIs in multiple ways, such as automated resolution of customer calls, improved agent productivity from reduced agent handle time, and improved customer satisfaction from lower call abandonment rates. So, let me give you a few examples of these successes. The first is a leader in the weight loss industry, which saved costs by leveraging our workflow automation solution to improve a critical sales process that was being managed by a legacy on-premises solution provider. The legacy on-prem solution was cumbersome to maintain and was costly. With workflow automation, we were able to transform their business by moving them seamlessly to the cloud in under 90 days and reducing their costs by 15% to 20% versus the legacy on-prem solution. The second is a global company that empowers over 3.5 million small businesses with point-of-sale technologies and business management tools. Working closely with our partner and reseller in Latin America, they implemented natural language call routing through our IVA solution to eliminate the old 'Press 1' experience, producing savings of 30 seconds per call. With over 2.5 million calls a year, that has equated to over 2 years of time saved for their customers, greatly improving customer satisfaction and business results. Finally, the third is a global shipping and logistics company, which reduced costs and improved customer satisfaction through our IVA solution. This customer was facing challenges with average hold times of over 30 minutes, which caused 3,000 customers to hang up every day before having their issue resolved. They deployed our IVA to offload their significant volume of shipment tracking inquiries from agents to a self-service solution. Our IVA was able to successfully self-serve over 90% of those customer inquiries, leading to a 95% decrease in customer hold times, a 96% decrease in customer hang-ups, and a 44% reduction in telephony costs while significantly improving customer satisfaction. So those are three examples. As a result of the increased customer focus on automation and the comprehensiveness of our solution, we had record bookings for our automation portfolio in Q2. Focusing on the largest component of the portfolio, namely the IVA, we saw year-over-year bookings growth of 63% and 335% for new logos and the installed base, respectively. Our investment in AI and automation is being recognized by customers and industry analysts alike. And in Q2, we were named a leader in the 2022 Opus Research Decision Makers Guide to Enterprise Intelligent Assistants. We were honored to be the only CCaaS provider featured in the report and to be recognized for our strategic and holistic approach that champions product completeness and flexibility. Next, I’d like to discuss our continued march upmarket. During the second quarter, we continued to show strong growth in the upper end of the enterprise market, which remains the fastest growing part of our overall business. Our success here is due to the rearchitecture of our platform, as I talked about earlier, and organizing our sales teams into clearly defined swim lanes, enabling us to match selling skills with market demand. Our strategic and enterprise teams have performed especially well with this new focus. The alignment has worked particularly well with systems integrators who tend to focus on the high end of the market. Partners, of course, have been a big part of our overall playbook here. So let me share some recent partner highlights. First, we enhanced our partner advisory board and our partner marketplace and created an all-new partner portal. Next, we expanded our relationship with Slalom Consulting and have seen terrific traction in several key markets, especially in conjunction with our Salesforce partnership. And finally, I am thrilled to report two new key partnerships for Five9. The first is Kindrel, a strategic technology services and consulting company delivering value to over 4,000 customers worldwide. Kindrel was an existing Five9 customer using our services internally. Based on their positive experience with Five9, Kindrel decided to expand into a strategic reseller and managed services partnership with Five9 to deliver holistic and global customer experience to their high-end customers. The second partnership I am pleased to announce is with WWT, World Wide Technologies. WWT is a $14 billion revenue, 8,000-employee technology service provider, and they have signed to be a global strategic reseller partner for Five9, further expanding our partner ecosystem. These initiatives are paying off with second quarter channel bookings growing 52% year-over-year. And lastly, our international expansion. The significant and sustained investments we've made internationally continue to pay off with second quarter LTM international revenue growing 45% year-over-year. LTM international revenue was 9% of total revenue, and we continue to expect that this will increase to the mid- to high teens by 2026. Our progress in EMEA is particularly noteworthy since our last call. In fact, we announced the expansion of our data centers in Frankfurt and Amsterdam to serve Five9 customers in the European Union. We opened up our new innovation center in Porto. We established a dock and Iberian presence, both of which have closed initial orders and successfully brought the $12 million ARR European insurance company, Live, which is now starting to ramp. In summary, the familiar and proven building blocks needed to deliver disciplined, durable, and profitable growth—namely our platform, our march upmarket, and our global expansion—remain solidly in place despite the macro uncertainties. We continue to believe these building blocks position us well to reach $2.4 billion in revenue and 23% adjusted EBITDA by 2026. Last but certainly not least, I want to recognize and thank the people who have made all of this success possible, namely our employees. We couldn’t do any of this without them, and it is our employees’ engagement and dedication to our mission and their incredible execution that make us so successful. This spirit and motivation are illustrated by Five9 recently being named one of the year’s best workplaces in the Bay Area by Great Places to Work and Fortune magazine. The award is based on employee feedback collected through America’s largest ongoing annual workforce study. In that survey, 95% of our employees responded that Five9 is a great place to work compared to 57% of employees at a typical U.S.-based company. So, a huge thank you to our team. And I will now turn the call over to our President and Chief Revenue Officer, Dan Burkland.

Thank you, Rowan, and good afternoon everyone. As Rowan stated, we had a very strong quarter on both top line and bottom line financials. I am also pleased to report that we had exceptional bookings for Q2, setting a record for any Q2. Had it not been for the $40 million-plus ARR deal we announced last quarter, it would have been an all-time record in any quarter for bookings. We continue to grow the pipeline to record levels and we’re getting even greater leverage, as Rowan mentioned, from our partners while also strengthening our international presence with the expansion into new markets. And now, I’d like to share some examples of key wins for the quarter. The first example is a Fortune 200 financial services group, offering a diverse range of services from life insurance, group protection, investments, and retirement plans. They had been using a legacy on-premises system, which made it difficult for integrations, omnichannel, and consolidation across various business units. They looked at all the CCaaS providers and selected Five9 due to our advanced automation solutions, including IVA, Agent Assist, and WFO powered by Verint. The initial IVA self-service use cases include bill pay, service cancellation, and document requests. They are implementing the full omnichannel solution from Five9 and integrating it with their current proprietary CRM as well as into Salesforce, which will be rolled out into several departments. We anticipate this initial order to result in over $7.3 million in ARR to Five9. The second example is a Fortune 100 financial services company that provides both personal and business insurance as well as investment products. They had been using a legacy premises system, which did not support their integrations, omnichannel solutions nor their analytics requirements. After looking at several CCaaS solutions, they chose Five9 for our superior AI and automation offerings, our Verint WFO suite, and integration into their Microsoft Dynamics CRM along with the direct high-touch professional services they knew would be key to their success. Due to the vast array of products and services, they would use Agent Assist for next-best action coaching while also using IVAs to provide status on quotes, cases, delivery of tax, and other documents. We anticipate this initial order to result in over $4.5 million in ARR to Five9. The third example is a state agency, the Employment Security Department, responsible for that state’s unemployment system, taking calls and inquiries from residents applying for unemployment benefits, updating their employment status, and documenting job applications. They were using a legacy on-premises system that lacked the automation and self-service options, resulting in excessive queue times for inbound callers. The state and their consultant looked at all the CCaaS offerings and selected Five9 for our end-to-end solution and our excellent service offerings for supporting them on an ongoing basis. They will be implementing the omnichannel solution with chat and email, QM, interaction analytics, WFM, and integrations to both Microsoft Dynamics CRM and Microsoft Teams UC solutions. We anticipate this initial order will result in over $2.8 million in ARR to Five9, while also setting up other agencies who we are currently working with to purchase off the same contract. And as they normally do, I’d like to share an example of an installed base customer who has expanded their use of Five9. This one may sound familiar. This parcel delivery service company first contracted with Five9 in Q1 of 2021 with an anticipated ARR at the time to Five9 of over $14 million for that initial order. Their EU division was waiting to see the level of success that the U.S. and the Americas division had when they expedited the rollout to more than 10,000 agents in time for the 2021 holiday rush. Once they saw that Five9 exceeded their expectations and they had performed their due diligence with their U.S. Americas teams, who provided a glowing endorsement of Five9, we recently signed the add-on order with the EU division with an anticipated ARR to Five9 of more than $12 million. This add-on order includes all of the same advanced solutions we deliver to the U.S. and Americas teams, including IVAs, Agent Assist, VerintQM, speech analytics as well as integration to Salesforce and various other systems. In addition to other subsequent orders since that initial order in Q1 of 2021, we now anticipate this add-on order will bring their total spend with Five9 to nearly $50 million in ARR. So, as you can see, Five9 is continuing to deliver to customers of all sizes throughout the world as we successfully move upmarket, deliver innovative automation solutions at an accelerating rate, leverage partners, and expand our international footprint. And with that, I will hand it over to Barry to review our financials.

Thank you, Dan. First, a reminder that unless indicated otherwise, financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. As Rowan mentioned earlier, we had another excellent quarter with revenue growing 32% year-over-year, primarily driven by LTM enterprise subscription revenue growth of 41% year-over-year. With regards to revenue composition, Enterprise made up 85% of LTM revenue, and our commercial business represented the remaining 15%. Our commercial business grew in the 20s on an LTM basis. And as a reminder, we expect our commercial business to grow in the teens for the next several years as we continue to focus the majority of our investments on moving upmarket. Recurring revenue accounted for 91% of our total revenue in the second quarter, and the other 9% was comprised of professional services. Our LTM dollar-based retention rate was 118%. Quarterly fluctuations are inevitable as mega customers come onto the platform at different times and ramp at different rates. In addition, we will continue to lap the one-time COVID benefit through Q4 of 2022. However, we expect our 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 benefit from higher ARPU driven by automation and other offerings. Second quarter adjusted gross margins were 60.7%, a decrease of approximately 260 basis points year-over-year due to ongoing investments in professional services and public cloud. As we have been saying, our accelerated investments in these areas are transitory and began to moderate in the second quarter. Therefore, Q2 marked a turning point as gross margins expanded slightly quarter-over-quarter by 20 basis points. For the remainder of the year, we expect further small expansion in the third quarter and more so in the fourth quarter with the expectation that the annual adjusted gross margins would be at a minimum of 61%. Operating expenses as a percent of revenue decreased by approximately 340 basis points year-over-year, primarily driven by G&A declining 210 basis points, marking the 31st consecutive quarter of year-over-year improvement in G&A expense as a percent of revenue. Adjusted EBITDA margin was 17.5%, an increase of approximately 80 basis points year-over-year. Second quarter non-GAAP EPS was $0.34 per diluted share, a year-over-year increase of $0.11 per diluted share. Next, I’d like to share some balance sheet and cash flow highlights. Days Sales Outstanding (DSO) came in at 34 days, an improvement from the 36 days we reported in the prior two quarters as our invoicing process using the new billing system normalized. Q2 operating cash flow was negative at $3.1 million due to $5.9 million of the $24 million Inference earn-out payment being reflected in operating cash flow, as previously mentioned. LTM operating cash flow was $41 million, excluding $12 million of one-time items. We have now delivered 24 consecutive quarters of positive LTM operating cash flow. We expect LTM operating cash flow to increase in the second half and to increase meaningfully in the long term given our demonstrated ability to expand adjusted EBITDA margins, our substantial net operating losses, and our low DSOs. Before turning to guidance, I would like, in addition to what Rowan talked about earlier, to provide some additional color on our operating plans given uncertain macroeconomic conditions. We believe our long-standing commitment to balanced growth sets us up well to navigate through these macro challenges. Our disciplined approach of authorizing new hires based upon bookings and revenue performance enables us to effectively manage expenses. In this regard, I will note in passing that our visibility into our top line allowed us to continue hiring strongly in the second quarter, and we plan to continue to grow headcount in the second half of this year as well, albeit more cautiously given macro uncertainties. I would also like to point out that there is ample cash on our balance sheet. We consistently generate operating cash flow, and we have minimal exposure to foreign exchange risks. And now I’d like to finish today’s prepared remarks with a discussion of our guidance for the third quarter and full year 2022. In terms of top line, we are guiding Q3 revenue to a midpoint of $193 million, which represents a 2% sequential growth, a slightly higher increase than the typical pattern heading into prior third quarters, where we guided to a 1% increase. I would also like to point out that the implied year-over-year growth at the midpoint is 25%, which is the highest growth rate we have guided to in any third quarter. While we remain optimistic that we will continue to enjoy strong growth in new logos, we are mindful of the macro environment when it comes to our existing customers. Therefore, we are being more prudent than normal with the raise in our annual guidance, where we are increasing the midpoint from $771.5 million to $781.5 million, which represents an increase in the year-over-year growth rate from 27% to 28%. As for the bottom line, we are guiding Q3 non-GAAP EPS to come in at a midpoint of $0.32 per diluted share, a decrease of $0.02 per diluted share sequentially. This quarter-over-quarter decrease aligns with the typical pattern for third quarter guidance and reflects the continued investments we are making to further drive our enterprise and international momentum. Despite these investments, we are raising the midpoint of our full year guidance from $1.23 to $1.39 per diluted share. Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count, taxes, and capital expenditures. In summary, we are very pleased with our second quarter performance and our ongoing success in moving upmarket and expanding internationally. We remain laser-focused on executing like clockwork to deliver durable, balanced growth.

Thank you very much. We will start with a question from Ryan MacWilliams at Barclays.

Thanks for the question. Pleased to see record bookings for the second quarter. Given the relatively longer sales cycles per contact center, are you experiencing any changes to new pipeline origination? So, like are you pleased with the number of new opportunities coming in? And is there any additional weighting towards IVA? Thanks.

Yes. Well, certainly, IVA grew faster than the rest of the portfolio, and I think we shared some of those numbers in terms of the IVA volume. But as to the first part of your question, Ryan, yes, we are starting to see some extended sales cycles. We are starting to see extra questions, one extra round of demos, not dissimilar from what I think you’ve been hearing potentially from other software companies that have been kind of sharing B2B sales processes. That seems to be—we’re not immune to that. Now Dan and his team hustled to make it up in this last quarter. But look, we’re not immune to the broader macro experience that I think you’re going to see out there.

Yes. Sorry, too many buttons on the computer. No problem. Maybe a question for – given that you’re seeing so much traction on the IVA channel and just kind of a need to optimize for labor in general, like what areas do you see that kind of carrying your development into? Or what ways can you kind of extend your lead on the IVA and just kind of AI channels that you have?

Yes. I think – well, we have our CX Summit coming up in Las Vegas in a couple of weeks, and that’s certainly a focus for us given the attention that people have on cost savings right now. IVA is sort of well aligned to that. We—Meta, I think you’ve asked this in the past actually, just on that point. You’ve asked us about selling into the installed base. And we just—we did start to do that, and that was very successful this last quarter. So we are starting—just scratching the surface really, but we’re starting to go back into the existing customers and offer them IVA. In terms of what we do to extend our lead, well, we’re launching a brand-new product. So stay tuned for the CX Summit. But we have made some announcements around the new version of Studio, and you’re going to get to see some of the new capabilities there. So we’re trying to extend that lead now with that capability and adding in more capabilities pretty much every week on our Agent Assist from an automation perspective. So that’s—it’s a big area of focus and investment for the company. And again, CX Summit, coming up in 2 weeks, we got some good announcements there around the next version of Studio and how we’re helping customers drive—it’s really about driving that ROI however they measure it, right? They could measure it in terms of reduced call handle time or improved productivity of agents in other ways. But fundamentally, we have to be able to demonstrate that ROI to customers for this to be something that I think really takes off and helps them save money, especially at this time when they need to do it more than ever.

Hi, guys. Good to see, Rowan. Congrats on the results. I don’t know if this is a Rowan or a Barry question, but if we think about net revenue retention of 118, how much in the past has been driven by organic agent seat expansion? And I guess the follow-up to that would be, like what are you contemplating going forward?

Barry? We got you on mute, Barry.

Sorry, too many buttons. So great question, DJ. We—it’s something we’ve analyzed very closely. And in the past and up until fairly recently, it would have been—and Dan can also add into this as well. It would have been very largely seat count growth and not MRR per seat. But I will tell you that this last quarter, I’m not going to give you the exact amount, but it’s nontrivial. What the hell. 30% of it came from increased MRR per seat, which is a record for us, a meaningful increase year-over-year. And part of that is what all the different things we can sell incrementally and that Dan and the team are doing so, including prominently things like IVA. Dan, do you want to add to that at all?

Yes. I think you hit it right on, which is we’re selling more and more applications. When we don’t see the seat growth, we’ve got to turn to the rest of the portfolio, which is great because we have the new automation solutions and other solutions that we can provide that increase the ARPU.

Yes. Yes, makes sense. And then one follow-up, if I could. The large deals, the mega deals that we talked about over the last couple of quarters, I think some have started implementation. Others are starting later this year. Just from what you’re hearing from those customers on a timeline perspective, is everything still on track? Has anything changed at all?

No. They were right on track. They have got initiatives of their own and milestones to hit to make these changes. Much of what Rowan mentioned earlier. They either have to have invested in a significant upgrade, or they are reaching an end-of-life situation. So, there are critical dates that they have to meet as well.

Hi, everyone. Congrats on the strong bookings quarter. Thanks for taking the question here. Rowan, I wanted to target or pick on or ask about your $2.4 billion revenue target that you reiterated from your previously public commentary. Wanted to understand how the current macro environment impacts your algebra to get to that number because obviously, you’re guiding to some potential slowness in your business. And secondly, where does the confidence come from that if you do have a little bit of slowness here over the next couple of quarters on a relative basis, of course, that you can still meet that goal?

Yes. I’ll start, but Barry, maybe you can give a little more detail as well because we’ve talked about this together. We did not—when we put out the projections for the 2020—the $2.4 billion, we did not factor in any kind of macro slowdown. And so while we can still do math to see the numbers getting there, you can certainly say that it could be longer than that if the slope—depends on how long—how much of a slowdown we see and how long it lasts. Barry, do you want to add to that?

Yes. I think you said it very well. We did not allow for that. So unquestionably will be, it will be more difficult. We’re fully committed to continuing to try, and we have a lot of levers we can pull. We didn’t endorse in that proxy set of numbers annual growth rates. It is true that it would be 32% compound to get there from 2021 to 2026. But—and we’ve got our guidance and you’ll draw your own conclusions on where this year will shake out. But there are a fair number of things that we’ve shared with the Street and one and two that we haven’t that could become material and give us a chance to still get there. But unquestionably, it has become more challenging to do. So we did not allow for that. And we don’t know how—if there is a recession technically, apparently there is, how protracted it will be and how deep it will be. And we’ve just been prudent in the meantime.

Yes. Good afternoon. Hopefully, you can hear and see me. Yes. Congrats on the quarter. I feel like we could just do a whole call on AI and automation, by the way. So I’m going to go for that one again, that topic. Rowan, you were good in terms of providing a lot of macro kind of topics or talking points earlier on both new logos and installed base activity and why we will see resilience. What I’m curious about is, let’s say, instead of like, hey, they have a burning desire to move to cloud and replatform, let’s say, it actually starts with AI and automation as more of the tip of the spear. Are you noticing that those sales cycles actually go faster than like, hey, we just need to move to the cloud? Or is it maybe the inverse of that where it’s still kind of novel to them, AI and automation, so that they need more kind of testing? And the second part of that single question is, when you do get a really nice AI and automation deal, whether it’s IVA or Agent Assist, what kind of ARR uplift are you seeing? Thank you.

Yes. I’ll start that one out. Maybe I’ll let Dan take the last part of that question, ARR uplift. But I just had a call with a CIO of a Fortune 500 company, who I met—you know this is just going to give you sort of one anecdotal that I think will actually sort of represent what we see most often with regards to AI adoption—and that was four years ago, a meeting where he said, we got to get to the cloud. We want to deploy your solution and the whole thing. We’ve been doing that. He’s now happy. It’s a huge hotel brand that is doing really well with the core platform and now is looking at AI. So it tends to be in that order because you kind of have to get to the cloud first before you can take those next steps. Some of the big deals from last year, same story. They got to get to the cloud first. The CIO of the global healthcare company, the largest deal in our history, when I talked to him before we closed that deal, was the same story. It was like, let’s just modernize our— that’s—the priority is going to modernize the platform, get onto Five9. But then we want to go take those next steps. And so it’s more in that order. And I don’t see it accelerating it, to be honest. It’s not that much—I think folks move as fast as they can move. So I haven’t seen it accelerating the shift. But we may see more—and we have talked about this. Dan and I have shared this with you all that we think that we see more enterprises being interested in moving to the cloud as a result of this, and we see a better wins on our side because it’s something that you can’t get on-prem. So there used to be 2, 3 years ago, I think a CIO could have made the argument or an engineering team in IT could have made the argument, hey, we can do all that cloud stuff on-prem. But you can’t do the stuff we’re now talking about on-prem. It’s not possible. So that’s yet another—I think it is one of the things that’s causing more enterprises to consider moving. And you can look at our numbers also. We share a little bit of that detail around the strategic deals. It’s—and notably the strategics are starting to move faster. Dan, do you want to add anything to that?

No. I think you hit it right on. And regarding the ARR, the uplift that we get, when we do go into an environment where they are willing to not only move to the cloud but then add the automation solutions, they definitely take the ARPU up to the—from what’s normally an average of just north of $200 per seat per month. That number can creep way into the high 200s or even into the 300s as we bring on those automation solutions. And so lots of upside not only with new customers, but as we talked about, we just started penetrating the installed base with those. And so, as we see that, the ARPU should lift. And that’s where we will make up for what might be a little slowdown in the seat adds, if you will.

Yes, hi, thanks so much for taking my question. So Rowan, you mentioned earlier seeing some sales cycle elongations and things taking a little bit longer to close. So when looking at the guide, Barry, the 2% sequential growth implied in the 3Q guide, I think, is very similar to the guidance framework that we’ve seen in the past. So just given that, can you maybe talk about the potential risk in the guide if the macro worsens or the assumptions that are currently embedded in that today?

Yes. Thanks, Taylor. The—you’re right. It’s a very similar guide. The 2% is within the 1% to 5% from the last several years. We feel very strongly that—both on the installed base side and in net new side where we have the backlog that we’re pretty comfortable with that. And it’s a very reasonable but prudent sequential guide.

Hi. Great. Thanks for taking my questions as well. So, Barry, maybe—or actually maybe—Rowan, just maybe a follow-up for you on the decision to hire at a slower rate in the back half. I guess I am a little surprised just because of the strength that you have seen so far year-to-date. Is that in anticipation of things potentially slowing, or is that a reaction to what you are seeing in real time, let’s call it, the last week of July?

Barry, do you want to take that one?

Yes, Samad, it’s both. As Rowan said, we saw some weakness in the course of the second quarter, not just June. We are selling to enterprises that sell to consumers. And there are parts of our diverse customer base where the consumers are buying this and there is less need for agents. And Dan and his team were able to use Rowan’s word, but he describes it very accurately, I would hustle it and do what we needed to do, and we will continue to do that in the second half. But we live in uncertain economic times. Just we have learned, technically we are in a recession. And so we are going to be prudent in our hiring. We are still hiring pretty—it’s not like we are talking 5 or 10 people. It’s quite a lot of people. It’s just being a bit more cautious. So, it’s both.

Great. Thank you, guys. I appreciate the views.

And I would just add one additional point because it’s kind of a couple of times. What we are doing with hiring is not actually anything different than we always do every quarter. We always do this in real time. We look at hiring, we look at revenue, we look at the projections. We have a long horizon on revenue visibility, as you all know, given the recurring nature of the business and the big backlog. So, we are able to get out in front of those things, potential slowdowns, or potential in this region or that region way in advance. And this is a well-developed muscle at the company. So, even though we are adding in additional conservatism about what might happen given everything else on the macro side, the process is the same and the philosophy is the same. So, just wanted to comment on that. Thanks.

Hey. Great. Thanks. Large deal momentum continues. We love that second or third slide, three deals totaling $50 million in ARR, a $12 million expansion in the first half of the year. You talked about some of the progress you have made with the go-to-market and with partners. But maybe we can just go back to what’s working on the large deal side. Now that you are geared and have the services that are blowing up, are you finding that motion is becoming more repeatable? And then understand with the consideration that the macro can always change the cadence, but maybe just help frame out how many similar-sized deals are still out there for cloud because I do think some element of this market is just underappreciated in terms of the size.

Dan?

Sure. I will take that one. I am going to kill my video because I am having a little bit of Internet issues and I will answer this one just with voice. And you are spot on when we say the momentum that perhaps has created up-market into these mega deals. Yes, that’s a new market for all the CCaaS providers, right. We had to show not only scale, but we had to show them true innovation and a reason for them to really go through that major—what is a disruption to their environment to bring us on. And we are reference selling, and those tend to be the companies that even during a downturn like this, they have the wherewithal to invest. And if I—I will touch on that for a moment. I mean if you look at it, have we seen some pockets of softness? Sure. Typically, at the lower end of the market is where we see that. Is it harder to find the opportunities? Perhaps, yes. And so I have every bit of faith in the leadership team that we have here and the sales teams to be scrappy and be aggressive and out-hustle and out-execute our competition as we have done in the past. And remember, it’s a huge market and especially at the high end, as you mentioned, it’s very underpenetrated. And many of those companies need us now more than ever. And let me explain. If—for those of you who—most of you probably know, I have been in this business and selling contact center and call centers for over 30 years. And I lived through the 2001 dot com bubble and the subsequent downturn. We—I sold through the 2008 financial crisis and what came from that. And in both cases, we faced headwinds and slowdowns. And however—and many companies that we sell to tend to hunker down during those times and just kind of put everything on hold and don’t do much. And what I found was it’s the companies that look at that and seize that opportunity and look at it as an opportunity to differentiate and invest in software, and in this case, I believe in the automation solutions, that can give them vastly improved efficiency as well as cost reduction, which is so, so important in an environment like this. So, those companies that have the foresight and the wherewithal to invest will do so, and they will come out of this in a much better position relative to their competition. And so it’s our job to go find those companies and make sure that we can match our technology to what they are looking to do. And I have seen it before. I have no reason to believe it won’t occur again, and it’s just a matter of finding those folks that are wanting to invest in order to save and come out of this in a better position.

Yes. Hey everybody. Thanks for taking the question. Maybe just one question on your thoughts on use case exposure at this point. I think Rowan, you brought up an interesting point where CFOs are looking to maybe drive efficiencies or cut budget in this environment, maybe is not focused on where you guys would traditionally play or focus on some of these kind of longer term contact inter-modernization initiatives, maybe around more discretionary spending in things like sales and marketing, right? So, as you think about where you guys sit, we would love to get your perspective on is that I guess what portion of revenue, you don’t have to give direct numbers, obviously, but customer service and help desk versus maybe some of those implementations that are in the sales and marketing organizations where there may be a little bit more efficiencies being recognized in this environment. Any thoughts on kind of that exposure?

Well, we tend to be more—most of our seats are on the service side, not on the sales and marketing side. We do have a fair bit, however, I mean it depends on what you call marketing really, I guess I should say, because outbound campaigns certainly fall into our world. And that’s—that would clearly be on the marketing side. Sales, not so much. If you look at the companies that have been in the Rev Ops space, those are—we don’t typically tend to play there more directly. Dan, do you have anything to add on that?

I think you hit it right on, yes.

Hey. Good afternoon. Thanks for taking the question. I appreciate the time. I guess Barry or Rowan, as you look at kind of how you are adding some prudence to the model in the second half and as you look out to ‘23, are you expecting some deals to sort of get slipped into the next year or pushed out or is some of that maybe smaller upfront deal, understanding that your land-and-expand motion has been very successful and even adding automation down the line? Rowan to your point, you got to get the platform in place first. So, just curious kind of how you are fine-tuning that prudence and where we should expect maybe some data points to give us, either confirmation that you have moved past that or you are seeing some weakness? Thanks.

Barry?

Yes. So, Matt, the easiest way to communicate that is to make a sharp bifurcation between the big enterprise net new deals and then the installed base, both just the ongoing organic expansion and organic growth of the business and the expansion once they have landed. They—Dan and his team have got so many tools to figure out what’s real, budgeted, the authority there, the desire or whatever. And we have taken their numbers and used them and feel comfortable doing so. We do stress test, where we cut what they are saying, and we still come out pretty constantly. Flip over to the faster, high velocity where recognizing revenue within weeks or a month or two months, there where we have seen some weakness, we have taken an added dollar precaution. It’s difficult to be precise because even our customers don’t know. How on earth would we know in some cases? But we have such a wide diverse set of customers in so many different industry segments that we can on average be pretty realistic. And that’s what we have done.

Hi guys. Great quarter. Thanks for the question. I guess going off of Scott’s prior question, appreciated the added color around MRR per seat there, Barry. What are you guys seeing on the usage side of verticals like e-commerce and financials show a slowdown? I guess the crux of the question is, where do you expect subscription versus usage mix to kind of trend over the next couple of years here, especially as some of these larger deals don’t include usage elements? As a result, it’s kind of my back-of-the-envelope math would imply we are getting close to the 70% range being subs in the subscription bucket.

Yes. So, first of all, yes, I do confirm that it is actually north of 70% of the recurring revenue that’s subscription. The other arching comment that you have to keep in mind with respect to the usage aspect. Yes, there are some of the bigger customers who bring their own telephony, but that is not that material in the grand scheme of things. We have got so many customers and such a big company. It doesn’t really affect it, and we do track it. Aside from the initial spike in COVID, where they just couldn’t get agents and the phones were exploding, typically, they move in tandem with the usage growing somewhat slower than the subscription and leading to a mix shift of maybe 1%, 2%, or even 3% per year. And we don’t see that changing anytime soon. And if there is a major economic slowdown, it will affect both, not just the usage.

Great. Thank you, guys for taking my questions. I think on your Analyst Day, you talked about international and moving that up to–kind of talked about like mid-teens by 2026, so I think roughly 10% today. So, any thought in terms of your investments to accelerate growth of the markets? Are you maybe thinking about pulling back? And then on the flip side of that, any color, commentary you can share with how purchasing behavior internationally is any different than here in the U.S.? Are you seeing similar trends where maybe it’s a little bit more cautious?

On the last one, I don’t know, Dan, do you want to take the international purchasing?

Yes. I think when you look at the size of our teams covering very large geographies, though there might be some macro headwinds that are facing their overall economy, we are being very scrappy and working very closely with our partners to find the opportunities. And we are working off—coming off of a very small base. So, we are seeing that as tailwind, and that’s why you saw that we grew international revenue 45% year-over-year is because we are—yes, we are coming off of some smaller numbers, but we are not over—out over our skis by putting people everywhere into an economy that’s not ready to digest it.

And in terms of the investment side, we are being cautious internationally as well, especially given what we have heard about the European economy. Now, we are small. So, it’s not like we will feel it in the same way that someone who has got more coverage there. But—so there is a lot more opportunity for us. Yes, we are being very careful about that as well. I mean we continue to hire, as Barry said, but at a slower rate. And we are thinking specifically about country-by-country and what we should do in each country, to be honest. And I would just add one additional point because it’s kind of a couple of times. What we are doing with hiring is not actually anything different than we always do every quarter. We always do this in real time. We look at hiring, we look at revenue, we look at the projections. We have a long horizon on revenue visibility, as you all know, given the recurring nature of the business and the big backlog. So, we are able to get out in front of those things, potential slowdowns, or potential in this region or that region way in advance. And this is a well-developed muscle at the company. So, even though we are adding in additional conservatism about what might happen given everything else on the macro side, the process is the same, and the philosophy is the same. So, just wanted to comment on that.

Great. Thanks. Large deal momentum continues. We love that second or third slide, three deals totaling $50 million in ARR, a $12 million expansion in the first half of the year. You talked about some of the progress you have made with the go-to-market and with partners. But maybe we can just go back to what’s working on the large deal side. Now that you are geared and have the services are blowing up, are you finding that motion is becoming more repeatable? And then understand with the consideration that the macro can always change the cadence, but maybe just help frame out how many similar-sized deals are still out there for cloud because I do think some element of this market is just underappreciated in terms of the size.

Dan?

Sure. I will take that one. I am going to kill my video because I am having a little bit of Internet issues and I will answer this one just with voice. And you are spot on when we say the momentum that perhaps has created up-market into these mega deals. Yes, that’s a new market for all the CCaaS providers, right. We had to show not only scale, but we had to show them true innovation and a reason for them to really go through that major—what is a disruption to their environment to bring us on. And we are reference selling, and those tend to be the companies that even during a downturn like this, they have the wherewithal to invest. And if I—I will touch on that for a moment. I mean if you look at it, have we seen some pockets of softness? Sure. Typically, at the lower end of the market is where we see that. Is it harder to find the opportunities? Perhaps, yes. And so I have every bit of faith in the leadership team that we have here and the sales teams to be scrappy and be aggressive and out-hustle and out-execute our competition as we have done in the past. And remember, it’s a huge market and especially at the high end, as you mentioned, it’s very underpenetrated. And many of those companies need us now more than ever. And let me explain. If—for those of you who—most of you probably know, I have been in this business and selling contact center and call centers for over 30 years. And I lived through the 2001 dot com bubble and the subsequent downturn. We—I sold through the 2008 financial crisis and what came from that. And in both cases, we faced headwinds and slowdowns. And however—and many companies that we sell to tend to hunker down during those times and just kind of put everything on hold and don’t do much. And what I found was it’s the companies that look at that and seize that opportunity and look at it as an opportunity to differentiate and invest in software, and in this case, I believe in the automation solutions, that can give them vastly improved efficiency as well as cost reduction, which is so, so important in an environment like this. So, those companies that have the foresight and the wherewithal to invest will do so, and they will come out of this in a much better position relative to their competition. And so it’s our job to go find those companies and make sure that we can match our technology to what they are looking to do. And I have seen it before. I have no reason to believe it won’t occur again, and it’s just a matter of finding those folks that are wanting to invest in order to save and come out of this in a better position.

Thanks, Dan. I appreciate it. In summary, let me thank everyone for joining today’s call. We’re proud of our strong performance and look forward to continuing to deliver our growth strategy while maintaining our focus on providing robust solutions for our customers. We appreciate your support and interest in Five9.