Five9, Inc. Q3 FY2025 Earnings Call

Thank you for joining us today. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance and cash position of the company, expected improvements in financial and related metrics, expected ARR from certain customers, certain expected revenue mix shifts, expectations regarding seasonality, customer growth, anticipated customer benefit from our solution, including from AI, the extent of the anticipated TAM expansion and our ability to take advantage of any such expansion, our AI and our CCaaS revenue opportunities and current estimations regarding same, including the ability to leverage data in support of AI revenue opportunities, company growth, enhancements to and development of our solution, statements regarding our share purchase program, market size and trends, our expectations regarding macroeconomic conditions, company market and leadership positions, initiatives, pipeline, technology and product initiatives, including investment in R&D and AI and other future events or results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors. Actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate, including the impact of adverse economic conditions, including the impact of macroeconomic challenges, including continuing inflation, uncertainty regarding consumer spending, high interest rates, fluctuations in currency exchange rates, lower growth rates within our installed base of customers 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 and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our Investor Relations deck that can be found in the Investor Relations section of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today and may no longer be accurate at the time of a replay. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP. And now I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland.

Thanks, Tony, and thanks, everyone, for joining our call this afternoon. We're pleased to report a solid Q3 with continued momentum in bookings, highlighted by enterprise AI bookings growing more than 80% year-over-year, contributing to healthy improvements in backlog. Subscription revenue, which makes up 81% of total revenue, grew 10% year-over-year, primarily driven by enterprise AI revenue growing 41% year-over-year in the third quarter. In terms of profitability, adjusted EBITDA grew 37% year-over-year to a margin of 25%. We also generated record free cash flow, which grew 84% year-over-year to a margin of 13%. The meaningful increase in profitability and cash flow is driven by the transformation initiatives we announced earlier this year. We continue to take action to drive operational improvements while investing in AI and go-to-market initiatives, maintaining a line of sight to our 2027 medium-term targets as we work toward the Rule of 40 and beyond. Turning now to our business updates. Today, I'd like to focus my commentary on three key areas. First, our significant and evolving market opportunity ahead. Second, how we believe we're uniquely positioned to win in this new market of AI-powered CX; and third, our momentum with strategic partners. We are in the early innings of an industry shift in CX, where our market opportunity is being driven by multiple growth vectors. For instance, Gartner forecasts the market for traditional CCaaS to grow at a 9% CAGR and the GenAI customer service market to grow at a 34% CAGR through 2029 to a combined annual spend of $48 billion. We believe this growth will create a powerful tailwind for category leaders like Five9 as we continue to execute against this durable multiyear opportunity. Furthermore, we believe Five9 is uniquely positioned to be the platform for orchestrating end-to-end customer experience across both AI agents and human agents. At the heart of our advantage is data. The contact center holds a brand's richest customer data, the full conversation history across every channel and every interaction. Our platform essentially remembers everything a customer has said, whether they spoke with a live agent or an AI agent through voice or digital. This creates what we call a relationship-based experience like when your favorite app recognizes you by name, remembers your preferences and picks up exactly where you left off. Every engagement feels personal, contextual and connected. AI point solutions can't replicate that because they only see isolated transactions, not the full relationship. At its core, our platform is a real-time orchestration engine for every interaction across all channels, whether handled by a human agent or an AI agent. In addition to our suite of AI products, which you're all familiar with, we also infuse AI within our core platform. For example, we now have AI-based routing, which leverages AI to dynamically manage and route every interaction with context to the best human agent or AI agent regardless of channel. Additionally, our platform is uniquely positioned to deliver experiences that will allow human agents and AI agents to collaborate in real time. This can include experiences such as in-queue self-service, where during a time a customer waits in queue for a live agent, an AI agent can proactively help resolve the issue, turning hold time into resolution time. Also, agent sidebar, where AI agents can quietly consult a human agent mid-conversation to get help without interrupting the customer and AI barge-in, where a human can seamlessly step into an AI interaction to ensure the issue is resolved and the experience remains positive. These experiences showcase what only an end-to-end AI-powered CX platform can deliver: a continuous collaboration between human agents and AI agents, where each interaction enriches the next. That feedback loop compounds over time, creating a powerful data flywheel that strengthens performance, accuracy and personalization. In addition, we're being recognized by industry analysts for our platform-driven approach. For example, Five9 was named a leader in the 2025 Gartner Magic Quadrant for CCaaS for the eighth year, and we were also named a leader in IDC's inaugural MarketScape for European CCaaS. Analysts are recognizing us for strengths in our AI capabilities, cloud-native architecture, global scalability and strong European market presence. This dual recognition validates our strong market position, innovation and consistent customer satisfaction. These platform advantages are also driving momentum with our strategic partner ecosystem, including a major milestone we achieved in the third quarter. In September, we launched Five9 Fusion for ServiceNow, a turnkey AI-powered integration that unifies voice and digital interactions through real-time transcription and intelligent routing. This launch delivers two key capabilities. First, our transcript stream integrates directly with ServiceNow Workspace, enabling Now Assist to generate AI-powered summaries and resolution notes that dramatically reduce handle times. And second, our routing engine now directs ServiceNow digital channels and cases alongside Five9 channels for true omnichannel orchestration. This represents a significant milestone in our eight-year partnership with ServiceNow, and they're leaning in stronger than ever, demonstrated by our year-to-date ACV bookings with ServiceNow quadrupling with even greater acceleration in this third quarter. We are also seeing strong traction with other key technology partners, including Salesforce, where year-to-date ACV bookings grew more than 60% and Google Marketplace, where our pipeline has tripled since the announcement of that partnership in Q1. Our strategy of building meaningful partnerships remains a key strength as our long-standing alliances with key partners continue to differentiate us in the market. Additionally, we're seeing ongoing momentum, particularly upmarket, where enterprises are looking to create holistic customer experience strategies that seamlessly integrate with their core business systems. In conclusion, we're optimistic about the foundation we are building for the next decade. At our upcoming CX Summit, we will be announcing new innovations that we believe will set the stage for the next wave of growth as we continue to lead the AI-powered CX revolution with our end-to-end platform to orchestrate interactions across the continuum of AI agents and human agents to deliver what we call the New CX. Importantly, we're doing so with a balanced approach by driving operating leverage and investing in what we believe are the highest return opportunities to drive innovation and durable growth for our business. I want to thank our team of Five9ers for their unwavering dedication to strengthening our leadership position. I'm extremely excited about the future of Five9 and confident we have the platform and the expertise to drive long-term growth. Before turning it over to Andy, I'd like to provide a quick update on our CEO search. As you know, we're focused on identifying a leader with experience and a proven track record in product innovation, a commitment to operational excellence at scale and a growth mindset to further capture market share in this expanding TAM driven by AI. I'm pleased to report that the search is progressing well, with our ongoing goal of announcing a successor by year-end. And with that, I'll turn it over to our President, Andy Dignan. Andy, go ahead.

Thank you, Mike, and good afternoon, everyone. We were pleased to deliver another solid bookings quarter in Q3. We won the highest number of $1 million-plus ARR new logos in two years, and our installed base bookings hit another all-time high, driven by ongoing strength in upsell and cross-sell activities. For example, a major U.S. card servicer chose Five9 in a $3.7 million ARR deal. A multistate hospital system selected Five9 in a $2.7 million ARR deal. A leading European mobile and broadband provider partnered with Five9 in a $1.3 million ARR deal. And a global parcel delivery leader expanded their relationship with Five9 in a $3.5 million ARR deal. Looking ahead, we remain encouraged by the momentum of our business, fueled by pipeline and RFP activities sustaining elevated levels. In addition, we are increasingly winning competitive evaluations against AI point solution providers as enterprises recognize the value of our unified platform, where AI is natively embedded across the entire customer journey. I'd like to talk about four examples of customers experiencing AI-elevated CX because of the Five9 platform advantages. The first example is the global parcel delivery leader already on our core platform who is moving off an AI point solution in order to take advantage of our contextual data for hyper-personalization plus our deep integrations to their third-party systems. In addition, the efficiency gain for being able to have real-time insights across human agents and AI agents was another key reason they selected our AI-powered platform. The second example is a commercial vehicle financing provider who uses Five9 AI to support multilingual F&I servicing across North America, orchestrating seamless journeys from AI agents to human agents with deep CRM integration and omnichannel visibility. The third example is a regional digital bank that monetized their services with Five9 AI-powered routing, Agent Assist for banking integrations, enabling real-time orchestration of financial interactions while preserving full customer context across channels. And the last example is a major academic health system that replaced legacy IVRs with Five9 AI to improve patient access and scheduling, using our end-to-end platform to orchestrate voice and digital journeys with shared context between AI agents and human agents. And with that, I'd like to turn it over to Bryan to take you through the financials. Bryan?

Thank you, Andy. Before we dive into our quarterly results, I'm excited to announce our inaugural $150 million share repurchase program, which is an important milestone that reflects a deep conviction in our long-term growth opportunity. We believe Five9's current valuation does not reflect our intrinsic value, particularly when considering the total platform opportunity for both our core CCaaS and AI-driven growth. The structure of the program includes an allocation of $50 million through an accelerated repurchase program, which we expect to complete before the end of Q1 2026 and the remaining $100 million balance open for up to 2 years. This program underscores our commitment to a disciplined and balanced approach to capital allocation and delivering strong returns to shareholders. Now turning to our financial update for the third quarter. Q3 revenue came in at $286 million, representing 8% growth year-over-year. Subscription revenue grew above total revenue at 10% year-over-year, driven by enterprise AI revenue growing 41% year-over-year, now making up 11% of enterprise subscription revenue. As anticipated, revenue growth was negatively impacted by approximately 5 percentage points due to a tough compare from our largest customer completing its multiyear ramp throughout 2024 and from minimal seasonal uptick compared to Q3 '24. As a reminder, subscription revenue reflects both customer growth and product expansion, including our AI solutions. Subscription revenue represented 81% of total revenue, up from 79% a year ago. And we expect this mix shift to continue as we focus on high-margin subscription dollars increasingly led by our AI solutions. Telecom usage represented 12% of revenue and professional services made up the remaining 7%. By design, these two categories are not growth drivers and steadily becoming a smaller percentage of total revenue. On an LTM basis, enterprise contributed approximately 91% of total revenue, with the subscription portion growing 18% year-over-year. Our commercial business represented the remaining 9% and declined in the teens year-over-year as we continue to focus upmarket, which has better unit economics. The year-over-year decline in commercial is more pronounced than anticipated, but we're in the process of recalibrating and expect to get to historical year-over-year trends within the next couple of quarters. LTM dollar-based retention rate came in at 107% in the third quarter, down sequentially from 108% in Q2, which is within the small band we spoke about last quarter. This was driven by the tough compare I mentioned a moment ago regarding subscription revenue growth. In Q4, we anticipate DBRR to continue to be range-bound, but expect upside in 2026. Turning now to profitability. Q3 adjusted gross margin was 63%, up approximately 100 basis points year-over-year, while adjusted EBITDA margin reached a record of 25%, up approximately 530 basis points year-over-year. This marks our fifth consecutive quarter of year-over-year expansion in both metrics. The consistent improvement is driven by our revenue mix shift toward higher-margin subscription revenue, combined with operating leverage as we scale and achieve cost efficiencies from our transformation initiatives. Additionally, we continue to boost productivity as demonstrated by our revenue per employee increasing 12% year-over-year. Q3 GAAP EPS was $0.21 per diluted share, representing four consecutive quarters of positive GAAP earnings, while non-GAAP EPS came in at $0.78 per diluted share. In terms of cash, both operating and free cash flow reached record highs. We generated $59 million or 21% of revenue in operating cash flow and $38 million or 13% of revenue in free cash flow. Turning now to guidance for the fourth quarter and full year 2025. For Q4 revenue, we're guiding to a midpoint of $297.7 million, which represents sequential growth of 4%. Despite our ongoing expectations of minimal seasonality, the 4% sequential growth is higher than our typical guidance pattern for Q4 due to revenue contributions from the backlog driven by both new logo and installed base bookings from past quarters that are starting to ramp. For full year 2025 revenue, we're maintaining our guidance at $1.1465 billion, which represents double-digit growth for the full year. For Q4 non-GAAP EPS, we're guiding to a midpoint of $0.78 per diluted share, which reflects our ongoing disciplined cost management and an estimated 1.7 million shares being retired through our accelerated share repurchase, offset by lower interest income. For full year 2025 non-GAAP EPS, we're raising the midpoint by $0.06 to $2.94 per diluted share. Additionally, we're raising our full year 2025 adjusted EBITDA margin expectations to approximately 23% compared to our prior outlook of 22%. In summary, 2025 has been a year of transition, shaped by multiple financial and operational dynamics. However, I'd like to provide some perspectives on how we expect the business to inflect as we progress throughout 2026. It's important to understand the evolution we are seeing in how bookings convert to revenue, particularly for our recent installed base expansions, including more AI products. Deployment of these AI solutions and expansions into additional departments within existing customers have longer implementation cycles, typically converting to revenue over multiple quarters. This translates to a meaningful portion of the strong installed base bookings we've been achieving layering into revenue progressively throughout 2026 with the most significant impact in the second half of the year. And this is in addition to our new logos in the backlog ramping throughout 2026. Given these factors, we expect the sequential change in Q1 '26 revenue to be relatively flat, followed by momentum building quarter-over-quarter throughout the year. From a year-over-year perspective, we expect revenue to return to double-digit growth in the second half of 2026. As a result, we're comfortable with the current Street consensus revenue of $1.254 billion for 2026. On the bottom line, our historical pattern is for Q1 to step down sequentially, representing our lowest quarterly EPS of the year. And we expect that same pattern to continue in 2026. We anticipate sequential improvement in Q2 with more meaningful acceleration in the second half, particularly Q4. For the full year 2026, we expect to exceed the current Street consensus non-GAAP EPS of $3.14 per diluted share. Also, we expect annual adjusted EBITDA margin to expand by at least 100 basis points year-over-year to 24% plus in 2026. Lastly, we expect annual free cash flow to be approximately $175 million in 2026. In closing, Q3 reflects strong execution on our transformation initiatives, which are driving bookings momentum and meaningful operating leverage. We remain laser-focused on achieving the Rule of 40 in 2027 with a return to double-digit total revenue growth driven by bookings strength in both core CCaaS and AI, coupled with ongoing margin expansion. The share repurchase program we announced today demonstrates our confidence in the team's ability to execute and create long-term shareholder value.

We will begin with DJ Hynes from Canaccord.

Bryan, I'm going to start with you and just what happened in the quarter. I mean, look, Five9 has generally been known for being pretty measured with its guidance. I look at Q1 of this year, you beat the high end by $7.2 million. Q2, you beat it by $7.8 million. This quarter, we're only at the high end of the guidance range. So I guess it begs the question like what changed? What happened in the quarter?

Yes, DJ, thanks for the question. So just a couple of points I want to make there. First of all, we're in the current growth environment that we're transitioning through. We do not expect big beats, number one. And then if you think about the quarter, I'm going to stick with subscription revenue that represents 81% of our revenue. There are two components. So it grew 10% year-over-year in Q3 versus 16% in the quarter before. So that 6 percentage point differential, five of those six is made up by the tough compares that we've been talking about all year long, right? We have the headwind from our largest customer who is finishing its multiyear ramp throughout 2024, making a tough comparison as well as our seasonal uptick that was very strong last year, which was minimal at this time in Q3. And then there's a third component that was unanticipated in the sense that earlier, I mentioned the commercial revenue declining year-over-year in the teens. So that was more than what we anticipated. And there are really two key drivers there. One was we underallocated demand gen spend toward commercial during the quarter. The other piece is that we had a gap in sales capacity as we promoted more commercial reps to enterprise than normal. So we're in the process of recalibrating that, and we anticipate over the next couple of quarters to kind of return the commercial revenue growth year-over-year trends back to the historical norms. But those are kind of the puts and takes that went through the quarter.

And DJ, I'll just add, promoting those reps from our commercial team to our enterprise team happens naturally. That's our farm system for talent internally. So again, from time to time, we get a lot of promotions that happen. And then what you have is in commercial, you've got reps that are ramping, right? So that was part of it.

Our next question will come from Siti Panigrahi from Mizuho.

I wanted to inquire about your installed base bookings. Last quarter, there were record bookings, and now we have another quarter of record bookings. Why is it taking so long to convert that into revenue? I understand it may take a couple of quarters, but based on your guidance, it seems more like we won't see results until around Q2. Can you help clarify this and what actions can be taken to speed up the process?

Yes, absolutely. So Siti, the installed base bookings, as you've heard in the last two quarters, have hit all-time highs, which is great. A lot of that is through upsell, cross-sell of software, including AI and new business units that we're discovering within our existing customer base. So these kind of bookings, and we're having more and more of those each quarter, they have a ramp converting from bookings to revenue, very similar to new logos essentially. So that's why our Q4 guide, if you look at it, the sequential growth there is rounding up to 4%, which is higher than the typical guidance that we give for Q4. And that reflects the backlog of not just new logos, but installed base bookings that are starting to convert into revenue. And then not just Q4, but into 2026 as well. So this is a new dynamic, but one that we have taken into consideration for our guidance.

Our next question will come from Ryan MacWilliams from Wells Fargo.

And look, we'd love to hear about what the bookings environment in the third quarter was like and how that's evolved with all the attention on AI now. And I know this is less a part of your business at this point, but I still have to check in just on the holiday season usage in terms of how we could see seasonal hiring for seats there, both for open enrollment and retail customers.

I'll start, Andy, feel free to chime in and Bryan, too. But good to see you, Ryan. Look, some highlights for the quarter. AI bookings up 80% year-over-year. We're really, really pleased with that. And again, the momentum in AI is continuing. But I'll add that our non-AI bookings in enterprise was actually a Q3 record as well. And again, as these worlds come together over time, we're still breaking out our AI products from our non-AI products for you all in terms of revenue and bookings commentary. But look, it's a good bookings environment. As we just talked about, there's a little lag in the engine given the character of the bookings. But look, highest number of $1 million-plus logos in two years, that's great and an all-time record for installed base bookings. So all in all, we're really pleased with the bookings momentum, but didn't mean to steal your thunder.

Let me quickly discuss seasonality, Ryan. We observed several interesting dynamics. I will focus on the consumer vertical among our top seasonal customers, which serves as a good proxy. On the subscription side, we noted minimal seasonality as expected. However, in telecom usage, we experienced a slight increase. We reached out to those customers, and they reported a similar small uptick in contact center interactions. They are closely monitoring the situation to see if we experience a stronger increase in late November and December, which could lead them to expand their seasonal business with us if possible. Currently, we expect minimal seasonality, but an increase could present a small upside for us.

Our next question will come from Catharine Trebnick from Rosenblatt.

Andrew King here on for Catharine Trebnick. Just wanted to double-click on the international really quickly. Good to see that IDC report out. Just wanted to hear what you see your differentiator as over in that market? And how is that BT relationship helping you progress over there?

Yes. The BT relationship continues to be strong for us. I mean, obviously, they bring to bear sort of the reseller type market. They bring their services to bear. And so we continue to have a lot of success there. And look, we've been saying it, international has a lot of upside for us, and we continue to lean heavily on the partner go-to-market. We still have direct business. And so we feel good about how that's tracking and again, continue to invest in that space, both obviously, in our core business, but then AI and digital as well. As many of you might know, in the international space, digital is sort of a key technology area. So if we continue to expand that business, it's going to pay off for us.

Our next question is from Terry Tillman from Truist.

This is Connor Passarella on for Terry. Just wanted to kind of follow up on the Salesforce relationship, particularly on the drivers of the booking strength that you called out there. Is there a way to maybe frame the performance across the two opportunities that you have within that ecosystem being Agentforce and Service Cloud?

Yes. Service Cloud is a key focus for Salesforce and us. We have over 1,000 joint customers and we collaborate with Salesforce on every opportunity to advance that initiative. This is why we developed the Fusion framework, which outlines how we integrate CRM systems, whether it's Salesforce, ServiceNow, or others. We are experiencing significant success in the self-service market. Regarding Agentforce, it's still early days for that opportunity. Our goal in any situation is to capture the core CCaaS. Salesforce has CRM, which is the best solution for the customers where we align. Again, with Fusion, we aim to ensure customers see the advantages of our collaboration. This has been essential in generating opportunities, as our sales teams and Salesforce's sales teams are effectively communicating the same benefits to customers.

And I'll just add that the momentum with Salesforce and our joint customers is very, very strong. I talked about the 60% year-over-year growth in bookings year-to-date.

Our next question will come from Raimo Lenschow from Barclays.

I have a question. When I examine the data in the call center space, it appears that there is still a significant presence of outdated on-premise technology, particularly at the higher end. While everyone is currently focused on AI, it seems like we might be tackling things out of order. From your conversations, do you sense that people are beginning to recognize the need to transition? You have been a cloud vendor since the beginning, so can you observe this shift in discussions and in the pipeline?

Yes, for sure, Raimo. And again, I'll let Andy kind of chime in after me. But look, at a high level, you're right on. I mean, look, we're still 40-plus percent cloud, and that means 60%-ish on-premise. You're right on. There's still a ton of kind of core contact center that's on-premise that has to move to the cloud. But as you know, I mean, AI has become so front and center for every CEO. And therefore, all their CIOs are out looking at AI and sometimes AI-first is the way they're making decisions. And we've now adjusted our go-to-market motions to actually be part of those discussions with an AI-first go-to-market motion where we may start a sales cycle with AI and then pull the CCaaS through as a second decision. It's just an evolving market. But at the end of the day, look, these enterprise brands know that they've got to go to the cloud to get all the benefits of AI, right? And so they go hand-in-hand. But in some cases, the order of the decisions might change. And it's playing out just pretty much as we expected and very favorable for us.

Yes. I think there are three types of customers. First, you have those who have already transitioned to the cloud and are now focusing on AI. Next are customers who are open to exploring both AI and CCaaS. Finally, some customers understand the need to move to the cloud but are looking for immediate benefits. For those customers, we have an AI-first strategy. Sometimes, as they pursue this approach, they realize it's better to tackle everything at once. However, we are noticing more customers expressing a desire to prioritize AI first, and we support that direction by quickly following up with CCaaS. This is an exciting time for us because we can accommodate all three pathways in the market.

I'll add that we're succeeding because of our integrated platform. It's not that we have two distinct components, even though we discuss them separately as AI and CCaaS. We have a single platform that manages interactions, whether they involve AI agents or human agents. It's not different systems; it's one cohesive solution that most enterprise brands are seeking. That is the reason for our success in the current market, and we believe it will help us continue to thrive in the AI space.

And sorry, to add one more. It's just like that parcel delivery company, right? They're a core CCaaS customer of ours, right? They chose a couple of years ago to go with an AI point solution. Here we are three years from now, replacing that solution. And that's again because they've gotten to the point where they see the value of, obviously, our AI stand-alone. But to Mike's point, having that continuum of AI agents and human agents is the end-to-end platform that they're looking for.

Our next question will come from Elizabeth Porter from Morgan Stanley.

I was hoping to get an update on just the competitive environment. I think we've seen Zoom up a little bit more in our mid-market checks and Amazon Connect reportedly just crossed $1 billion of ARR. We've seen several splashy headlines around AI-native companies. So curious if you're seeing any sort of change in behavior or win rates or buyer dynamics as these players start to get more headlines?

Yes. I mean, in terms of the competitive dynamic, just pure CCaaS, it still continues to be us and our two biggest competitors. You mentioned the hyperscalers. We do see them. We like to say sometimes if we're in the same deal, one of us is probably in the wrong deal — just two different kinds of solutions customers are looking for. So not a huge change there. We do see Zoom in the mid-market, but our win rates continue to be strong, and we feel really good about where we're at in the core CCaaS platform. And obviously, when you look at both CCaaS and AI together, and certainly our AI-first go-to-market, I think we continue to have success. So not — I wouldn't say any major changes in the competitive dynamic.

Next question will come from Jackson Ader from KeyBanc.

I had a question on the layering in of some of these — of some of the either the enterprise deals or the AI deals. Is there anything that you can do? Is there anything within either your control or maybe partners' controls that you would say, all right, can we accelerate the time to actually get some of these products implemented and generating not just bookings, but revenue ahead of what's happening right now?

Yes. As Bryan and Mike mentioned, we have been experiencing record bookings for two consecutive quarters due to the changes in our installed base. However, there is still some lag in the process. We've recently added new functionality in our AI products, which utilize generative AI for faster delivery. It's less focused on building workflows and more about prompt engineering. We're able to move quickly, and our customer base reflects this. Many companies are undergoing an AI transformation, which often requires them to improve their data management. While companies have made progress, there are still dynamics akin to new implementations. I believe that as we advance, more customers will feel comfortable fully embracing generative AI, particularly in sectors like healthcare and financial services that are currently lagging. The positive aspect is that we can address trust and governance concerns. Some customers prefer to stick with workflow-driven methods. However, we are seeing a shift towards a more comprehensive adoption of generative AI. We are well-prepared for this transition, but the key factor will be the customers' willingness to adopt and trust the platform. We have made significant improvements to reduce inaccuracies, and our team has excelled in this area. This will enable customers to accelerate their deployment timelines, though we may still face challenges when they are not yet ready for full implementation.

Our next question will come from Samad Samana from Jefferies.

This is Billy Fitzsimmons speaking for Samad. Clearly, the business continues to grow at a strong pace, with increased revenue and record enterprise bookings. Looking back a few quarters, there was a time when you announced several significant deals, including one in healthcare and another in logistics. If I'm not mistaken, it has been several quarters since that $50 million ARR deal in financial services. I would like to hear your thoughts on the reasons behind this. Is it possible that slower on-premise conversions or decision fatigue due to AI is affecting this, or is it simply a result of some changes in your sales organization from about a year ago? If I remember correctly, those changes included incentivizing smaller deals more than larger ones. Are you now focusing more on these smaller opportunities?

Yes, Billy, I'll begin. The pipeline for megas remains very strong, but these opportunities take time to develop. The long sales cycles are a key factor here. We’ve consistently mentioned that the process can be uneven. It's crucial for us to maintain a steady flow of smaller deals coming through our sales funnel. Recently, we noted a significant increase in new logo wins of over $1 million, the best in two years. The smaller deals are becoming a more critical metric for us. Overall, there's a robust pipeline of megas out there, and we are well-positioned, particularly with some very strategic partners.

In terms of the sales changes, we didn't make any — we put focus back onto the dolphins, but we kept a dedicated team. It's actually even bigger than it was before with not just salespeople, but solution consultants and experts and the services team. We continue to double down on the market. But to Mike's point, it's just lumpy and takes time. But we feel good about that space.

Our next question will come from Will Power from Baird.

Yanni Samoilis for Will Power. So I noticed that Q4 revenue guidance is a $6 million range top to bottom, which is a bit wider than the range that you normally give or guide to for a given quarter. I was just curious if there's anything that might be driving the wider range of outcomes that you're forecasting there. And then on the flip side, I appreciate the color on your early expectations for 2026. But what's giving you the confidence to comment on next year with that level of precision, giving the wider guidance range for Q4? If you could just help juxtapose that for us.

Yes, absolutely, Yanni. So the $6 million range for Q4 is mainly based on the fact that we beat Q3 by $1.3 million, and we actually held that back because of the commercial revenue decline that was bigger than what we anticipated. And so that was for prudent reasons. While we're recalibrating and we expect the normalcy to happen over the next couple of quarters, and we're expecting some partial recovery in Q4, we just wanted to have a little bit of a wider range there to allow for that. Now going into 2026, we have built contingencies into our outlook there. But if you think about 2025, it's been a year of transitions, shaped by multiple financial and operational dynamics. A lot of tough compares that we were going through, which we expect to lap fully by the end of the year. But then we're starting out with a strong backlog, not just for new logos, but installed base bookings that Mike and Andy talked about as well. So with those ramping starting in Q4, but mostly in 2026, that gives us that comfort around that Street consensus of $1.254 billion. But we'll provide more details next quarter when we give formal guidance for next year.

Our next question will come from Rishi Jaluria from RBC.

Nice to see continued AI adoption. Maybe I want to think a little bit one step deeper and think about kind of the current state of enterprise adoption. Look, I get that you have a lot of the tools to be the trusted AI partner in terms of governance and security and data privacy, and you've been a trusted partner with critical data over the years. So I totally understand your positioning. What we've been seeing, and I'd be curious to hear what you're seeing is a lot of enterprises are maybe slowing down the rate of AI adoption as they try to figure out the right use cases and one of those being customer support. But maybe just any color you can give in terms of what you're seeing broadly within your base of kind of the state of enterprise AI demand today versus how it had been maybe just six months ago. And as we think going forward, right, getting that greater uptick in AI throughout your customer base, what are things that you have in your power and your control to work with those customers to just kind of get over a lot of those hurdles that are holding back AI demand in the enterprise?

Yes, I'll start, Rishi. Look, the AI demand is so strong. I think what we're seeing is just a continued improvement, quite frankly, in appetite and demand and willingness by the larger brands out there to do more than proof of concepts and actually deploy AI. It's being proven. Again, their appetite is shifting toward platform players like Five9 for that AI. I think they're realizing the limitations of these point solutions in some respects, right? So that's the flip side. But what they're seeing, and it's why Andy talked about that one case where one of our largest customers that had a point solution for AI basically is replacing it with our AI because it's all part of our platform. So I think there are two very different things happening here. I think the demand is very high across the brands for AI. They're getting more comfortable with it, but they're getting more comfortable with it from platform players like Five9, and that is a good thing for us.

And in terms of what's in our control, we've talked about in the past our AI blueprint strategy. So we have the ability to go into our installed base. We're having a ton of success, right, as you see in the numbers in terms of installed base. We know the types of calls they have. They have their recordings, right? We're working with the customers. Obviously, they have access to all of this. Our teams can come in and take a very data-driven approach on, 'Hey, here are the use cases that we see that would have high ROI upside.' We've done a lot of work on the back end to have essentially prebuilt types, both go-to-market and implementations to deliver on those quickly, right? So I think that's an area where we continue to double down on. The other thing is our product team and engineering team in terms of AI, they work closely with our services teams and our sellers and our customers to say, 'Hey, what are you seeing out of these blueprints? What are the things that we could build into the product to even accelerate some of that demand?' So it kind of gets that flywheel going on the opportunity that we have the customers' data. Obviously, their data is their data, but we have the knowledge and working with them to be able to deliver that. So that's what we can control.

Next question will come from Peter Levine from Evercore.

Maybe to piggyback off of an earlier question around the competitive landscape is, I mean, are you seeing any pricing pressure on your core live agent seats at renewal, meaning as you see some of these competitors come in, trying to gain share, are your customers at renewal perhaps maybe fighting or pushing back for higher discounts? So maybe the question is just like what's your discipline on pricing for core agent seats given just the escalation in terms of the competitive landscape? And then second, can you just remind us how you charge for AI and the revenue recognition behind that?

Yes. So I'll take the front part of that. What we're seeing at renewal time is we aren't seeing pricing pressure on our core business. What we are seeing with customers is they want to make sure that we have pricing models built in for them to take advantage of AI. Last quarter, we talked about a couple of big expansions to health care companies. And that was at renewal time where they said, 'Hey, look, we've been leveraging our platform for multiple years, and we were able to renew at a higher level and then build into that renewal both AI and agents.' So we don't see that kind of pricing pressure. But I don't know, Bryan, if you want to comment on the revenue side.

Yes. Definitely on the revenue side, the pricing model for our AI products is either capacity or consumption-based. And whichever model it is, it's usually a block of units that you're getting and then overage if you go beyond that. So it works pretty much like a commitment model plus overage charges.

Our next question will come from Arjun Bhatia from William Blair.

Okay. Perfect. Just took some time. Can we just go back to the commercial business for a second? Obviously, it seems like that caught you off guard a bit. What is sort of the remedy? Is it just allocating more sales and marketing spend? And then how do you think that might evolve next year? Like can that get back to growth? Or is that a little bit too ambitious for 2026?

Yes, Arjun, I'll start. Look, we did over-rotate in terms of demand gen allocation to enterprise and majors, which again, we're always trying to crack the code there because, look, it's 91% of our revenue is enterprise, and it's the bigger market opportunity and so forth. But I've encouraged the team to just be careful not to over-rotate. We've already corrected some of that allocation of demand gen spend back to commercial. The good news about commercial is it's kind of a real-time indicator, right? I mean it's things move — deals move through the funnel quickly and they turn to revenue quickly. So while we had the impact of that in Q3, we've rectified that, and I believe we'll be right back to where we have been in commercial within the next quarter or two. Now at the same time, just keep in mind that is not a growth vector overall for the business. But at the same time, we don't want it to become a headwind like it was in the quarter. This sales capacity that we talked about earlier in commercial is also something that we've got to just anticipate. Again, sometimes it's going to be a little lumpy. In this case, it was lumpy where we had several promotions. We just got to manage that a little bit better. So in our control.

Our next question will come from Tom Blakey from Cantor.

Just wanted to maybe talk a little bit more about competition. I think there was a question earlier. Just looking at the dynamic growth of some of these conversational names like Sierra and Decagon. I mean, are you seeing these guys currently in the market? Are they disrupting in any way? I think just given the dynamic growth there, I think we should address that. And just maybe a housekeeping item for Bryan. Was the 5-point headwind from the large customer from 3Q '24 like different from where you implied in the guide? Was it more of a surprise or kind of in line, that will be great?

No, the 5 points, that was in line. So that was exactly expected. But I'll turn it over to Mike.

Yes. And you can talk to Sierra and Decagon. I mean they're getting a lot of limelight these days, right? And limelight, they're not very large companies yet. But they're getting a lot of press. And this gets back to what I said earlier about kind of point solutions versus platforms. Most of these large brands want to look at the hot stuff, so to speak. They want to take a look. But in the end of the day, a lot of these decisions are made based on the end-to-end platform capabilities, right? Because providing that connected contextual personalized experience between AI agents and human agents is only possible if you have an end-to-end platform like ours. Again, I'll let Andy chime in if you want to talk about...

I mean we see them. I wouldn't say consistently, but we come across them. A lot of times, there's pilots. Certainly, we're in there, like it could be in one of our own customers, right? They've just made their way in. Obviously, they're getting a lot of publicity in the market. But this is where we lean into what we've been talking about, right? It's that continuum of being able to deliver to both AI agents and human agents. If you look at where they've started, and again, I'm sure they'll comment on they're going to go down the voice path. It's largely been digital, right? That's been the focus of a lot of these point solutions. Voice, as we've talked about, is a strength for us, right, and a very big strength for us that's hard to replicate. So you add those things together, and we feel strong about where we're competing on those use cases, and we're going to continue to get better.

This concludes the Q&A portion of our call. I will now hand the call back over to CEO, Mike Burkland, for closing remarks.

Thanks, everyone, for joining us. We look forward to keeping you updated as we close out the year and enter into 2026. Exciting times. Thank you very much for joining us.