Five9, Inc.

Good day, everyone, and welcome to Five Nines Q3 FY 2020 earnings call. Today's call is being recorded, and at this time, I'd like to turn the conference over to Lisa LaCranie. Please go ahead.

Thank you for joining us today. I'm the caller, Rowan Chalix, CEO, Dan Berkland, President, and Barry Bornstein, CFO. Certain statements made during the course of this conference call are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives, and the proposed acquisition of inference, and the timing and expected benefits thereof, 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, should not be unduly relied upon by investors, The 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, that the closing of the inference acquisition is subject to certain closing conditions, that the transaction may not close when expected or at all, and that the total purchase price is subject to various purchase price adjustments as well as whether or not certain earn-out metrics are satisfied and the other risks discussed under the caption risk factors and elsewhere in Five-Nine's annual and quarterly reports filed with the Security and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available and our test 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 and Five9.com. And now I'd like to turn the call over to Five9's CEO, Rowan Trollope.

Thank you, Lisa, and thanks to everyone for joining our call this afternoon. I'm thrilled to report outstanding performance in the third quarter driven by continued strong execution, positive industry trends, and constant product innovation. We reported record third quarter revenue of $112.1 million accelerating to 34% year-over-year growth and 12% sequential growth, both of which are all-time highs as a public company. Enterprise subscription revenue grew 35% on an LTM basis And on the bottom line, adjusted EBITDA margin was 21.5%, also a Q3 record for Five9. And we continued to experience strong bookings across the boards for both commercial and enterprise with our existing customers and with new logos. In addition to these excellent financial results, we're also very excited to announce a definitive agreement to acquire Inference, a leading provider of intelligent virtual agents and a partner we've been successfully going to market with. Inference accelerates the 5.9 AI portfolio to provide effective digital labor, driving a new level of efficiency for contact centers. IVAs use conversational AI, enabling natural dialogue between computers and humans and are a major evolution from touch-tone or voice-activated IVRs, which depended upon structured, fixed grammar interactions. These more accurate and user-friendly IVAs result in significant savings through increased call deflection rates, better informed agents, or both. With its proven IVA technology, the inference acquisition will position Five9 to take advantage of the trend towards increased automation of mundane contact center tasks. Having an IVA is fast becoming a fundamental requirement in enterprise deals as demand continues to increase on contact centers, especially in this COVID-driven environment. And it can no longer be addressed in service by simply hiring more agents. What customers are requiring is digital labor, as provided by solutions like IVAs, to meet the increased demand and enhance their customer experience. A great recent example is the logistics company deal that we talked about last quarter. The company helps state governments and managed healthcare organizations with transportation services. The deal, which was one of our largest ever, started out with an IVA focus through Inference, our partner at the time, and mushroomed into a full contact center solution. With Inference, They're able to trigger automatic booking confirmations, SMS reminders, status of rides, as well as follow-up surveys and more. And Dan, in a few moments, will provide more examples when he talks about our third quarter deals. We selected Inference for a number of reasons. First, they are a market leader in this emerging category, both from a technology and from a market share perspective per industry analyst firm, EMG Consulting. Inference is deployed worldwide with customers in Asia Pacific, Europe, and North America. Second, it's disruptive. Most current IVA solutions are either professional services centric, which are available only to the mega enterprises with huge implementation budgets, or they're developer centric. The Inference solution, on the other hand, can be deployed in days. with minimal people involved, offering the best of both worlds. Third and finally, we see very considerable go-to-market synergies. A large number of Tier 1, 2, and 3 telecom providers around the world, including AT&T in North America and Telstra in Australia, trust Inference. And we see considerable opportunities to leverage the Inference global presence and introduce them to our partners, including systems integrators, VARs, and other resellers. We've been delighted by customer demand and acceptance of the Inference solution, and this is one of those moments where new technology is reaching maturity at a time when the market demand is increasing, which creates a great opportunity for Five9 with Inference. We expect to close the Inference acquisition no later than January 5th, 2021, and Barry will talk more about the financial impact in his section. Having introduced inference, I'll now turn to discuss the underlying market drivers for our strong performance. First, the transition to the cloud continues unabated, including for larger enterprises, and we believe will continue for many years to come. Second, it's become imperative to digitize customer experience as part of a company's overall digital transformation. Third, these two megatrends, the move to the cloud and digital transformation, have been accelerated by COVID-19. We see this in the significant increase in the demand for agents in general, and in particular, the demand for agents working from home with a mutual benefit to businesses and agents. And finally, fourth, as I will elaborate upon in a moment, the demand of AI-driven automation is clearly increasing. In short, as we all know full well, the new front door for many types of businesses from yoga gear to e-learning, telemedicine to electronics and so on is the contact center. And we believe that this front door will open wider in the future. I'd now like to discuss our go-to-market approach and highlight our key achievements. Over the last few years, our GTM approach has become more balanced with our extremely successful direct approach being complemented with master agents, with bars and distributors, with systems integrators, and finally, with service providers. Our investments in these complementary areas are clearly paying dividends, as you can see from the following examples. First, our SI momentum continues. Once again this quarter, our SI bookings more than doubled compared to last year, and we anticipate our SI bookings to finish 2020 at more than triple what they were in 2019. We're also now significantly more diversified by SI partners than we were last year. Second, we're very pleased with the performance of our AT&T partnership. Following AT&T's rapid onboarding and the successful launch of AT&T Cloud Contact Center, we're now jointly delivering initial customer deployments and quickly growing our global pipeline together. And finally, third, we continue to enjoy significant international traction. Our products localized from multiple languages is enabled within country connectivity to a host of local carriers, and is supported by in-region support personnel and partners. Moreover, we've successfully migrated our platform to run on Google Cloud Platform and deployed two new instances in Canada, in addition to our data centers in London and Amsterdam. We're experiencing momentum from our international marketing strategy, which includes thought leadership programs, regional programs around awareness and demand generation, as well as partner enablement and amplification. Our growing international presence was also evident and our recent CX Summit where we saw strong international participation with 54 countries represented. And finally, some metrics. Although the numbers are still admittedly somewhat small, our international momentum continues with record bookings in EMEA and Latin America, with EMEA growing 3x and Latin America growing 4x year over year in Q3. I'll now turn to focus on our product execution and leadership. Here, our emphasis is on portfolio expansion to increase our average revenue per user, which complements our growth via logo addition. The tool, of course, takes some time to manifest in our financial results, but we're very encouraged by the strong positive feedback of our customers and partners on the capabilities we're delivering. To achieve this ARPU growth, we're focusing both on product evolution and innovation and are making great progress on both fronts. So with respect to evolution, here are three recent highlights. First, our most recent release included over 135 new features with significant focus on digital channels. Second, our recently acquired VO business is doing extremely well, posting record bookings in Q3. The first version of integration into the Five9 platform has been completed, and further enhancements are underway. Finally, third, we broadened and deepened our CRM and UC integrations. We're especially pleased with our recently GA'd Zoom Phone and Microsoft Teams adapters. We're also seeing excellent early traction on the innovation front. So here are some examples. First, VoiceStream. VoiceStream is a media streaming API enabling the building of apps that access real-time call audio. These apps will enable businesses to do things such as authenticating a caller's identity through voice biometrics, Effectively coaching agents while they're on a call, utilizing speech and sentiment analysis, and much more. This will help contact centers improve agent performance while also delivering a better end customer experience. And with VoiceStream, Five9 is taking a unique approach, implementing it in our own products while also creating a platform capability that makes it easier for our partners to build AI apps for the contact center. Second, we announced the release of Agent Assists. which captures in real time call transcripts and generates accurate time-saving call summaries which automatically sync with the CRM platform and greatly improve agent efficiency. AgentAssist uses innovative natural language processing technology developed by Five9 and has already had remarkable reception for such a pioneering product. Third, as I mentioned earlier, we now also have inference which will help us take a meaningful step in meeting industry demands while increasing ARPU. Given a virtual agent is priced at up to $400 per virtual seat per month, roughly double our current ARPU per human seat. So stay tuned for much more to come. In conclusion, we believe we are very well positioned for continued strong growth With clockwork-like execution, our team continues to focus on go-to-market initiatives and capitalize on the significant tailwinds in the market. We have a tremendous market opportunity with only 15% crowd penetration of the $24 billion contact center software market. Moreover, we see the opportunity to potentially more than double our current TAM with labor arbitrage, through the deployment of automation technologies. Our acquisition of inference is the first step to realizing the arbitrage opportunity. And given these favorable market trends and the proven ability to execute, we continue to believe that we can maintain 30s-level enterprise subscription growth for quite some time. With that, I'd now like to turn it over to our president, Dan Berkowitz. Dan?