Five9, Inc.

Good day, everyone, and welcome to 5.9's fourth quarter fiscal year 2020 earnings call. Today's webinar is being recorded.

At this time, I'd like to turn the conference over to Lauren Sloan. Thank you. Thank you for joining us today.

On the call are Rowan Trollope, CEO, Dan Berklin, President, and Barry Zorenstein, CFO. Certain statements made during the course of the call 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, 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, our acquisition of Inference Technologies Group, and the other risks discussed under the captioned risk factors and elsewhere in Five9's annual and quarterly reports filed with the Exchange and Securities 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, available on the investor relations section of 5.9's website at investors.5.9.com. And now, I'd like to turn the call over to 5.9's CEO, Rowan Trela. Please go ahead.

Thanks, Lauren, and thanks to all of you for joining our call this afternoon, our very first using Zoom. I'm thrilled to share that we had outstanding results in both Q4 and 2020, driven by exceptional execution, new product innovation, and a strong market. Our financial results demonstrate our accelerating leadership position in the market, and more importantly, underscore the great strides we're making on our mission to help businesses transform their contact centers and reimagine their customer experience. First, a summary of the results. Fourth quarter revenue. was $127.9 million accelerating to 39% year-over-year growth and 14% sequentially, both all-time record growth rates. For the full year 2020, we closed with revenue of $434.9 million, an increase of 33% from 2019. In 2020, we continued the trend of increasing revenue growth rates every year since our IPO. which started in the low 20s, moved to the mid 20s, then the high 20s, and now to over 30%. This acceleration revenue growth has been fueled primarily by increasing traction in enterprise. Enterprise customers now account for 83% of LTM revenue, and enterprise revenue is mostly driven by enterprise subscription revenue, which rose to 39% from 35% last quarter. We're seeing especially strong growth in the high end of enterprise, where in Q4, we had over 91 customers generating $1 million in ARR, up from 59 a year ago. Now in a moment, we'll share some exciting news on orders, including a landmark enterprise deal for Five9. Now on to commercial. We have continued to see fantastic execution by our team here. And commercial business now accounts for 17% of LTM revenue, and posted year-over-year LTM growth in the teens. Now let me turn to the bottom line. In the fourth quarter, our adjusted EBITDA margin was 22.8% and 19.7% for the full year, up approximately 120 basis points from 2019, despite the stepped-up investments we've been making, not the least of which was the 300-plus net hires we added to our team over the course of 2020. Now, while I'm on the subject of team, I'd like to take a moment to thank our dedicated and hardworking Five9 employees for their contributions to the success of our company. I am incredibly proud of what we've achieved over the years, and particularly through these very challenging times. So thank you, team. With that, I'll turn to the market and briefly outline three of the key drivers helping to fuel our performance. First, the transition from on-prem to cloud. This transition continues to be a significant driver for us, and it's accelerating as ever larger enterprises recognize the value and flexibility that's offered by the cloud delivery model. Next, digital transformation is accelerating, with Gartner recently reporting that 69% of boards have accelerated their digital transformation plans. More specifically, the topic of reimagining the customer experience is dominating most of our conversations with business leaders who are increasingly focused on the contact center as the new front door for their businesses. Finally, we're seeing an emerging demand for AI-driven automation to increase efficiency, effectiveness, and optimization in the contact center. And those are the top three drivers in the market. Now let's talk about product innovation. I'm pleased to share that we've meaningfully strengthened our leadership position as a result of the investments we've made in our executive team, our doubling of R&D investments over the last two years, and with the acquisitions of Wendoo, Virtual Observer, and now Inference. We believe this leadership position will help us continue our new logo growth and should increase ARPU over time. And I'll share a few highlights right now. First, we've made a big investment in our underlying cloud architecture, and I can now put a stake in the ground and say that after two years of hard work, we've reached a critical milestone in delivering a hyperscale architecture, specifically Every Five9 product is now redesigned to run in the public cloud in a container-based architecture. What this does is it lets us leverage the many advantages of public cloud, such as storage, elastic scaling, multi-zone redundancy, and so on, just to name a few. So to accommodate our rapid international growth, our full suite of products are now deployed in the public cloud in Canada and Europe, with more relates coming throughout the year. Next, we've increased the depth and breadth of our platform integrations and APIs. I'll focus on Zoom and Microsoft Teams integrations. Both launched in the fourth quarter, and we saw over 30 deals right out of the gate. This isn't surprising given the traction that Zoom and Microsoft Teams have seen in the enterprise space, with Zoom recently announcing over a million phones sold. Finally, our thesis around demand for AI-powered automation in the contact center is coming to fruition, and serendipitously, comes at a time when the technology has meaningfully matured. In a recent survey by Gartner, the number one priority for contact center leaders is to migrate away from human-only service to self-service through automation. To build a leadership position in this emerging category, we've launched AI-powered automation offers that target each of the three phases of an engagement in a contact center, before, during, and after an interaction with a human agent. Starting with the first phase, before a human agent is even involved, our market leading inference IVA uses conversational AI to answer questions and perform simple tasks automatically. And here we focus on the high volume and low value tasks that can be easily automated. For example, order status requests, address changes, and so on. If the engagement cannot be handled by the IVA, and a human agent needs to be involved, we pre-populate key information from the conversation that the agent is going to need so customers don't have to repeat themselves. Our AI-based agent assist then steps in and provides the human agent with real-time guidance based on the content of the conversation, covering areas like script adherence, compliance, upsell opportunities, and so on. And finally, when the agent is wrapping up after the interaction, AgentAssist automatically summarizes the call and inserts it into the CRM system, dramatically cutting the time needed for wrap-up while also meaningfully improving the quality of the summaries. AgentAssist is also deeply integrated with our workflow automation platform, formerly known as Wendoo. Together, they make it really simple for contact centers to implement proactive outreach and notifications with their customers, which normally requires considerable effort and development work. In summary, AI-powered automation is hitting its stride, and the contact center is going to increasingly deploy this technology. We intend to remain at the vanguard of this transition. Our trifecta of IVAs, agent assist, and workflow automation is delivering results today, assisting us in winning deals and generating initial revenue. So those are just a few of the highlights on the product innovation side. But now let me shift to our go-to-market progress. First, we've accelerated our progress with systems integrators. In Q4, SI bookings more than doubled compared to last year, and as anticipated, 2020 bookings more than tripled what they were in 2019. SIs are leaning into the cloud transition and automation opportunities, particularly around IDAs, where they can add significant value building automations and helping customer deployments. We are now significantly more diversified by SI Partner, and we expect another strong year in 2021. Next, our AT&T partnership is making great progress. Just three quarters ago, we announced the AT&T Cloud Contact Center based on Five9. And since then, we've consistently grown both wins and pipeline. And this will continue to be an investment for us in product development and joint go-to-market efforts. And we look forward to this contributing to our 2021 revenue and momentum. Finally, we're accelerating our global expansion. We increased international headcount by more than 70% year over year, although starting from a small base. The rollout of our platform on the public cloud will be a further enabler for accelerating international expansion. We saw strong bookings in Latin America, growing more than 130% year over year in the fourth quarter. Our acquisition of inference with operations in Australia has added to our global footprint and will help us drive expansion with global service providers. But without a doubt, The star of the fourth quarter was EMEA, where we won the largest deal in the history of Five9 with a leading European insurance company. This five-year deal is expected to result in nearly $12 million of annually recurring revenue to Five9, more than two times the size of our previous record for a new logo. In conclusion, we've executed like clockwork over the last year, and we believe we've positioned Five9 to capture this massive market opportunity and expand our leadership position. With only 15% cloud penetration of the $24 billion contact center software market and the potential to more than double our current TAM with labor arbitrage through AI-powered automation technologies, we believe we have a tremendous and long runway ahead. We've invested in both organic product development and strategic acquisitions to take an early leadership position in contact center automation. And finally, we're going to stay laser focused on investing in four key areas, strategic enterprise go to market, our technology platform, international penetration, and finally channel growth. With an innovative product portfolio and a modern cloud platform, favorable industry trends, and a veteran management team, we believe we can maintain 30th level enterprise subscription growth through 2021 and beyond. With that, I'd now like to turn it over to our president, Dan Berkland, to share some specific customer wins. Dan?

Thank you, Rowan. We continue to execute strongly on all fronts with our go-to-market machine. We have all-time records for any quarter for both enterprise net new and enterprise install base, and a Q4 record for commercial bookings. We also had record bookings for the year in 2020 with SIs more than tripling year over year, as Rowan mentioned. International bookings nearly doubling year over year and channel bookings growing over 80% year over year. In addition, over 65% of our deals were influenced by partners and our pipeline continues to grow at an all time high. And now I'd like to share a few key wins for the quarter. The first is our largest deal to date. This leading European insurance company, which Rowan referred to, signed a five-year contract with Five9 to modernize, innovate, and automate the customer experience they deliver throughout Europe. We competed with many solution providers, from carrier-hosted services to premise-based upgrade proposals to their Cisco system to several other cloud providers. Five9 was chosen for our platform security and reliability, our robust innovation and automation solutions throughout the customer journey, and our superior approach to supporting this customer throughout the European markets they serve. We're leveraging technologies, including omni-channel interactions with chat, email, and social, in addition to workflow automation, performance dashboards, video engagement, our WFO suite powered by Verint, and integration to Microsoft Teams. As Rowan mentioned, we anticipate this initial order to result in nearly $12 million in annual recurring revenue to Five9. The second example I'd like to share is a large bank based in the southeastern US. After competing with the usual cloud competitors, Five9 was chosen for several automation capabilities, which will drive efficiency and reduce the number of human interactions required across their contact centers, supporting their 11 divisions. The first, the most dramatic impact occurs from incorporating IVAs from our inference acquisition to enable self-service. The second is they are using proactive outbound IVR and SMS notifications for confirmations, new services, and account activity alerts. And third, our agent assist AI solution, which transcribes, summarizes, and dispositions calls and uploads those into their Salesforce and ServiceNow CRMs. These automation innovations, along with our WFO suite powered by Variant, including QM, WFM, speech analytics, and performance dashboards, will help them transform the customer experience while improving agent efficiencies. We anticipate this initial order will result in approximately $2.7 million in annual recurring revenue to Five9. The third example is a healthcare operational and financial systems provider to hospitals and healthcare facilities throughout the world. They had been using a cloud solution from one of our key competitors, but were not achieving the reliability and support they were promised. They chose Five9 for our reliability, high-touch support model, as well as our innovative technologies to allow them to fulfill their customer experience goals. They are leveraging chat, email, visual IVR, video engagement, our workflow automation from Wendoo, and the full WFO suite powered by Verit. They were also looking to improve agent utilization by truly blending inbound and outbound campaigns, something that was not achievable on their previous system. We anticipate this initial order will result in approximately $2.4 million in annual recurring revenue to Five9. And now, as I usually do, I'd like to share an example of an existing customer who continues to expand their use of Five9. As a customer of ours since 2016, This well-known media company with streaming service of premium content and live TV was looking for contact center innovation in three subsidiaries not being serviced by Five9. Due to our proven track record of reliability and support, ability to easily integrate with ServiceNow and Zendesk, and providing self-service options to their customers throughout the experience through our inference IVAs, they expanded their contract with Five9 With these additional subsidiaries, their ARR with 5.9 is anticipated to go from $2.3 million to over $4.2 million. So as you can see, we continue to capitalize on market demand for contact center innovation. We're also seeing increased momentum as companies realize a strategic differentiation for them is the customer experience they deliver and the vast array of interaction choices they offer their customers throughout their journey. You know, several years ago, Rowan predicted that the contact center would change more in the next five years than it had in the previous 25. And we are seeing that firsthand, and we're helping our customers lead the way. With that, I'll hand it over to Barry to share our financials. Barry? Thank you, Dan.

First, a reminder that unless otherwise indicated, all financial figures I will disclose are non-GAAP. Reconciliations to GAAP are posted in the investor relations section on our website. We had another excellent quarter with both the top and bottom line results far exceeding our expectations. The record revenue growth rates Rowan mentioned were driven by our enterprise business. Clearly the market is healthy and our enterprise offering is resonating and our commercial business continues to be resilient. The spread of our total revenue between recurring revenue and one time professional services was 93% and 7% RESPECTIVELY. LTM DOLLAR-BASED RETENTION RATES INCREASED FURTHER TO 110% UP FROM 107% LAST QUARTER AND FROM 105% A YEAR AGO. OUR RECORD IN STORE-BASED BOOKINGS WAS THE KEY DRIVER OF THE CONTINUED IMPROVEMENT IN LTM DOLLAR-BASED RETENTION RATES. I WOULD LIKE TO EXPAND ON RETENTION RATES FOR A MOMENT LONGER. THE RETENTION RATES WE HAVE BEEN REPORTING SINCE WE WERE IN have been calculated using invoicing rather than revenue. We now have eight quarters of trended LTM retention rates based upon AC606 revenues. We are therefore conforming to how the vast majority of other SAS peers report, and we are now providing retention rates based upon revenue. Going forward, we will stop providing invoicing-based retention rates. The revenue-based retention data is as follows. For the fourth quarter of 2020, LTM dollar-based retention rate was 117%, up from 114% in the third quarter, and up from 112% in the fourth quarter of 2019. Each of these revenue-based retention metrics is seven percentage points higher than the invoicing-based retention rate previously reported for the three periods. The LTM dollar-based retention data for both revenue and the invoicing methodologies for the eight quarters through Q420 have been posted in the IR section of our website. I will now address the two most frequently asked questions investors and analysts ask. Namely, how much of the improved top line that we have been reporting is due to COVID? And second, what happens when hopefully in the not too distant future, COVID is contained? As Rowan mentioned, accelerated digitization has contributed to a heightened interest amongst prospects and to the strong bookings Dan talked about. The biggest impact has been in our sole base, which has seen a significant uptick in bookings and consequently in revenue. Overall, while difficult to estimate precisely, especially given the seasonal impact that fluctuates meaningfully from year to year, we believe that the COVID added approximately mid-single-digit percentage points to our second half 2020 revenue growth, primarily from the increase in store-based booking. What about post-COVID? Will companies undigitize in a post-COVID world? Hardly likely, although it is certainly possible that a portion of the bump caused by COVID may recede post-pandemic. Take retail as one example. Retailers will reopen stores, and customers will have other options beyond the contact center to engage with those companies again. However, in most cases, we believe that the pandemic only accelerated the inevitable, and we will see the new digital engagement option as being generally permanent. Overall, we believe much of our business will likely not return to pre-COVID levels, and we could potentially retain some OF THE MID-SINGLE DIGIT INCREASE WE SAW IN THE SECOND HALF OF LAST YEAR. TURNING NOW TO THE REST OF THE FINANCIALS, FOURTH QUARTER ADJUSTED GROSS MARGIN WAS 66.4%, A RECORD, AND UP 200 BASIS POINTS YEAR OVER YEAR. FOURTH QUARTER ADJUSTED EBITDA MARGIN WAS 22.8%, ALSO A RECORD, AND UP 160 BASIS POINTS YEAR OVER YEAR. The strong overall performance resulted in us generating $2.7 million in GAAP operating income in the quarter. Fourth quarter non-GAAP net income was $23.7 million, an increase of $6.7 million year-over-year. Non-GAAP EPS for the fourth quarter was $0.34 per diluted share of $0.07 year-over-year. Before turning to our full-year performance, I WOULD LIKE TO REPORT THAT OUR AVERAGE CONCURRENT SEED COUNT FOR THE FOURTH QUARTER GREW TO 184,483 SEEDS, UP A RECORD 40% YEAR-OVER-YEAR AND 15 PERCENTAGE POINTS HIGHER THAN THE 25% YEAR-OVER-YEAR GROWTH IN THE FOURTH QUARTER OF 2019. NOTE THAT WE ESTIMATE OUR CONCURRENT SEEDS TO BE EQUIVALENT TO APPROXIMATELY 277,000 SEEDS ON A NAMED SEED BASIS. a unit of measure that some others in the industry cite. As a reminder, we provide the seat count metric only on an annual basis. And now for a closer look at the key full-year 2020 income statement metrics. 2020 revenue was $434.9 million, up a record 33% year-over-year. 2020 gross margin was 65.5%, up 130 basis points year-over-year. While on the subject of gross margin, I would like to underscore that in 2021, we will likely see an interruption of our seven-year track record of annual gross margin expansion due to a meaningful increase in public cloud spending to support international expansion and domestic growth. We expect this public cloud spending to reduce 2021 gross margins by approximately two percentage points. 2020 adjusted EBITDA margin was 19.7%, up 120 basis points year over year, despite the meaningful investments we have been making in R&D and go-to-market. Finally, before turning to guidance, some balance sheet and cash flow highlights. The ESO was 29 days in Q4, a sequential improvement of two days, despite the strong enterprise business. Fourth quarter operating cash flow was $19.3 million, and a record $67.3 million for the full year. We have now maintained our LTM operating cash flow margin in the team for 11 consecutive quarters, and we remain optimistic about our potential for continuing cash flow generation given our long-term model, our substantial NOLs, and our low DSO. I'd like to finish today's prepared remarks with a brief discussion of our expectations for the full year and the first quarter of 2021. For the year, we are guiding revenue at the midpoint to grow 20% year-over-year to $520 million. For those of you who have been following Five9 for some time now, you will know that for the past six years, we have always started the new year with prudent revenue guidance of 16% year-over-year growth. mainly due to the uncertainties around the magnitude of the seasonal impact of our second half business. Approximately two of the four percentage point increase from 16% to 20% is driven by the revenue contribution from inference and the other two percentage points is driven by the evidence strength of our core business. Before sharing the specifics on the 2021 bottom line guidance, please keep two important factors in mind. First, as we pointed out on our last call, we will have meaningful dilution from the inference acquisition. Second, and I'd like to underscore this point, we are awash with high quality opportunities, which will require incremental expenses. And given the healthy market environment, it would be irresponsible for us not to continue investing in our business Thus, as the year unfolds, we will continue our tried and true pragmatic approach of balanced growth, but with some slight temporary moderation on the emphasis that we have placed on our strong bottom line performance. We are firmly of the opinion that making these investments will position us even better to achieve our long-term model, which, as a reminder, is to reach 27% plus adjusted EBITDA margin in about four years from now. As a result of these two factors, we are guiding 2021 non-GAAP net income to a midpoint of $60.6 million, which implies a year-over-year decrease of $6.8 million. As for the first quarter, we are guiding revenue to a midpoint of $122.5 million, which represents a 4% sequential decline which closely follows the guidance patterns that we have established over the last several years heading into Q1. However, I would like to point out that the implied year-over-year growth at the midpoint is 29%, which is the highest growth rate we have ever guided to in any quarter. With respect to the bottom line, we are guiding first quarter non-GAAP net income to a midpoint of $10 million, which reflects a $13.7 million quarter-over-quarter decrease which is driven by the same two key items I mentioned a moment ago, namely dilution from influence and the increase in investments we are making, as well as the customary FICA reset. Additionally, I would like to provide more color on the quarterly profile of both the top and bottom line for the remainder of 2021. For revenue, consistent with guidance in past years, we do not expect SEQUENTIAL GROWTH IN THE SECOND QUARTER. HOWEVER, FOLLOWING SEASONAL BUSINESS PATTERNS, WE DO EXPECT REVENUE TO INCREASE SEQUENTIALLY IN THE THIRD QUARTER AND MORE STRONGLY IN THE FOURTH QUARTER. GIVEN THE SHAPE OF THIS REVENUE CURVE AND THE RAMPING OF EXPENSES, WE EXPECT SECOND QUARTER NON-GAP NET INCOME TO BE LOWER THAN Q1 AT $9 MILLION, WHICH SHOULD IMPROVE MODESTLY IN THE THIRD QUARTER and more significantly in the fourth quarter. Finally, here are the customary estimates for modeling purposes. For calculating earnings per share, we expect our diluted shares to be 76.5 million and basic shares to be 67.5 million for the first quarter of 2021, and 78.6 million and 69.5 million respectively for the full year 2021. Please note that diluted shares of 78.6 million for the full year 2021 represents a year-over-year growth of 15%. This higher than normal increase is primarily driven by early adoption of ASE 2020-06. This standard reduces the complexity of accounting for convertible debt by eliminating the non-cash interest expense from the debt discount created by separating out the equity component, but also meaningfully increases the leader shares by requiring the use of the if-converted method rather than treasury stock method. We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $290,000 for the first quarter of 2021 and $1.2 million for the full year 2021. Capital expenditures for the first quarter of 2021 I EXPECT IT TO TOTAL APPROXIMATELY $13.5 TO $14.5 MILLION. FOR THE FULL YEAR 2021, WE EXPECT CAPITAL EXPENDITURES TO BE BETWEEN $42 AND $45 MILLION. AT THE MIDPOINT, THIS REPRESENTS APPROXIMATELY 8% OF THE FULL YEAR REVENUE GUIDANCE. RELATIVELY IN LINE WITH WHAT WE REPORTED IN 2020, BUT HIGHER THAN HISTORICAL TREND. IT'S HIGHER THAN TYPICAL LEVEL OF CAPITAL SPEND IS PRIMARILY DRIVEN by international expansion and the build-out of our new headquarters. In summary, we are very pleased with our fourth quarter and full-year performance, achieving all time records on multiple metrics. We continue to execute like clockwork against this massive market opportunity, and we believe our ongoing and increased investments position us very well to continue to expand our leadership position.

Operator, please go ahead. Great.

Our first call is, or first question, excuse me, is from DJ Hines with Anacord.

Hi, DJ.

Hey, guys.

How are we doing?

There we are. Good to see everyone. I like the new format and congrats on the strong results. Roland, one for you. I want to ask, kind of two related questions around IVA. So first, just how often are your big deals now landing with IVA as part of them? And then the second question would just be kind of, as we think about the back to base opportunity, like, can you use usage as a indicator of who would be, you know, apt to get leverage out of an IVA sale? In other words, like I would think there has to be, you know, demand is correlated with, increasing usage. So maybe just talk about that motion of the back to base with IVA as well.

Yeah, maybe Dan, I'll throw the big deals one to you.

Sure. Yeah. On the big deals, IVA is the hottest thing right now. Every one of our big deals has interest in figuring out how to automate and how to bring choices to their end customers on how to interact with them. And there's several ways for us to automate, right? One is self-service using the IVAs. Other ways of automating is to provide agent assistance and be able to bring more leverage and more power to the agent, empowering the agent to be more efficient and more effective so that the customer can do more with fewer resources. And then the third is through our workforce automation. The when do acquisition of WFA allows us to automate a lot of the functions that were done manually within a contact center can now be done automatically, triggering alerts and notifications of upcoming appointments, upcoming shipments, whatever they might be. You can trigger activities based on conditions. So, great question.

Yeah. As far as the base question, I think that make sure I understand the question you're asking. I think it's around like, how do we decide where to take this offer within the existing base of five, nine customers? Is that the question?

Yeah, that's right. And like, can you use usage as a leading indicator of kind of who would leverage?

There's probably, there are a few signals and the inference team are really good at identifying where to get the most traction the fastest. So we've actually staffed up and put one of our top leaders onto a new team in the sales organization. That's helping both on the, you know, sort of the net new positioning, but also the go after the base side. And, uh, so him and his team are, um, sort of tracking that strategy, but we're starting from a good place because we already know the inference already had, you know, a fairly strong revenue run rate, um, on their own outside of us in terms of the growth of that revenue. And so we're able to go after and sort of use their sales strategy in terms of which industry verticals and, what other signals we can use to figure out where there's going to be take. It wouldn't just be usage. It would be other things as well, like industry vertical. And then also like we have TAMs in many cases and customer success managers covering these accounts. So we can do a very sort of surgical job of identifying where it's going to be the highest return on our, on our time speaking to the base. Yeah.

Yeah. Awesome. Thanks for the color guys and congrats.

The next question is from Mita Marshall with Morgan Stanley.

Great. Thanks. Just a question on, you know, kind of building on DJ's question, you know, just what are you seeing as far as initial deal composition? Is it, you know, they're looking at, you see contact center, WFO, AI kind of all at the same time, or just how is that evolving of what you're seeing kind of in what customers are trying to do in the initial deal cycle and then maybe as just a second question just any update on on the AT&T relationship thanks sure um let Dan take the first part

Okay. Yeah. Regarding the deals themselves, it really runs the gamut. When you look at companies that are trying to deliver a better optimal customer experience, that can mean different things to different companies. Some have mastered certain portions of the mix, if you will. But what we look for is going in and consultatively working with that customer to say, what is it that you're trying to deliver and how can we help? And oftentimes that comes down to they have lacked automation in the past, and they're looking for ways to give their customer more choices. And that can mean even things as basic as adding chat or email, the omni-channel solutions to the full automation that I described earlier. So it does run the gamut, and it really depends on the particular customer. But that's the key for us is being able to deliver a full end-to-end portfolio that can allow us to tailor a solution for the given customer. Regarding the AT&T relationship, we're seeing tremendous traction there. We're building up a tremendous pipeline and executing and selling more and more deals. The larger deals are starting to come through with AT&T. Not because there wasn't interest in the larger deals. The larger deals have a longer sales cycle and a larger engagement cycle. So those are starting to come to fruition. And as we had mentioned last year, 2021 is the year to really capitalize and see a revenue mover from that activity.

Thanks, Meeta.

The next question is from Terry Tillman with Truist.

Hey, congratulations on the results. Great job. My two-part question, Rowan, you were very proactive and helpful on AI before, during, and after an interaction. I'm curious, of those three kind of areas or phases, where are you seeing the most activity And again, I know it's early days, but it does seem strategically important for the business, particularly like driving revenue in the middle and during the interaction. But how's the pricing and the packaging and working out? Thank you.

Sure. The interest is strongest on the before, because if you can handle the interaction before it ever hits an agent, you get the most savings. And then the second is really, I would call it after, is where we're getting traction. And that is doing after call work and call summarization automatically for customers. So those are the two areas. And the during is something I would say we're still working on delivering the capabilities. But yeah, really before and after and before being very, very much the place that I think people are most interested in looking right now.

Could you maybe just talk real quick about the packaging or the how's it working out in terms of the the pricing and monetization?

Yeah. Yeah. So we already have established market pricing from inference before the acquisition, before the acquisition. And so, you know, we've kind of used that as our baseline. So and we've introduced a default offer that comes with five nine and then sort of three tiers above that. So you can sort of buy the silver, you know, the bronze, silver and the gold version of inference. With the sweet spot probably being in the $450 per digital agent pricing price range.

Thank you. Thank you, Terry. Our next question is from Sterling Auty with J.P. Morgan.

Hey guys, this is Drew on for Sterling.

I was wondering if you could provide a little more color on the incremental investments in 2021 and kind of which operating expenses you plan to ramp up specifically. Thanks.

Yeah, Barry. Yeah. So this is in basically an order of importance. We investing increasingly leveraging slightly in our sales and marketing expenses. So number one, Number two is R&D. Again, we expect another year in which the percentage will inch up. Now, separately, we're also going to be spending a fair amount on, but relatedly, on inference. As part of our agreement to buy them, there was an earn out. We ring fenced the sales and marketing R&D. And that's quite a big change year to year. So that, again, is sales and marketing and R&D. And then finally, as we alluded to in the prepared remarks, we are spending a fair amount this year, especially in second quarter onwards, on public cloud as we roll that out across different regions. That, however, will not show up in expenses primarily. It'll show up mostly in cost of revenue.

Got it. Thank you.

Our next question is from Will Power with Baird.

All right, great. Thanks for taking the question. Congratulations on the strong results. You know, I wanted to ask on the international results. I think you indicated bookings doubled year over year. I mean, it seems like you're really seeing strong growth and, of course, alluded to, I guess, what's your biggest deal ever. So maybe if you could just talk about what the key drivers have been as you look over this past year of traction you've generated internationally and what are the next key drivers, right? As you look over the next three years, what helps you maintain that kind of traction?

Yeah, well, we started thanks. Thanks. Well, we started the investments there. As you know, you know, we started talking about that a couple of years ago. You know, we hired a new leader in EMEA. And so we really began staffing out and investing there as well as making the investment in porting our infrastructure to public cloud, which has allowed us now to very quickly stand up new instances. So some of the bigger deals that we're now starting to win are directly on the back of that investment because we wouldn't have been in these very, very large accounts had we not been able to satisfy local European data residency requirements and so on. So it's a combination of factors, no one factor. I think the last factor I would throw out is market readiness. This is another one where and maybe probably even COVID, right, with sort of, okay, we've got to finally look at the cloud kind of recognition of that being a new reality. So I think just a combination of factors, not any one individual thing, and just all hitting at the kind of all coming into play in 2020 for us.

Thank you. Yeah, thanks, Will. Our next question is from Michael Turin with Wells Fargo. Hey there. Thanks.

Good afternoon. I appreciate you taking the question. So clearly great close to the year here heading into 2021. Just wondering if there's anything you can add in terms of how you're thinking about the progression throughout the course of the coming year versus what you're seeing today. There's certainly potential for rebound from some of the impacted industries, but then also chance for normalization of some of the accelerated trends towards remote you've seen. And so I know you've referenced many times this is a patient market. Does the secular, from your perspective, just outweigh some of those puts and takes in terms of the various industries? Or anything you can add just around how you're classifying the coming year I think is helpful as we're just parsing through what we're seeing right now.

Barry, do you want to comment on that, please? Sure. So a couple of things. First of all, about 80% of our revenue comes from aid industries. ranging from education to technology to healthcare and so on. And only, and I'm only concentrating on that 80% because we didn't do much of an analysis on the other 20. And in that 80%, there's very little that's sort of squarely hit by COVID in a negative way. I'm thinking of things like discretionary travel and vacations and leisure and so on. So basically our business is fine pre-COVID or post-COVID or during COVID. What is now changed is the fact that people are relying more and more on the contact center to work with companies. And in that environment, I referenced back, Michael, to our prepared remarks where basically saying that We saw a very strong growth in our install-based bookings, maybe added mid-single digits in terms of overall growth, and we expect much of that to remain post-COVID.

Excellent. Great, great finish to the year. Thanks, guys.

Thank you, Michael. Our next question is from George Kurosawa with KeyBank.

Hi, guys. Thanks for taking my question. I'm dialing in for Alex here. My question is about the competitive landscape. You referenced some very impressive deals in the quarter. I believe in all three of the wins that you highlighted, you mentioned you either competed against cloud offerings or in one case actually beat out a competitor's cloud offering. Just from a high level, would you say 5.9 is still a story of displacing incumbent solutions or is there more an element of beating out competitive cloud offerings? Thank you.

Well, we always run into competitors on, on these deals. Uh, you know, it's a competitive market and it's by and large, still a replacement of on-prem, you know, drives most of our business. However, uh, you know, sometimes we see, uh, in third, you know, if number one and number two are the two incumbents in, in on-prem systems, they are the ones that we replaced the most, but number three, is actually another cloud vendor that we compete with. So we're actually sometimes replacing other cloud vendors that the company has tried and wasn't right for them. So we are seeing that, but by far the biggest driver is continuing to replace on-prem. And on that front, we continue to see the same competitors, strong competitors in Nice and Contact and Genesys are the two big ones that we see. And they're in most of the deals, I would say.

Great. Thank you very much, and congrats again on the quarter.

Thanks, George. Our next question is from Scott Berg with Medium.

Hey, Rowan, Barry, and Dan. Congrats on a really good quarter, and thanks for taking my question here. I guess my question is around the big deal environment. It looks like it's going pretty well for you guys, including your largest deal ever. And I guess as you look at the big deal environment, I know it's early on the automation side, Rowan. But are those solutions starting to impact how you're selling those deals or what the bookings in those looks like? Or should we imagine or view the automation solutions as really being more of a 21 bookings event versus maybe what you've done last quarter or two?

I'll let Dan. Thanks, Scott, for the questions. Good one. Dan?

Yeah, Scott, great question. And, you know, we're... coming to every opportunity with the automation story and the ability for these companies to take on and automate more of the functions that they used to do manually. And the key there is many companies will go ahead and implement automation day one, but it doesn't move the revenue needle as much so far. To your point earlier, the bookings that we've done thus far haven't really moved the needle on the revenue front. And part of that is because they see our story, they test those solutions, and they say, great, in many cases, get me to the cloud with 5.9. I know you guys are my long-term solution. And the automation will occur over several years. Yeah, we'll definitely get impact in 2021. But when you start to say, okay, let's put in IVAs to self-serve, are the consumers all going to self-serve and get all of their transactions handled that way? No. But there's a small percentage that will. And I think over time, as our society gets more and more comfortable talking to machines, we all do it at home with Siri and Alexa and other devices. The spoken commands into a system and expecting to get the right response is going to only get better and better adoption. over time and you know you think about it where we are today versus where we were three four years ago it's come a long way and now it's starting to creep into the contact center in ways that we haven't seen before so to answer your question i think it's going to be a it's going to be a several years of you know, labor arbitrage that we're going to be able to benefit from, but it's not going to happen overnight. It's going to be an adoption that will probably take over the next decade, and it'll just keep increasing each and every year, and part of that is societal. Part of it's the technology, but a big part of that is just our societal acceptance and comfort level with getting self-service that way.

Excellent. Great quarter again.

Yep. Thanks, Scott.

Thanks, Scott. Our next question is from Remo Linchao from Barclays.

Congrats from me as well. Enterprise is doing really well, and we've talked a lot about it. We've talked less about the SMB part of the business, but that has been also like a mini success story for you guys. So I just wanted to talk a little bit about that. You know, you talked about teens growth, and that's much better than the high single digits we had before. How much of that is just the new leadership and it's a one-year effect versus actually you having been done like fundamental changes to that to kind of make that a sustainable trend? Thank you. Dan?

Yeah, so part of it is that leadership change and really that team coming in and focusing on solution selling. More of an enterprise-like sales motion than what we had had prior to that several years ago. The other is channels. We talk a lot about these channel organizations that we've signed on and many of them do business across the spectrum from small customers to larger customers. And so we get handed and brought into a lot of transactions that we wouldn't otherwise have seen. They wouldn't have reached out and found Five9 on their own. but the channel can bring us that business. And so that's been another driver for why we've been able to see a resurgence in that growth model within what you call SMB, which is really what we call commercial, but same thing. Yep. Thank you.

Thank you. Yep.

The next question is from Ryan McWilliams with Stevens.

Thanks for taking the question. So when I used to work at a contact center back in college, We always talked about two things that would never happen, remote agents and virtual agents. So we have seemingly opened Pandora's box for contact center now. You know, I would love to double click on your expanding net retention rates. Are you seeing an expanded enterprise opportunity with existing customers? So are you seeing organizations that use contact center for an individual business silo expand and implementation throughout the organization over the last year? Next.

We have seen that. Yeah, I'll let Dan comment as well. But we definitely have seen expansion within our existing customers as they look at totally new use cases. I'll give you one example, customer that I'm the exec sponsor for in the healthcare space and big hospital network. And they figured out that their receptionists in their offices, in their doctor's offices that they have many, many, many of, are sort of doing the job of a contact center agent, and especially now that they're remote. And they sort of said, well, how can we repurpose these folks so that when they're not dealing with customers who are in front of them, if they have extra time, they can actually start dealing with other virtual requests that are coming in, not even to that office necessarily, but into any office. So that's one example of sort of an adjacent use of contact center getting more broadly embedded into the fabric of an organization. And Dan's probably got a lot of other examples like that.

Yeah, well, the one that first comes to mind, Ryan, is if you look at the million-dollar customer base that we have, and we talk about that every year, that group of customers is growing tremendously. But if you look at that group of customers over the last several years, they've grown at a 67% CAGR. And if you think about that for a moment, that's all due to what you just described. It's a land and expand model. When you go into a large enterprise, they're not going to flash cut and say, get rid of all my premises equipment and take me to the cloud. The beauty of the cloud is you can pick off group by group or department by department. where they need us most, right? They need to innovate. They need to automate. And so they look at those groups first. And then once you get that momentum going, it's easy for them to internally use the other groups as references. And that makes it real easy to then go after the rest of the enterprise. And so that's why we see that CAGR so high within those large install-based customers.

Thanks. Yeah, I'm excited to see how lasting remote agents change things next, but appreciate it. Thanks, guys.

Yep. The next question is from Andrew King with Colliers. Yes. Hi, Andrew.

Go ahead.

Unfortunately, Andrew, I'm not able to hear you. I don't think we're able to hear you.

Can you hear me now?

It sounds like no, not really.

Can you guys hear me now?

Yeah, that's better. Thank you.

Okay, great. So, obviously, you guys had a really strong quarter with Zoom phones, and it seems like a lot of that adoption is coming from the phone solution. Can you talk a little bit about any new use cases you're seeing pairing CCAS with video solutions? Dan, do you want to take that one?

Yeah, we've seen several that have adopted video engagement, particularly we have a couple key customers in healthcare that doing remote, Teladoc being one of our big customers, being able to do those remote interactions and being able to service a patient via Zoom or another video type solution. And there's some very specific products that allow that to happen. It's not as simple as, hey, just turn on video for every interaction you're going to have within a contact center. But there's some specific solutions that do cater directly to healthcare and some other key verticals. You know, it's still niche play when it comes to, you know, video in the contact center. Some organizations are, you know, it's not the right fit and they don't necessarily want their agents being viewed in every interaction, but it is a growing trend and it does have its place, especially with today's remote workforce. And if I touch on that for a moment, the previous question was being asked about remote workforce and will that be kind of a permanent thing. We're finding lots of our customers for a couple reasons, several reasons are looking at having a remote workforce well after the pandemic ends. And the reason is because they can cast, they now find with the technology, they can observe, monitor, track performance And they're getting the productivity that they never imagined that they would out of a remote workforce. Ryan's point earlier was, oh, I never thought I'd see remote agents. Well, we've now proven it, and customers are finding the data is reflecting that they can get that productivity. And when you look at the remote workforce, I can now cast a wider net. I don't need to hire within 30 mile radius of my contact center. I can also get a higher educated workforce because I'm able to hire people that may have had to stay at home previously for other personal reasons, but they now can be part of that workforce. And I have the tools, like I mentioned, to be able to track and monitor them. So lots of customers are finding, will they go back to the way it was before? Very few. There's studies coming out right now with statistics that show very few will go back to the way it was. Few will completely stay remote. Most of them will have a combination or a hybrid model. So we're looking forward to that as well.

Great. Thank you.

Thank you.

Thank you, Andy. The next question is from Jeff Van Ree with Craig Hellam.

Great. Thanks, guys. Hey, congrats. I mean, great quarter. A lot to love. I like the format. Barry, I love the Cap'n Crunch in the background. That's good stuff. So just a couple for me. I guess, guys, one for you, Dan. It's in the what have you done for me lately category. How long is it going to take to beat this deal size? Do you think this record deal size stands for the year? Obvious question. How many more are these in the pipe?

Boy, you put me on the spot with that one, huh? Yeah, we keep, we keep, uh, the last several quarters, we've, we've put a record on the, on the wall. Um, you know, it's, what is it? February 22nd. I'm not gonna, I'm not gonna make that prediction at this point in the quarter, but, uh, But we've seen a pipeline that grows. I'll make a generic statement, and that is when you go in and you sell a significantly meaningful global enterprise that considers themselves having some of the most complex requirements and needs, Once you execute successfully within that enterprise, there's going to be many more that are going to come to the table and say, wow, if you can support them, I have confidence you can support me. And that reference settling when you get up market is so, so important. And we've seen that with help of our SI partners. as well as the customers themselves being able to say, yep, Five9 executes, they get it, they're helping me, I'm extracting the value I expected. So will there be continued momentum further and further at market? Absolutely. I don't want to try to put a timing on beating the record, though.

Can you get us in the ballpark on how many seats a deal like that might be, even within a range?

Well, you can kind of back into it with our typical model of around $200 per seat. And then you add a few of the extra SKU technologies for some of the large organizations that do buy more. And you can figure out where that falls. It's actually hard for customers to estimate their concurrent usage when they purchase because they're looking at it with, well, gee, I never really had to worry about concurrency. They worried about overall licenses for every end user. So some of that is estimating at the front and then truing up as you go.

Yeah, it makes sense. Different day. One last sort of, if I can sneak it in Rowan, you know, you got a question earlier on, on competitive landscape, but I wanted to revisit it. Obviously the space is on fire, customer engagement, digital engagement, digital transformation is a super strong space. You know, Avaya is out talking about their move to the cloud and you've talked about the legacy guys that you're in there frequently displacing. I'm more interested in, in both the UCAS guys that are, they're trying to sell contact center into the base and, And then also Amazon Twilio, you know, Twilio had great numbers the other day. Amazon's throwing out some big numbers. I mean, there's a lot of room to play with these numbers, but I'm just kind of curious in the positioning, like where you're seeing them, you know, just how everybody's carving out their relative spaces for future dominance.

Well, this is probably, this is definitely an oversimplification, but the UCAS vendors tend to be in the smaller end of the customer base. uh you know ring central and eight by eight for example and then you know amazon tends to at least you know they're either they're both they're sort of a very very small you know less than five or ten agents and then very very large so we're not running into amazon that much and we don't run into the ucas vendors that much that's why when we talk about our competitors who we face head-on it is those pure play cloud contact center as a service companies and to remind you You know, the, the distribution of contact centers, it really follows a bell curve where, you know, the 50% of the contact center seats are in these sort of midsize contact centers between 50 to 500 seats. And, you know, we, we play, you know, from sort of call it two to five seats at the low end, all the way up into the, you know, into that 50 to 500 space and beyond now, obviously you're seeing that traction as we're getting up into the top end of the market, but. And that of it is there is plenty of market to go after, you know, in the segment without actually bumping into some of the competitors that you mentioned.

Yeah. Well, fair enough. Congrats, guys. This is great.

Thank you.

Thank you.

We have time for just one more question. So our last question is going to come from Matt Van Bleet with BTIG.

Hi, guys. Congrats on the quarter. You mentioned in the prepared remarks a growing ecosystem of SI partners, but wanted to dig in a little bit there and kind of maybe what do you feel like are some of the biggest catalysts of them increasingly joining the fray? And then also as you look at kind of an omni-channel and especially the digital channel inclusion, is that something that customers are driving? Are you educating them about that? And are those the kind of deals where the SI partners are really getting involved in bringing in communications from a multitude of different areas of the organization?

Yeah, so awesome question. And I'll tell you right now, when you look at the SIs, they've been in this business for decades. So they've been helping companies with their contact center purchases and applying technology and consulting with how to apply technology to solve the customer experience. They've just done it historically with premises-based legacy vendors. And, you know, they had built their practice around that. We kind of cracked the code for the first time with Deloitte several years ago and said, hey, time to start leading with cloud. Well, did they run out and lead with cloud on every deal? No, but we were kind of first first mover with them to build a practice around that. And as we saw momentum come, it really comes from customers. It's the customer saying, no, no, I want to consider cloud. You bring me a cloud, bring me a portfolio of cloud options. And so for the SIs, they had to respond to their clients and really come to us and say, okay, it's time. So when you look at Accenture and IBM and Slalom and Deloitte and others, they really had to build their practice around it. Not because they just woke up one day and made a decision. It was because the customers were driving it. And that's actually the same. It's very analogous to the channels. When you look at the channels that distributed Avaya and Cisco and Genesis for years, they had the same thing happen there, which is, hey, we're going to sell this as long as we can, as long as our customers will accept it. And then customers started saying, no, no, I need to innovate. I need to be in the cloud. And so they had to bring a cloud offer. So that's why we're seeing increased momentum in both of those areas. So great question.

Thank you.

Yep.

All right, and that does it for all the questions we have time for today. I'm going to give the conference back over to Rowan for some closing remarks.

All right, thank you so much. Well, thanks everybody for joining our call today and for all the great questions. The record financial results for Q4 and 2020 should really be viewed simply as the outcome and a reflection of the fact that we're doing a terrific job of making customers happy. And that we're making progress on our mission to help them reimagine customer service. The integration of inference as well has given us a leadership position in this expanding TAM opportunity for automation. And I said it at the beginning of the prepared remarks, but I'll say it again. This progress is a direct reflection of the hard work and the efforts of our incredible employees who deserve all the credit for the performance that you have seen from Five9. So thanks to our employees and thanks to all of you for joining today. We'll see you next quarter. Thank you.