Five9, Inc.

Thank you for joining us today. On the call are Mike Berkland, Chairman and CEO, Dan Berkland, President, and Barry Zworenstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, customer growth, industry size and trends, our expectations regarding macroeconomic conditions, company market position initiatives and expectations, technology and product 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 information in such statements. These statements are subject to substantial risks and uncertainties, that could adversely affect Five Nine's future results and cause these forward-looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration, including increased inflation, increased interest rates, supply chain disruptions, decreased economic output, and fluctuations in currency exchange rates, lower growth rates within our installed base of customers, the impact of the Russia-Ukraine conflict, the impact of the COVID-19 pandemic and the other risks discussed under the caption risk factors and elsewhere in five nights annual and quarterly reports filed with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this fall. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and currently available in the investor relations section on Five9's website at investors.five9.com. And now I'd like to turn the call over to Five9's chairman and CEO, Mike Berkland.

Thanks, Emily. And thanks everyone for joining our call this afternoon. I'm pleased to share that we closed out the year with strong results for the fourth quarter and 2022. Fourth quarter revenue grew to $208 million, up 20% year over year. For the full year 2022, revenue grew to $779 million, an increase of 28% year over year. Our enterprise business, which accounts for 86% of total revenue, continues to drive this increase, with LTM subscription revenue growing at 32% year over year. Fourth quarter adjusted EBITDA came in at 22% of revenue, helping drive another record quarter for free cash flow of 25 million or 12% of revenue. These results clearly demonstrate that not only do we continue to be a leader in delivering on this massive under-penetrated opportunity, but we also believe our business model supports a very attractive combination of strong growth and profitability. Let me illustrate what I mean when I say massive and under-penetrated. Based upon trusted industry sources, there are over 16 million contact center agent seats worldwide with approximately 20% or 3 million of those agent seats having already migrated to the cloud. This leaves an opportunity of about 13 million seats. To put this into context, as one of the leaders in the industry, we had approximately 440,000 named seats at the end of 2022. In spite of the current macroeconomic backdrop, we remain very optimistic about our long-term opportunity in this market, especially at the upper end, which is the largest and least penetrated part of the market and the fastest growing category of our business. Our confidence in this opportunity is based on three key trends. First, the viability and desirability of cloud solutions are no longer questioned. Legacy vendors are retrenching, forcing enterprises to develop concrete plans with an even greater sense of urgency to replace their on-premise contact center solutions. Second, companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience. According to multiple industry analysts, CX technology budgets will increase in the next 12 months. Enterprises know that the sooner they move to the cloud, the sooner they can take advantage of the benefits that come from game changing technologies to differentiate their customer experience. And third, AI and automation have become front and center in the CX market, providing an attractive and tangible ROI, thus becoming a significant catalyst for enterprises to shift to the cloud. This labor arbitrage opportunity is especially important in tough economic climates and tight labor markets. Now I'd like to discuss what we view as the three main growth drivers for our business, namely our platform, our march-up market, and our continuing international expansion. Let's begin with platform. As we talked about last quarter, we continue to make investments to enhance our platform with the objective of delivering ongoing reliability, deployment at scale, and continuous innovation. Our recent enhancements fall into two categories, each of which we believe plays a central role in the future of the contact center and customer experience markets. The first category is analytics. Our recently launched Five9 Analytics product marks a turning point for reporting and analytics in the contact center industry. To truly optimize CX performance, contact center managers need the ability to define unique business metrics for success. Five9 Analytics allows customers to perform deep data discovery, explore trends in their contact center, create their own dashboards, and fulfill their custom reporting requirements in a self-service manner like never before. Today it is crucial for contact centers to unify and analyze customer interactions across self-service and live channels to transform data into a winning customer experience strategy. Five9 Analytics integrates state-of-the-art business intelligence with operational data to create a contact center intelligence platform. Users can gain performance insights across all channels to identify where workflows can be added or improved. To help customers gain instant value from this offering, we provide a built-in library of over 250 metrics, modern visualizations, and a robust data analysis engine. The second category is generative AI, such as ChatGPT. As you know, we have been leading the market with our AI and automation solutions, and we are now further strengthening our portfolio with the inclusion of GPT-3. we are pleased to announce two new product offerings that leverage GPT-3 from OpenAI. The first offering is AI Insights, which uses real-time transcription to automatically interpret interactions and cluster them into categories, which then allows customers to identify opportunities for automation and process improvement without the need for professional services or tuning. Five9 AI Insights is the latest example of what we call practical AI. The second offering is AI summaries, which is offered as part of our agent assist product line. AI summaries allows customers to auto summarize call transcripts in seconds and publish them in real time into their CRM. Again, this new offering requires little to no professional services or tuning, meaning the time to value is much quicker. These offerings come to market as we see AI continuing to gain momentum, especially in the enterprise. For example, in the fourth quarter, 41% of RFPs that came into our strategic and enterprise sales organization cited AI as the main or auxiliary reason for issuing an RFP. Our industry leading AI and automation portfolio of products now has eight distinct modules, including speech analytics, workflow automation, Voice IVA, Digital IVA, Agent Assist, and now Five9 Analytics, AI Insights, and AI Summaries. We believe that AI and automation are at the core of the modern contact center and that generative AI based on large language models is game changing. Overall, our portfolio of omnichannel solutions plus our AI and automation offerings, including these recent additions that I just spoke of, creates a platform to deliver what we refer to as Fluid CX. Fluid CX enables consumers to move through the most efficient and personalized path across channels and between virtual and live agents, keeping context and creating a frictionless customer journey. Enabling this is critical in the modern Enabling this is critical as the modern consumer continues to demand an integrated and seamless customer experience from the brands that serve them. Now turning to the next growth driver, our March up market. We continue to see strong momentum up market and exited 2022 with 161 customers that are each generating over 1 million in ARR up from 134 customers a year ago. This cohort now makes up slightly more than 50% of our recurring revenue. Another key factor driving our success upmarket is the growth of our channels and partner ecosystem. The channel, long beholden to the legacy vendors, has pivoted to the cloud. And as a result of our focus and investments, we are executing and gaining leverage with an expanding list of partners. We have a balanced route to market strategy with direct sales being complemented by VARs, distributors, technology solution brokers, global service providers, and importantly, systems integrators. These channel partners love how easy Five9 is to work with. And our partners appreciate how their enterprise customers can easily make the migration to Five9 with tools we have developed to replicate and easily transfer their configuration data, routing logic, and reporting information from their legacy solutions to Five9. Before turning to international, I want to mention a factor that I believe is key to our overall success. Not just upmarket, but across all customer categories, and that is the trust we have built up over the years. Due to significant and sustained investments in professional services and customer support, we have consistently delivered exceptional experiences through strategic implementations that help customers accelerate time to value and ongoing worldwide support designed to optimize and improve efficiencies. As a result, we continue to set the benchmark for the industry with NPS scores in the 80s and 90s. Lastly, I'll briefly discuss our international expansion. We have been making significant investments internationally, and we continue to enter new markets, including Germany, Spain, and several other countries. These investments are paying off as our 2022 international revenue grew 44%. Additionally, our partner certifications for sales and implementation services are gaining significant momentum globally, but especially in international regions where the number of total certified partners more than tripled in 2022. As a result of our broadening global reach, driven by both direct and channel expansions, our international bookings grew 87% year over year in Q4. In closing, let me reiterate my enthusiasm and excitement about the opportunity ahead for 5.9. I believe we are extremely well positioned with our industry-leading platform combined with the best team of people that will enable us to continue executing against this massive under-penetrated opportunity. With that, I will turn it over to our President and Chief Revenue Officer, Dan Berkman. Dan, go ahead.

Thank you, Mike. I'm pleased to report another strong bookings quarter in Q4, driven by our continued momentum in $1 million-plus ARR new logo deals and unprecedented leverage from our channels, who are now participating in not only sales but also implementation and ongoing services, particularly in the international markets, as Mike mentioned. Customers are clearly seeing the benefits of transitioning from on-premise to the cloud, and we believe they are more motivated than ever given what we are seeing from legacy providers. As a result, this is driving more opportunities, growing our pipeline to another all-time high. While we are continuing to see macro headwinds in our install base and in new logos in the mid-market, that softness is being offset by overachievement upmarket in our strategic accounts and strong growth in our international bookings. And now, as I normally do, I would like to share some examples of key wins for the quarter. The first example is a global business process outsourcer, or BPO, based in Spain and Latin America, serving retail, telecommunications, and financial customers. Five9 was chosen to replace many of their Avaya solutions where they do not have the flexibility and full suite of applications that Five9 can provide, including omni-channel, IVA, and automation solutions their clients are demanding. We anticipate this initial order to result in over $4.3 million in ARR to Five9. The second example is a Fortune 500 clinical laboratory providing healthcare diagnostic testing and services throughout the U.S. They take inquiries into their contact centers from patients and healthcare providers to schedule tests, check results, and collect payments from patients and health insurers. They were operating primarily on Avaya and could not add the innovation, automation, nor analytics they required. After evaluating several CCAS providers, they chose Five9 for our complete and fluid omnichannel solution with analytics, insights, and deep integration to ServiceNow. They will also use our digital IVA, voice IVA, and email as additional channels to offer self-service for scheduling appointments, finding locations, and requesting test results. We anticipate this initial order to result in over $3.8 million in ARR259. The third example is a global company focused on partnering with physician-owned radiology facilities to build and equip them with state-of-the-art, high-quality imaging systems and related technologies. They were using both Cisco and Avaya as a result of prior acquisitions and lacked the reporting, integrations, and omni-channel solutions to effectively serve their customers. Five9 was chosen due to our end-to-end technology suite, our innovation and AI roadmap, and our quality high-touch implementation and ongoing managed services. We also partnered very closely with Salesforce, while our key competitor aligned with a different CRM they were considering. With QM, Interaction Analytics, and WFM, they can evaluate agent efficiency and recognize areas for improvement. They are using our advanced IBA to allow self-service for appointment scheduling, appointment confirmation, outbound reminders of appointments, and to process payments. We anticipate this initial order to result in over $2.3 million in ARR to Five9. And now, as I normally do, I'll share an example of an existing customer who expanded their use of Five9. This is a leading financial services company for consumers and they've been a customer of Five9 for over two years and are currently utilizing a full suite of solutions on our platform and had been piloting our IVAs. Due to the success they experienced with our initial IVA use cases, they are now expanding to include a broader, more advanced set of use cases. This additional IVA order is expected to add an incremental $1.8 million in ARR. bringing their total annual spend with Five9 to over $6.7 million. As we've demonstrated, Five9, along with our partners, continue to bring comprehensive end-to-end CCaaS solutions to our customers with the analytics and insights to improve their contact center operations while giving them the flexibility to deliver exceptional customer experiences to their end users. And now I'll hand it over to Barry to cover the financials. Barry?

Thank you, Dan. Before going into specifics, a reminder that, unless otherwise indicated, financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. As Mike mentioned, we had a strong quarter despite ongoing macro headwinds, with a fourth quarter revenue growing 20% year-over-year and LTM Enterprise subscription revenue growing 32% year-over-year. In terms of revenue composition for the fourth quarter, Enterprise made up 86% of LTM revenue and our commercial business represented the remaining 14%. The commercial business grew in the teens on an LTM basis and we expect this to continue. Also, requiring revenue accounted for 92% of our total revenue in the fourth quarter and the other 8% was comprised of professional services. will now give more color around revenue in doing so i will again provide more details than we customarily do please though bear in mind that we do not intend to routinely continue making these more detailed disclosures let's start with the install base where changes in demand show up promptly in revenue q4 is typically our strongest seasonal quarter with non-pandemic sequential growth rates ranging between 8 and 12% historically. This year, we reported sequential growth of 5% in the fourth quarter. This slow growth is primarily due to our installed base continuing to face headwinds, particularly in healthcare and consumer, which are typically our two strongest seasonal verticals in the fourth quarter. For instance, in the fourth quarter of 2021, these two industry verticals in aggregate increased 24% sequentially, while in the fourth quarter of 2022, they grew at slightly less than half this rate. If in the fourth quarter of 2022, these two verticals had matched last year's growth rate, the sequential growth in total revenue would have been within the historical range of 8% to 12%. Turning now to our other source of revenue growth, namely from new logos. New logo seat turn-ups in the fourth quarter continue to be strong and slightly exceeded our expectations. With respect to the deployment profile of the two new logo mega deals that we've discussed in recent calls, we continue to expect that the international operations of the parcel delivery company will be substantially deployed by the end of 2023 and the healthcare conglomerate to continue ramping throughout 2023 with full deployment in early 2024. To summarize, on the new logo side of the business, we have good visibility into 2023 revenue due to our continuing success in going up market and international expansion, as well as from a substantial backlog of bookseeds that are not yet generating revenue. Our LTM dollar-based retention rate was 115%, a decline of 3% each point sequentially. mainly due to macroeconomic headwinds causing our customers to add fewer seats than normal. Longer term, we continue to expect our retention rate to trend toward the high 120s by 2027 due to a higher mix of enterprise customers, especially larger ones, which have demonstrably higher retention rates and higher output from our automation and other offerings. Fourth quarter adjusted gross margins were 62.3%, a decrease of approximately 50 basis points year over year, but a quarter over quarter improvement of approximately 90 basis points. As we have been communicating, the sequential improvement is driven by the moderation of our previously accelerated investments in professional services and public cloud. Fourth quarter adjusted EBITDA was $46.2 million, representing a 22.2% margin and increase of approximately 90 basis points year-over-year. Fourth quarter non-GAAP EPS with 54 cents per diluted share, a year-over-year increase of 12 cents per diluted share. Before turning to our full year performance, I would like to report that our average concurrent seat count for the fourth quarter grew to 293,450 seats, up 19% year over year. Note that we estimate our concurrent seats to be equivalent to approximately 440,000 seats on a named seat basis, a unit of measure that some others in the industry cite. As a reminder, we provide this seat count metric only on an annual basis. And now for a closer look at key full-year 2022 income statement metrics. 2022 revenue was $779 million, up 28% year-over-year. 2022 gross margin was 61.3%, a decrease of approximately 220 basis points year-over-year, but above the 61% outlook we had provided, driven by the sequential improvements in the last three quarters due to the moderation of accelerated investments in professional services and public cloud. 2022 adjusted EBITDA margin was 18%, a decrease of approximately 10 basis points year-over-year. 2022 non-GAAP EPS was $1.50 per diluted share, a year-over-year increase of $0.34 per diluted share. Finally, before turning to guidance, some balance sheet and cash flow highlights. I am pleased to report that in the fourth quarter, we achieved another set of record highs for both operating and free cash flows of $32.7 million and $25 million, respectively, driven in part by continuous strength in DSO performance, which came in at 35 days and moderated capital spending. We have now delivered 26 conservative quarters of positive LTM operating cash flow, and we expect to increase meaningfully in the longer term, given our ability to expand adjusted EBITDA margins, our substantial NOLs, and our low DSOs. I'd like to finish today's prepared remarks with a discussion of our full year 2023 and first quarter 2023 guidance. As a reminder, For six years through 2020, we started each new year with prudent revenue guidance of 16% year-over-year growth at the midpoint, mainly due to the uncertainties around the magnitude of the seasonal impact of our business. Now, post pandemic, for 2023, we are returning to provide full year guidance at a midpoint of 16% year-over-year growth, or $901.5 million in revenue, in line with the high-level outlook we provided last quarter. Please note that our guidance takes into account a prudent view of the uncertainties around the magnitude of the second half seasonal uptick, along with our assumption that macroeconomic headwinds will persist throughout the year. Ultimately, the 16% year-over-year growth is a starting point, and we will update our outlook as the year progresses. Also, a reminder that, as we stated last quarter, given that install base typically contributes approximately half of the annual revenue growth, We may see a drop in the LTM enterprise subscription revenue growth rate into the high 20s due to the macroeconomic challenges. We believe that this will be temporary and will improve as macroeconomic conditions improve. Note that the enterprise subscription revenue currently makes up over 60% of our total revenue. With regards to the bottom line, we are guiding 2023 non-GAAP EPS to a midpoint of $1.69 per diluted share, well above the $1.58 outlook we provided for 2023 during our last ending score. Additionally, the $1.69 non-GAAP EPS implies a non-GAAP net income margin of 14% at the midpoint, which is in line with our 2022 net margin. As for the first quarter, we are guiding revenue to a midpoint of $207.5 million, which represents a slight sequential decline, but better than the 1% to 4% quarter-over-quarter decrease we have been guiding for Q1 in the past five years. Despite the macro headwinds, we are guiding to a smaller sequential decline than prior Q1s, due to the lower than normal seasonal uptick in Q4, which we expect to result in less seasonal downtick in Q1. As for the remainder of the year, we expect a very small sequential growth in the second quarter and larger sequential increases in the second half, primarily driven by the ramp up of our large customers and seasonal patterns. As a result, we anticipate slightly more than 30% of our annual revenue being generated in the second half of 2023. We expect first quarter non-GAAP EPS to come in at $0.24 per diluted share at the midpoint, a decline of $0.30 per diluted share sequentially. I would like to point out that the first quarter non-GAAP EPS is always the weakest of the year and that the $0.30 per diluted share sequential decline is relatively in line with the $0.29 per diluted share decrease we guided to in Q1 of last year. For the remainder of the year, we expect non-GAAP EPS to increase to approximately 32 cents per diluted share in Q2 and further improve in the second half. Please refer to the presentation posted on our Best Relations website for additional estimates including share count, taxes, and capital expenditures. In summary, we are pleased with our fourth quarter performance. We will continue our disciplined approach of driving balanced growth as we navigate through the macro uncertainties and invest in key strategic areas to reach our 2027 financial targets of 2.4 billion in revenue and 23% adjusted EBITDA margin. Operator, please go ahead.

Thank you. Before we take our first question, I'd like to remind everyone to please limit yourself to one question in the interest of time. Thank you very much. We will take our first question from DJ Heinz at Canaccord.

Hey guys. Good to see everyone. Thanks for taking the questions. Next quarter. Dan, I want to ask you a competitive question, but not the one that I think you get often. I'd love to get your thoughts on how you see Microsoft positioned in the CCaaS space over the next several years. I think traditionally we've kind of positioned this market as a three horse race. Totally makes sense today. But with Microsoft's addition of nuance, their alignment with open AI, the growth of teams, do you see them being a viable player in this space longer term? Any thoughts would be helpful.

Yeah, thanks, DJ. Great question. You never want to underestimate a Microsoft. While they've done those acquisitions and made a move to enter this space, as we've talked about over the years, it takes many years to to really perfect a solution and be able to deliver the reliability, scalability. The voice portion is so complex to be able to deliver that in real time across the world in a very highly, you know, quality way. You know, for instance, if you're running data applications and software gets scaled across the world regularly, you know, packet loss for the data is overcome very easily by the individual user. You hit your key twice, you wait a couple seconds and on you go. If you have that same packet loss with a voice conversation, it's disaster. And it's disaster across hundreds or thousands of agent conversations. So it's very hard to get that right. And there are very few companies, like we've mentioned, us and two others that have really mastered that. And it does create natural barriers to entry. A lot of folks believe they can quickly. And it takes them a lot longer than they anticipate. But we're always going to keep our eye on Microsoft and some of the other, you know, large hyperscalers that have mentioned their interest to enter this space. And we'll see where it leads. Some of them enter and realize how difficult it is and exit and others stick with it.

Yeah, yeah. Appreciate the call. It sounds like we're doing one question. So I'll hop back in the queue. Thanks.

We'll take our next question from Ryan McWilliams at Barclays.

Hey guys, love to hear about the AI summaries. Typing account recaps was the least favorite part of my contact center job. So my 19 year old self definitely thanks you. Separately, just the challenges you mentioned in the healthcare and consumer verticals, is that simply a product of the macro? And would you expect the seasonal agent ramps to normalize if the macro improves? And have you seen broader company layoffs impact contact center agents at this point? Thanks.

Yeah. So, Ryan, great, great questions. And again, in terms of, you know, those impact on those couple verticals, we believe it was macro. And again, that's you heard Barry's comments about kind of, you know, what we expect in Q1 relative to kind of, you know, the seasonality of Q4 typically versus that macro impact on that seasonality that just occurred. So, yeah. Again, we're pretty certain of that. Again, we get a lot of insight into our customers and what's impacting their businesses. Again, we always talk about the long-term opportunity that we have in this market and how attractive it is in spite of those macro headlines.

And if I could just also add, in terms of the layoffs, I have a list of the companies that grew less than we would have expected, both in health care and in consumer. And there's none of the usual suspects in terms of layoff in any of those names at all. We're just not overly dependent on that part. So in our view, it truly is transitory. It's on the install base. They're adding seats. They're just adding them at a lower pace. And one day that economy is going to come back and it'll be a case where it helps us.

Hopefully sooner rather than later. But guys, appreciate the color. Thanks. Thanks.

Moving on now to a question from Scott Berg at Needham.

Hi, everyone. Congrats on the quarter and thanks for taking my questions. Dan, I wanted to follow up on your commentary on the sales environment. Sounds like the million dollar deal traction was, again, pretty positive for you all. But can you help us understand how your bookings in the quarter stacked up relative to maybe your expectations going into the quarter and maybe relative to your third quarter comment where I believe third quarter had the most record number of new million dollar ARR signings ever. Thank you. Yeah.

Thanks, Scott. And when you look at us, as we move up market, the sales, naturally the bookings become rather lumpy, especially as we have those mega deals enter into the bookings equation. So we've got some tough compares that we're coming past and getting through right now, but we continue to see great momentum in the million dollar plus bookings. ARR deals, remember that market is very much at its infancy. It's just opened up over the last couple of years. And we continue to see that as our highest growth segment of the business. Both that and our international bookings, which grew 78% year over year in Q4. So the momentum's there. It's very strong. And as we said, the activities of the legacy providers and what they've mentioned to their marketplace and to their own customers, sets up very well for the migration from on-premise to cloud, as well as the AI and automation solutions where we can give truly tangible ROIs to those customers. So we're seeing absolutely no slowdown in the million dollar plus market. It's just the ebb and flow of those large deals and the happenstance of when they close is what happened in Q4.

Just a small follow-up on that, because it's a continuation of the question. Did you see any deals kind of move in or out of the quarter more than a normal fourth quarter seasonal trend?

No, there were still the flurry, you know, at the end, as there always is. And, you know, there's always, when you do a lot of transactions, you're always going to have, you know, a handful that, for whatever reason, can't get across the line. But we also have others that we pull forward. So it was no different than any other quarter and no different than any other Q4, if you look at that.

Austin, thanks for taking my question.

Yep.

We'll continue with a question from Mita Marshall at Morgan Stanley.

Great, thanks. Dan, I think it was you kind of gave the 41% of RFPs having kind of AI as part of that RFP. And clearly like the revenue versus seat count ads kind of shows the attach rate that you're seeing there. I guess just where are you on install base and kind of going into the install base and doing some of that AI upsell and just does the introduction of some of these new, whether it be GPT-3 or open AI integrations kind of slow that, sales process. Thanks.

Yeah, thanks, Mita. And if you look at, you know, what you mentioned about the install base and penetrating that with the new products, the AI insights, our new web admin and other applications that we can sell into that base are just getting rolled out. So those aren't entering the equation yet. So we don't have those in the bookings totals and in the revenue item for sure. But look for those to be additive probably in the latter half of 23. And yeah, but we're seeing, we're making a concerted effort. Our customers are very interested in adding those. And we are seeing quite a lot of growth in attaching the, you know, previously announced AI and automation solutions. Agent Assist, our IVA solutions, as always, are very appealing to the install base. And that's going just great. Great.

Thanks.

Now we'll go to UBS and Taylor McGinnis.

Hi, thanks so much for taking my question. So I know we're well into the quarter and 4Q was a little bit softer, but the 1Q got on a sequential basis is stronger than I think what you've done in the past 1Qs. And I think the full year guidance range on a dollar basis was a little bit softer than what we've seen in the past. So two parts here. The first would be, can you bridge some of that. And then when you talk about the softer verticals like healthcare and consumer, what is the guide assume in terms of seed ads versus trends? And then the second part is you reiterated the high 20s enterprise subscription revenue guide for this year, but on a trailing 12 months base, it only grew at 32%. So can you just talk about what gives you comfort in that outlook?

Yeah, very. Yeah, sure. So, Tula, I want to be sure that I understand the questions crisply. The first question is regarding seed ads in healthcare and consumer. Is that correct? And what are we assuming on that?

Yeah.

Yeah. So, for the rest of the year, we're assuming that the macro remains similar to what it was in the second half of 2022. And for those two verticals in particular the first three quarters of the year are pretty normal but they both take off in the past quite dramatically in the fourth quarter we've assumed a more moderate a much more moderate take off in the fourth quarter and to some extent in the third quarter as well If the consumers are less challenged than they were this past year, if inflation maybe is a little bit less and all the interest rates a little bit lower, but they feel a little less pinched overall, that could be upside to that. But that's the position that we've taken. The second question was with respect to the LTM enterprise subscription growth rate. Is that correct? Yeah, so we were crystal clear on that. We, in the last quarter, we said because half of our business comes from the installed base, basically, and if that's facing headwinds because of the macro environment in general, not just in those two verticals, you're going to see moderation in that growth rate. And we caution that it may dip into the high 120s in the course of this year. And that remains our position. And you may wonder, well, if that does happen, when in the year might it happen? It could happen in the first quarter. Obviously, we're doing our best not to have that happen, but it's certainly possible. And when it would recover depends entirely upon the macro. One thing we do feel very comfortable about is that this is Matt Stoddler at William Blair. Hey, gentlemen, thank you for taking the question. Just one on WFO and specifically Virtual Observer. Let's just get an update on the contribution there, what you guys are seeing, and then

In terms of expanding that product, are you seeing that move up market at all versus the typical focus in SMB or mid-market? Any color would be helpful.

Yeah, we continue to see WFO, especially our VO product, be attached to. And it's not just SMB. It's absolutely in that mid-market and even enterprise. We have the variant relationship, which is excellent for those customers that have a history. Typically, upmarket in this very large strategic accounts and the million-dollar-plus accounts, we still sell VO into several million-dollar-plus accounts. It's just there's oftentimes a history that someone has and they've collected years and years of data on their existing variant platform. And they want to be able to transfer that data over and continue using the interface they're comfortable and used to. So it's important for us to have both. And whichever one's the right fit is what we're going to move forward with.

Got it.

Thank you very much. We'll take our next question from Sterling Audie at Moffitt.

Thanks. Hi, guys. So given the commentary about the installed base, it would seem like the new logo wins are going to be even more important to the revenue targets for 23. So with that as the context, have you guys done anything different in terms of the way that you scrub the pipeline? or maybe increased coverage ratios or something else to, you know, give you an improved sense of being able to deliver that new logo close.

Yeah, Sterling, thanks for the question. I'll start and let Dan finish because I want to make one point really clear. 23 revenue is going to be impacted by our installed base. And quite frankly, mostly from our backlog of that new business we've already bought. It gives us extreme visibility into what's going to revenue in 2023. especially in a large enterprise part of our business, right? Where again, those bookings take quite a while to turn into revenue. So again, as we go through the year, our bookings, you know, especially in the second half of 23 on the net new enterprise side are going to impact 24 revenue, just to be clear. But Dan, if you want to talk about pipeline. Yeah.

And well, and what Mike just mentioned, the visibility of that backlog and the scheduled rollout gives growth portion. And then the other half of the growth, as Barry mentioned, comes from the net new logos. And that's all the way up and down the scale from the very smallest, which tend to turn to revenue very quickly, 30 to 60 days to when they start generating full revenue to some of the larger ones that can take three to six months or even longer. So yeah, we have very... close insights, how we're approaching it on the sales side is absolutely placing more scrutiny on the sales organization and how we go through and qualify opportunities, making sure people have true budget to make decisions and really working more closely with all the partners that are now bringing us more and more deals. Our expansion of our partner ecosystem is so important to the long-term, not only our long-term growth, but really making sure that we're in the pole position for those partners to turn to Five9 first. There's been recent studies out, channel checks to make sure how we're doing compared to our competitors, which we love to see from third parties, to validate that we're doing the right things and that they love working with us. And that's working very well. We've got a couple of projects that we're very focused on with the higher end of the market with some very select partners to really certify and enable them to deliver not only sales leverage, but as I mentioned in the prepared remarks, services and implementation and managed services work for us. You know, we've been careful over the years not to sacrifice the quality because we're delivering in the 80s and 90s from an NPS score. But there are certain partners who are willing to make the investment on their side to keep that level very high. And we're investing in them to be able to do that for us.

Understood. Thank you.

Thanks, Daryl.

Next from Jeffries Samad Samana.

Hi. Great. It's great to see you guys. Maybe just first question, Barry, is just think about the EPS guidance. It's slightly slower than the overall revenue growth. Just maybe how should we think about margins and maybe what the margin framework for 2023 will look like based on kind of different growth outcomes? And to that end, OPEX actually looked like it was down quarter over quarter in 4Q and OPEX growth slowed quite considerably. So just how should we think about maybe OPX and then the same question around margins just for 23?

Yeah, it's going to be classic 5-9. We're going to increase our OPX in line with what we see the revenue to be. You mentioned the bottom line guide and mentioned that it was, I believe you said it was slightly down. That's a function of the 2.5% increase in outstanding shares. But for that, we would have been completely flat. The So we will continue to increase our VEX with respect to the direct part of the question, namely, what do we expect the EBITDA and gross margins to be? We're not at this stage giving guidance on that. Just to remind you, though, of the following. We've given 2027 guidance to get to EBITDA of 23%, which is one percentage point more than we got in the fourth quarter. We got 22.2. And to get to gross margins of 70%. And we feel... for reasons we can go in separately, very comfortable in getting to those numbers. Now, obviously, it's easier to get to those numbers when your revenue trajectory is at the high end. To get to those 2.4 billion in 2017, you need a 25% CAGR off the 2022 revenue number. And in this particular environment, it's not particularly effervescent in terms of our ability to grow revenue given the macro.

Gotcha. And then Dan, maybe one for you, just as I think about some of the newer offerings, you just talked about that leverage at GBT. And then as I just think generally, as you get more AI and automation into the product, how should we think about maybe the evolution of the revenue model there, the pricing model? And are you seeing that yield gains? And if you think about how do you say the value that you're adding and monetizing that versus just kind of that traditional seat based model?

Yeah, thanks, Ahmad. And, you know, we've talked about the headwinds that the installed base is facing from a seat ad perspective. That caused us to really get, I think we referred to it a couple quarters ago about getting scrappy and going into the base and selling more applications. And it's great because now we have a whole suite of applications that are new to those install-based customers. So we're seeing an increase in the percentage of bookings that comes from those new applications that's continuing to gain momentum. And as we come out with the GTP3 and other capabilities for insights and analytics, those are products that can appeal to a vast majority of our install base. I mean, yeah, some of the very small customers don't need it. But once you get up into the mid market and above, you know, it's hard to say that they won't have they won't benefit from those applications. So it's too early to tell what the traction rate will be across the board. But, you know, on the sales side, I've got great optimism that the base is going to really take to a lot of those. And like we said, like I said earlier, I made this question, it probably won't find its way into the into the numbers until the second half of this year.

Great. Thank you again for taking my questions.

We'll take our next question from Fred Lee at Credit Suisse.

Hey, gentlemen. Thank you for taking my question. Dan, all the three key wins that you highlighted, they were all Avaya displacements. And I was just wondering if you could talk about the opportunity in 2023 versus 22 as it relates to legacy Avaya seats and whether Avaya's restructuring has accelerated customers' decision to leave, perhaps resulting in some pull forward in the opportunity?

Yeah, I'm glad you mentioned that because on the surface you'd think that. We've had Avaya and Cisco as one and two as far as the systems we most commonly displace and replace. And it's just coincidence that the three happened to be all Avaya this quarter. If you go back over the previous quarters, it was pretty much a mix. It was one and two, Avaya, Cisco, because of Genesis announcements. base are issuing rfps and so we're seeing more uh genesis uh become part of that uh that those three it's now two it was two it's now three that we that we replace it was one one and two being a via cisco and genesis was a distant third um those are becoming neck and neck now between all three

Great. That's helpful. Thank you.

Yep. And just to answer your Avaya question about their recent announcement, you know, everyone saw that coming for a long time. They've been having their financial struggles on and off for, you know, the better part of a decade. And so I don't think it's seen a dramatic, all of a sudden everyone is jumping into the fray and putting out RFPs. Most folks saw that coming for several years. Thank you. Yep.

Moving on now to Matthew Nicknam at Deutsche Bank.

Hey, guys. Thanks for taking the question. Congrats on the quarter. Mine is on new logo growth. I'm just wondering if you're seeing any sort of lengthening sales cycles or smaller initial deal sizes for new logos. And more broadly, is that something that maybe could slow the pace of new logo growth in upcoming quarters? Thanks.

Yeah, a small lengthening of sales cycles has occurred. Part of that is a function of moving up market because the larger and more complex the deals and when you add things like AI, automation, IVAs, you tend to get some new audiences that need to approve those or get them convinced on the ROI. There are, you know, like all software business we hear about now, there's oftentimes a few more people that want to put eyes on a contract to give approval. So we've seen days to close increase slightly, but not enough to make a significant impact to say, oh, new logo growth is going to suddenly slow down. It's not. And so like we've talked about, there's drivers that make this purchase It's mission critical. It's bringing a tangible ROI. And customers know that they need to move to the cloud to take advantage of the AI and automation. And the larger customers realize that that may be a two plus year process to go through an evaluation, issue an RFP, make a decision, and then get fully implemented. So they're seeing an urgency to want to enter that process very quickly.

Thank you. Matt VanVleet from BTIG has our next question.

Yeah, good afternoon, guys. Thanks for taking the question. I wanted to dig in a little bit on the international side. Obviously, you said it was pretty much your best bookings quarter ever there, very strong revenue growth as well. Anything you'd particularly point to that's really driving that and how much of sort of expanding the R&D team and having a few more kind of boots on the ground is helping you in that environment?

Yeah, a few things on the international front and I'll let Mike continue. We took from some very strong US, relocated them over to Europe, built out the teams. A big function of it is people. You got to have the scale of just people in the right places, in the right countries, and have the infrastructure prior to that. It's not about just dropping some salespeople in and watching productivity occur. You've got to build the infrastructure. You've got to get all the approvals, make sure you've got the compliance requirements and data sovereignty requirements in certain countries. We've done all that hard work. To set ourselves up. Now it's just it's more execution of drop salespeople in and let them go execute. And our multinational customers that we've sold here in the US oftentimes have operations in many of these countries. And so we have references we can point to that are local that may have been in place for years, even though we didn't have a presence in that local country.

And, Dan, I would just add to that, you know, the additional channels that we've established internationally are a big, big part of our footprint internationally. It's not just direct sellers. It's folks that support the channel, and it's basically signing up the right channel partners to drive business in a region.

Very great. Thank you.

Thanks, Matt.

Next, from Truist, Terry Tillman.

Yeah, thanks. Hi, Mike, Dan, and Barry. Sorry for the extreme background noise I have here. So I'm going to ask my multi-part single question and then go on to mute. What I'm curious about is, and congrats with more of the innovation on the AI and automation side. It sounds like it's eight solutions now. Do you have to start thinking about the pricing and packaging whereby instead of this a la carte, I like all these things, but wow, it's a sticker shop with six solutions. Is there potentially almost like an ELA or a platform sale for AI and automation? And then secondly, is it attaching more and more traction and strategic or enterprise? Thank you. Yeah, absolutely.

Thank you, Terry. And I'll answer the last part first.

We absolutely see more and more traction in strategic or enterprise. Thank you.

Yeah. Sorry, there was a little timing issue on the sound side. We're absolutely seeing a greater level of interest in the larger and larger accounts. They have the ability to really pilot these solutions, have professional services in place where they're needed, and be able to recognize the ROIs. You get the greater the span of that application, the greater the ROI in most cases. But now to your first question about bundling, we absolutely bundle several of these. In fact, when you look at our agent assist solution, Agent Assist historically has been where we'll listen into a conversation, fetch data, deliver back next best action or suggested answers to the agent to give to the customer. Now we're including, if you go to that level, you get transcriptions. as kind of step one. If you just want pure transcriptions of the call and insert those into your CRM, you get summaries as kind of a step two. You can bundle that in with transcriptions. And then thirdly, you can bundle in the agent assist with what I just described with those first two. So we're doing some very creative bundling in ways that our customers and our channel partners can more easily propose those and have them consumed by the customer. So it's not entirely a la carte.

Thank you. A question now from Jim Fish at Piper.

Hey, guys. This is Quinton for Jim Fish. Apologies for not being on video. The blizzard here is really impacting strength, so I apologize. For IVA adoption, you know, it seems like in this environment, if a cloud customer hasn't adopted or fully rolled out kind of AI or automation at this point, they might hold off until macro maybe improves slightly. Is that where you're hearing from customers, or is the pace of AI adoption kind of sustaining in the hopes that the ROI can save you in a tougher labor market. And then a quick follow up for Barry is just, is it fair to assume healthcare and commercial are the largest verticals for Five9 or any other spaces that we should be watching? Thank you.

Yeah, so the 1st part, Jim, I'll take that. This is Dan, the AI automation. I have not heard that whatsoever about folks waiting until macro improves to put those solutions in place. In fact, more just the opposite where customers are realizing, hey, we've got to do labor arbitrage. We've got to get some solutions in here that can save us money. And we've got the boat anchor legacy on-prem system that really isn't delivering the efficiencies nor the compelling ROIs. So the issue is more of what we talked about before, which is if you make that decision to move to the cloud in the larger accounts, it oftentimes can be two years before you actually have the system fully in place and reaping those benefits. So customers are moving to start the process I think more than ever right now because they recognize and they've seen other customers that have experienced that value. Instead of just a promise, it's now we have referenceability to customers that are achieving those ROIs.

And I would just add that the popularity and the press that GPT and GPT-3 are getting from OpenAI and our AI and automation solutions, quite frankly, are becoming a bit of a catalyst for you know, those RFPs, which I mentioned, but also just a catalyst for making the move to the cloud, quite frankly, because the cloud is the only place that enterprises are going to be able to reap the benefits of that AI and automation opportunity and the labor arbitrage opportunities. So Barry, you want to talk about? Right.

The order of ranking of the top five verticals based upon Q4 revenue is number one, healthcare, two, financials, three, consumer, Four, technology. Five, industrial.

Super helpful. Thank you.

Next up, we'll go to Michael Turin at Wells Fargo.

Hey, great. I appreciate you squeezing me in. Barry, I know there's some seasonality there, but the Q4 EBITDA margin is very close to the longer-term targets that you have out there. We're hearing lots of focus across software on efficiency. Can you just walk through how you're evaluating the growth margin trade-offs there? Any change in your approach to headcount additions entering this year versus prior? And then just on the other side of it, how do you make sure you're positioned for growth? Given there's an assumed growth rebound, we're talking about macro headwinds, but obviously the bigger picture in CCAS is still much cleaner. So Can you just walk through your evaluation in the current environment on both of those sides? Thank you.

Yeah, Michael, if I could start and Barry, please chime in. But, you know, we're fortunate in that we have a business model. We've been approaching this with balanced growth for a long, long time, right? In terms of investing, I always say investing on the curve. We're not ahead of the curve in terms of the revenue curve. We're not behind the revenue curve. We're very instrumented. We understand where our business is coming in and we tend to hire right on top of that curve. So we're able to manage the bottom line based on what we see from a visibility standpoint on the top line. We'll continue to take a very balanced approach. I think the balanced approach that we've taken has always put us in a pretty good situation relative to other tech companies in general. That said, We're always investing in this opportunity and setting the, you know, the track, so to speak, for the long-term growth opportunity that we see. And that's, again, we reiterate and we always talk about the $2.4 billion revenue target in 27. And again, as soon as this macroeconomic backdrop clears, we do have just so much optimism around the future growth opportunity. But at the same time, we're going to be cautious and thoughtful in the near run relative to the economic backdrop.

Yeah, anything I would say would be just saying what Mike said in different words. So I had nothing to add. Thanks, Michael. Sorry.

And with that, we'll take our last question from Michael Funk at B of A. Hey, guys.

How you doing tonight? Good. Yeah, what if I could? So let me hear your thoughts on elasticity of demand and if you are seeing a more competitive price environment And I guess, you know, related to that, it's in terms of demand. The weakness you called out in 4Q where you expected more seasonality, you had seen more seasonality from healthcare consumer. How much of that is macro that you mentioned versus maybe a post-pandemic pullback or resizing of those customer bases?

Yeah, so on price, no, we're not. There's always some discounting, but it's nothing new. at all different to what we've had in the past. Our prices have held up very firmly and are likely to go up gently as they have in the past, point one. Point two, in terms of elasticity, people aren't buying these systems based on price. This is all about mission criticality and the sharp point of the spear in terms of customer experience. In terms of seasonality, no, we can't be 100% certain that it's all macro. Sometimes our customers don't even know. It'd be arrogant for us to say we know exactly. However, we do get a lot of data in terms of the utilization of the seeds, the number of seeds, the past patterns, how they're different, et cetera, et cetera. And we come away convinced, Michael, that particularly on those two light verticals, that it's healthcare and consumer, that it is mainly macro related.

Great. Thank you for the questions.

Sure.

And with that, I'll hand things back over to Mike Berkland for any additional or closing remarks.

Yeah, in summary, I'll just say I'm so proud of the entire 5.9 team for the commitment, the dedication, the execution that drove our record results in 2022. We are making tremendous progress on our march-up market, our expansion internationally, and innovating on our platform. I thank all the 5.9 team. We look forward to keeping you all up to date as the year unfolds. And thanks again for joining us today.

With that, we will conclude today's meeting again. Thanks for joining us, everyone. Have a good evening.