Five9, Inc.

Thank you for joining us today. On the call are Mike Berkland, Chairman and CEO, Dan Berkland, President, and Barry Zwornstein, 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, anticipated customer benefits, company growth, growth in our portfolio of products and features, 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 the information in such statements. These statements are subject to substantial risks and uncertainties, that can adversely affect Five9'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 Five9's annual and quarterly reports filed with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon, as well as in the appendix of our investor deck, and in the investor relations section on Five9's website at investors.five9.com. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP. And now I'd like to turn the call over to Five9's chairman and CEO, Mike Berkland.

Thanks, Emily. And thanks everyone for joining our call this afternoon. I'm pleased to report strong first quarter results with revenue growth of 20% year over year, exceeding our expectations. Our enterprise business, which accounts for 86% of the total revenue, continues to drive this increase with LTM enterprise subscription revenue growing 31% year over year. Adjusted EBITDA margin for the first quarter was 16% of revenue, helping drive a record quarter for operating cash flow of 33.4 million or 15% of revenue. In spite of the current macro 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. Before we dive into our business, I'd like to spend a few moments to debunk two myths that are emerging around our industry. The first myth is that CCaaS will be disrupted by AI and automation. The reality is that AI and automation represent a significant TAM expansion for us and other CCaaS providers. Let me be clear. The automation from a virtual agent replacing live agent is a labor arbitrage opportunity for our customers and also a major TAM expansion for us. More specifically, if our customer replaces a live agent with a virtual agent, our revenue doubles from approximately $200 per live agent seat to $400 per virtual agent seat. And this is a one-for-one substitution. Therefore, we believe the total count of human and virtual agents combined will remain largely unchanged, thus resulting in a meaningful TAM expansion for us and other CCaaS providers. The second myth is that LLMs like ChatGPT will potentially commoditize contact center solutions. Let me use an analogy to explain why this is not the case. LLMs are the jet engine, while CCAS solutions are the airplane. You can't just strap yourself to a jet engine and fly across the country. We are providing the entire airplane, and it's important to understand that we are leveraging LLMs as the jet engine. These better engines allow us to build a better airplane, but also keep in mind, there's a lot more to building an airplane than just the engine. Think about all the systems necessary to build an entire aircraft and provide a smooth flight across the country. Now let's get into what's really happening in this market and our business. Our confidence in the market opportunity is stronger than ever based on three key trends. First, 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, cut costs, and increase revenue. 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. 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 our platform. We continue to make investments to enhance our cloud native platform to deliver ongoing reliability, deployment at scale, and continuous innovation across all of the core features of the contact center, as well as some of the new and up and coming innovations. Speaking of innovation, given the importance of AI and automation, to both enhance customer experience and drive tangible business value to our customers, I'm going to focus most of my comments on this aspect of our platform and strategy. Our goal is to help businesses efficiently deliver a world-class customer experience that removes friction and frustration, helps reduce costs, and increase revenue growth. We believe that AI and automation are fundamental to this goal and to the modern contact center. Through the Five9 Intelligent CX platform, we enable our customers to turn this goal into a reality and deliver what we call fluid experiences where consumers can interact with a brand however they wish across any or all channels from digital first to self-service to a live call and everything in between. This journey is a seamless experience in which their interaction history and customer data is persistent and travels with them where agents, whether human or virtual, are empowered with all of the knowledge, information and intelligence they need to delight their customers every time. We are focused on leveraging our unique position as one of the leading CCaaS providers to harness the power of AI in a way that will deliver the most value to our customers. Our AI strategy can be summarized in three key components. First, While we have been delivering our AI and automation solutions, we remain agnostic about which foundational engines such as LLMs we leverage. This allows us to rapidly innovate and consistently be at the forefront of delivering meaningful solutions to our customers that are leveraging the most innovative technology available. This has been our consistent strategy and has proven to be a more sustainable model than what some others have been doing. Second, we are continuing on our commitment to deliver practical AI solutions that deliver tangible business value. An example of a practical AI solution is our AI summaries offering, which uses OpenAI's GPT models to summarize agent conversations and publish them to the CRM in real time. I'm pleased to share that this product is now moved into general availability and we are enthusiastic about its potential. Third, we are embedding AI and automation into the fabric of our intelligent CX platform, allowing our customers to get immediate out of the box value. For example, our workflow automation solution is now fully enabled for all new and existing customers. Workflow automation enables customers to easily automate back office tasks, seamlessly connect disparate systems, aggregate information, and trigger cross-platform workflows, such as launching surveys or sending reminders as part of proactive customer communications. Similarly, our AI Insight solution gathers and aggregates valuable data from customer interactions, identifying repetitive requests, and then acts as a prescriptive tool to identify use case candidates for self-service automation. In summary, we now have a comprehensive suite of eight different AI and automation solutions in market that enhance customer engagement and contact center efficiency, whether that's Our goal is to continue to build out our portfolio and bring to market products that will help our customers reduce cost, increase revenue, improve service quality, and deliver fluid experiences. And now I'd like to focus on our march up market. Let me remind you that our 1 million plus ARR customers now make up over 50% of our recurring revenue. Our partner community is now influencing over 70% of our bookings, and we continue to certify an increasing number of partners, not only for sales, but also implementation services. Over the years, our PS teams have set a very high benchmark for quality of implementation services, as measured by our NPS scores in the 80s. who are committed to investing in maintaining this high standard for successful implementations. We call this important 2023 initiative project pull through, which we believe will not only give us services leverage leading to improved margins, but also provide more top of funnel opportunities, which will come from these partners. We just completed meetings a couple of weeks ago with our partner advisory board, where we collaborated on how to best drive collective success. Lastly, I'd like to touch on our international expansion. I'm pleased to report that our international revenue in Q1 grew 48% year-over-year on an LTM basis and has now grown more than 40% year-over-year in nine of the last 11 quarters. As we've discussed previously, partners play a significant role in our international expansion, and I'm excited to report that Five9 has entered into a strategic partnership with BT, formerly known as British Telecom. They have a large Salesforce throughout Europe and the rest of the world with a specialized contact center practice focused on customer experience transformation. After an extensive multi-year evaluation process, BT has chosen Five9 as its primary CCaaS solution to enable the migration of their thousands of legacy install-based customers to the cloud with the Five9 Intelligent CX platform. In closing, I'd like to express how proud I am of this entire Five9 team. Even with this challenging macro backdrop, the team is executing with an increased level of passion and purpose that I just love to see. The energy and excitement surrounding our opportunity has never been better. This speaks directly to the Five9 team-oriented culture, which I've always believed is one of our most significant competitive advantages. With that, I will turn it over to our president, Dan, go ahead.

Thank you, Mike, and good afternoon, everyone. I want to start by focusing on our move-up market and our momentum with strategic accounts. As we anticipated, our successful execution in delivering the parcel delivery service and the healthcare conglomerate has others taking notice. As a result, our pipeline for strategic accounts is roughly double what it was a year ago, and we continue to see an increase in RFPs. As we've stated previously, you should not expect mega deals every quarter. However, I do want to share some exciting news. We very recently booked another mega deal, a large regional bank where we anticipate this initial order to result in over $8 million in annual recurring revenue to 5.9, once it's fully ramped, which we expect to take up to two years. Given that this booking took place in early Q2 and has high visibility, I wanted to discuss this directly with you now rather than have you hear about it through the grapevine. Additionally, I'm pleased to report that we had our strongest bookings quarter for any Q1 from our mid-market, international, and commercial teams, and our overall pipeline reached another all-time high. All that said, there is a macro backdrop that in some cases is elongating sales cycles for our new logo bookings, as well as slowing seed ads for our install base, as Barry will elaborate on in a few minutes. And now, as I normally do, I'd like to share some key wins for Q1. The first is a healthcare technology and services provider of financial management and patient experience management. They had been using an on-premises Cisco solution, which did not support omnichannel, IVA, WFA, WEM, and several important integrations to deliver valuable data to their agents. We competed with the leading CCaaS providers and Five9 was chosen for our intelligent CX platform, which delivers all of these applications and integrations. In addition, they will be leveraging our AI and automation portfolio to perform authentication with voice biometrics, natural language recognition for call routing, and IVA self-service for checking account balances, payment status, and appointment reminders. We anticipate this initial order to result in approximately $4.7 million in ARR to find mine. The second example is a full-service regional bank operating in several states in the southern U.S. They had been using an outdated aspect on-prem system and evaluated the leading CCaaS providers. They were not only looking for a comprehensive CX platform with the full suite of applications, such as omnichannel, WEM, speech analytics, performance management, several AI and automation solutions, and a truly blended inbound and outbound capabilities. but also they were looking for a partner with the professional services expertise who could best deliver and tailor all of these applications to enhance the customer experience, improve their efficiency, cut costs, and increase revenue. We anticipate this initial order to result in approximately $2.3 million in ARR to 5.9. The third example I'd like to share is a rather unique sale that highlights the true value of moving contact centers to the cloud. One of our premier partners in Europe who has extensive expertise in selling and implementing Five9 acquired a company which has several dozen customers with legacy on-prem contact center solutions, which are being end of life. They placed an order with us to migrate the first phase of these customers over to Five9 throughout 2023 with more to follow in 2024. This initial order for phase one is anticipated to result in approximately $1.8 million in AR to 5.9. And we expect more to follow as their install base gets fully turned over to 5.9. And now, I'd like to share an example of an existing customer who has expanded their use of 5.9. The company has been with us since 2017, handling smartphone repairs, trade-ins, insurance, warranty, and recycling. as well as providing premium support with operations in over 30 countries. They had adopted the use of Five9's IVA in 2022 to measure the impact of providing self-service options for several use cases. The ROI and customer experience feedback both exceeded expectations. So in Q1, they ordered additional voice IVAs, digital IVAs, as well as our native SMS solutions to further provide automation, which are enriching the customer experience while dramatically reducing labor expense. They were a $1.9 million ARR customer before this Q1 order, which will now increase their spend to approximately $3.4 million in 2023. And now I'll hand it over to Barry to cover the financials. Barry?

Thank you, Dan. As Mike mentioned, first quarter revenue was strong and grew at 20% euro a year above our expectations despite the macro weakness. Enterprise made up 86% of LTM revenue with subscription revenue growing 31% euro a year on an LTM basis. Our commercial business represented the remaining 14% of LTM revenue and grew in the low teens on an LTM basis. Recurring revenue made up 92% of total revenue in Q1. The other 8% of total revenue is comprised of professional services. I will now give more color around revenue. Please, though, bear in mind that we did not intend to routinely continue making these more detailed disclosures. Let's start with new logos, which typically make up approximately half of our year-over-year annual revenue growth. New logo seat turn-ups in the first quarter continue to be strong, setting a new Q1 record and helping out revenue and art performance. With respect to the deployment profile of the two new logo mega deals, both are on track as we continue to expect the international operations of the parcel delivery company to be substantially deployed by the end of 2023 and the healthcare conglomerate to continue ramping throughout 2023 with full deployment in early 2024. Between these mega deals and, of course, the regular flow of enterprise deals, we have a substantial backlog of bookseeds that are not yet generating revenue, giving us good visibility into 2023 new logo seed turn-ups. Now I'd like to turn to our install base, which typically makes up the other half of our year-over-year annual revenue growth, and where changes in demand show up promptly in revenue. Last quarter, we discussed the macro headwinds primarily impacting our customers in the healthcare and consumer verticals, which are respectively our biggest and third biggest verticals. As a reminder, we mentioned at the time that the lower than normal seasonal uptick in Q4 2022 would likely result in a smaller seasonal downtick in the Q1 23 for these two industries, which is precisely what happened. For instance, in Q1 of last year, healthcare consumer vehicles in aggregate experienced negative sequential growth, which is typical given their seasonal pattern. In contrast, in the first quarter of 2023, these two industries in aggregate grew quarter of a quarter in mid single digits. However, financial services, which is our second biggest vertical, experienced meaningful macro headwinds, remaining flat sequentially versus high single-digit quarter-by-quarter growth in Q1 of last year. The remaining 14 verticals in our store base grew sequentially at a similar rate in aggregate as the first quarter of 2022. Our LTM dollar-based retention rate was 114%, a decline of one percentage point sequentially, mainly due to the ongoing macro headwinds, causing our store-based customers to add fewer seats than normal. Longer term, we continue to expect our retention rate to trend towards a high 120s by 2027, due to a higher mix of enterprise customers, especially larger ones, which have demonstratively higher retention rates and higher output from our automation and other offerings. First quarter adjusted gross margins were 60.4%, a decrease of approximately 10 basis points year over year. First quarter adjusted EBITDA was 35.1 million, representing a 16.1% margin, an increase of approximately 270 basis points year over year. First quarter non-GAAP BPS was 41 cents per diluted share, a year-over-year increase of 19 cents per diluted share. Before turning to guidance, some balance sheet and cash flow highlights. In the first quarter, we generated operating cash flow of $33.4 million, an all-time record, driven in part by continuous strength and DSO performance, which came in at 34 days. We have now delivered 27 consecutive quarters of positive LTM operating cash flow. First quarter free cash flow was also strong, coming in at $21.7 million, our second best showing ever, and we expect to resume reporting consistent positive LTM free cash flow now that our capital spending program has moderated. Finally, while still on the subject of cash, please note that on May the 1st, we received $74.5 million in cash from the unwinding of our cap goal relating to the maturity of our 2023 convert. And now I'd like to finish today's prepared remarks with a discussion of our guidance for the second quarter and the full year 2023. In terms of top line, We are guiding Q2 revenue to a midpoint of $214 million, which represents a 2% sequential decline in line with the typical guidance pattern heading into Q2. For the full year, we are increasing the midpoint of our revenue guidance from $901.5 million to $907.5 million, which represents the year-over-year growth in our guidance from 16% to 17%. This revenue guidance reflects the continued uncertainty of the macro backdrop, which as Dan mentioned, is in some cases, elongating sales cycles for our new logo bookings, as well as slowing seed ads in our storeways. As always, we are being prudent for now with our annual guidance. Also, a reminder that as we stated last quarter, We may see a drop in the LTM enterprise subscription revenue growth rate into the high twenties due to the macro economic challenges. We believe this will be temporary and will improve as macro economic conditions improve. Note that enterprise subscription revenue continues to make up over 60% of our total revenue. As for the bottom line, We are guiding Q2 non-GAAP EPS to come in at a midpoint of $0.39 per share, a decline of $0.02 per diluted share sequentially. This quarter-by-quarter decrease is within the range of the typical guidance pattern for Q2 guidance. For the full year, we are increasing the midpoint of our non-GAAP EPS guidance from $1.69 to $1.75 per diluted share, which mirrors the prudence in the increase of our revenue guidance implying 17% Euro year growth for both the top and the bottom line. Additionally, I would like to provide more color on the quarterly profile of both the top and the bottom line for the second half of 2023. For revenue, we expect it to increase sequentially in the third quarter and more in the fourth quarter. Given the shape of this revenue curve, we expect non-GAAP BPS to improve slightly in the third quarter and more in the fourth quarter. please refer to the presentation posted on our Investor Relations website for additional estimates, including share count, taxes, and capital expenditures. In summary, we are very pleased with our first quarter performance with a ramp of our new local business continuing its strong momentum, helping to offset the ongoing macro headwind on our store base. We continue to execute well against this massive opportunity and are investing strategically to deliver on our commitment of achieving 2.4 billion in revenue and 23% adjusted EBITDA margin by 2027. Operator, please go ahead.

Thank you so much. And before we begin our Q&A session, we will ask our analysts to please limit yourselves to one question to allow for as many questions as time permits. We thank you so much in advance. And we will hear first from Ryan McWilliams with Barclays. Ryan, please go ahead with your question.

Yeah, thanks for taking the question. Great to hear about the mega deal already signed in the second quarter. Also great to see RPO growing up 52% year over year. Two questions here, one from Mike, one from Barry. Mike, why are enterprise buyers prioritizing these large multi-year contact center deals at this point, despite a tough macro? And then for Barry, you know, kind of given your visibility here, how should we think about what's baked into the guidance after the beat in the first quarter? Like, does this imply that the headwinds for the agents and your install base for those impacted industries continue? Next, guys.

Yeah, great questions, Ryan. I'll just say this, and I'll highlight it. this industry has been waiting for for a long time. You look at the large enterprise part of this market, it's very low penetration. As you've heard many times over the last several quarters, including just a few minutes ago, we continue to penetrate the mega strategic opportunities in this market. A big catalyst is that AI, an example of the most tangible ROI. And again, there are many of them, but one of the most tangible and easy to understand is this labor arbitrage opportunity, a ten to one savings, if you will, that our enterprise customers can be the beneficiaries of by replacing a live agent with a virtual agent. Now, as we said in my remarks up front, this is a good thing for us either way, no matter how much of that replacement happens. We do view it as a virtually a one to one substitution. and $200 per seat for a live human agent. So either way, we're the beneficiaries of this as well, but our customers is really, they're the real beneficiaries of this because again, they're replacing a very expensive live human agent with a less expensive virtual agent, but either way we win.

And then Ryan, with respect to the guidance for the rest of the year, think of it in two buckets, Q2 and then H2. Q2, we have relatively good visibility. Obviously, on the install-based side, there is some uncertainties. But we have also there a good handle given how close our account management team are to our bigger customers. And of course, on the backlog of seats waiting to be turned up, it's pretty solid on the net new side. With respect to the second half, we've taking a more prudent approach. We think the macro will be somewhat similar, but there's a lot of uncertainties out there. Uncertainties in terms of the inflation, in terms of the rising interest rates, in terms of the instability in the financial services sector. And given those uncertainties, we want to hedge against any further possible downturns. And so we've just been a little bit more prudent than in the second half.

Thanks, guys. Congrats again. Thank you. Thanks, Fran.

And moving on to ZJ Hines with Canaccord.

Hey, guys. Good to see everyone. Mike, I really appreciate your leading comments on AI, obviously topical and super helpful. One part that I wanted to dig in on there, and I don't know if this is better for you, Dan, or Mike, but I was surprised to hear you say that as AI takes a larger share, that the aggregate count of the live and virtual likely remains unchanged, right? I think... There may be the impression out there that the efficiency gains that come with AI would be deflationary to total seat count. So can you just double click on why you don't think that's the case?

Yeah, sure, DJ. There are many factors that go into this. Yes, there is likely to be some marginal efficiency gain by using a virtual agent as opposed to a human agent in terms of talk time, but it's not going to be significant. And remember also that our enterprise customers are balancing. They're always balancing. And the most important thing for our enterprise customers, yes, they care about cost reduction and efficiency and that ROI that I talked about with labor arbitrage, but they're always balancing that cost savings against customer experience. We all remember the hellish days of IVR and the fact that you get stuck in the IVR. That was a result of over-automation. Now, again, the artificial intelligence underneath this with some of the technologies like GPT are obviously much better than the old technologies, but that doesn't Mark Benthien, ECA- mean that customers are enterprise customers are going to over automate and push their customers to or force their customers to automate. Mark Benthien, ECA- Through self service so they're always striking that balance and we do again in our customer base, we see kind of five to 10% of interactions. that are candidates for automation and self-service. So yes, that could increase over time, but again, you're still gonna have a lot of virtual agents that have to process those conversations, whether they're digital conversations or live voice conversations with a virtual agent, you're still gonna have a lot of traffic into contact centers and we don't see that traffic going down. So that's why we think it's gonna remain relatively steady. Great. Thank you.

Thank you so much. And now we will hear from Taylor McGinnis with UBS.

Great. Thanks. Hey, it's Seth on for Taylor. Maybe just one for me. You know, last quarter you had guided 1Q down sequentially. So I'm just wondering if that was typical 1Q conservatism or is there anything we should keep in mind in terms of large deals that might have helped to boost 1Q beyond what you thought? Thank you.

No, it's more being consistent, classically prudent. There wasn't any mega boost. We did outperform on the seat field eyes. We had a record. That helped. That wasn't fully anticipated. Frankly, also the downtick that we anticipated in terms of healthcare and consumer was there, but it was less than we thought it would be. And part of that, in turn, is due to the fact that in those two verticals, we have two groups of customers, the highly seasonal ones and the less seasonal ones. And in this case over here, the more seasonal ones did not decline as much. And the non-seasonal ones, like, for example, grocery stores and order of parts and pest control and so on, did pretty well.

Moving on to Meena Marsha with Morgan Stanley.

Great, thanks. Maybe a question for me just on, you know, I understand what you're saying about, and I think it's a helpful analogy about kind of the jet engine versus the airplane, but just where do you think customers are on kind of understanding that and kind of what are you doing to get in front of customers just to make sure they realize that you have those solutions already and that you can be kind of addressing their concerns before they turn to any alternatives that they might be hearing about.

Yeah, Amita, I'll start. And Dan, you please chime in here. But I think it's pretty clear to most of our enterprise customers that what they're really looking for are practical solutions to problems. And in the end of the day, that's really what drives their behavior. And we're providing those practical solutions in AI and automation. I don't think that there's a lot of confusion, quite frankly, amongst our potential customers and our existing customers around LLMs and what they bring and what our applications bring on top. And again, we're The analogy goes beyond just the aircraft itself. It's the people, right? You think about one of the things that differentiates us in the market is our technology, but also a big part of that is our people, our professional services, our expertise. And think about that as kind of the pilot, the crew, the maintenance crew, the whole experience of a first-class flight, if you will. That's part of what we're delivering for our customers. Dan, I'll let you chime in on.

Yeah. I think if you look at the criteria, they are looking for the AI and automation. So we are letting our customers and prospects know very front and center that we're leading the market and we're delivering those solutions. I think if you look at the RFPs that we're getting, the primary reason we indicated last quarter, the primary reason in 41% of those RFPs is was the AI and automation, that percentage has gone up. It's creeping up little by little each quarter. This quarter, it was 42% of those. But we're seeing these large enterprises recognize that they want to automate, they want to do so in a practical way, and they're going to do it in small steps. To Mike's point earlier about that balance of making sure you maintain a a very positive customer experience while automating. So it's more about providing them a choice rather than driving or forcing them to self-service and giving them that alternative if they want it. We also got to recognize that even today with IVAs, as strong as they're becoming, So there's still a completion rate across the industry of under 50%, well under 50%. So customers, I think to the earlier question that was asked about, well, isn't the automation going to make it much more efficient and it's not a one for one replacement? I would argue it is more of a one for one replacement. that start and try to self-serve and then opt out and end up speaking to a live agent. That will continue as you start building more and more complex use cases and trying to offer that automation. So this is going to be a journey. I think it's going to be a journey for a decade or more. And we've always looked at our industry over the past and said, where can we provide efficiency savers and automation solutions? And, you know, it was everything from, oh, in the 90s, everyone's going to go to the website and self-serve there. And then it was, oh, everybody's going to use self service IDR to self serve there. And what you find is these technologies, while very helpful for certain things, it doesn't really negate or take away from the need for customers to continue with the same level of interactions or inquiries to interact with the business. And the beauty here is we're providing them alternatives for interacting with a human and providing software to that human or interacting with a machine in the sense of AI for self-service. And we'll provide software for that, which actually yields us more revenue. As we said, the 400 versus 200. And there will be other technologies that come around too. And we want to be the source of those as a CX technology provider. So as new technologies come, that just benefits us because we're at the forefront of helping those customers deliver the best experience.

Great. Thanks. William Blair's Matt Stotler has the next question.

James Rattling Leafs- That everybody, thank you for taking the questions good to hear about the partnership with BT and maybe we'd like to flesh out a little bit more. James Rattling Leafs- get some thoughts on the strategy for that installed based transition with that might look like out there's in the model and then any other similar opportunities that you're you're looking at in the pipeline for continued international expansion.

Yeah, I'll start with the BTPs. I'm very, very excited about this opportunity that lies ahead. This, as Mike mentioned in the prepared remarks, a multi-year process for them to really zero in and pick a flagship partner that they want to work with to take out many tens of thousands of legacy solutions that they have throughout the world in particular. heavily weighted in EMEA. But when you look at that business, they really want to take that and help their customers migrate to the cloud because they're getting pushed by their customer base to say, hey, what can we do? And how can we automate and deliver the services that we just spoke of? So, in fact, just this morning, we recorded a fireside chat with the managing director. He and I, so we're going to be front and center at their sales kickoff meeting next week. And we've got a whole team of people engaged. They've already started training their technical groups, dozens of folks on the technical side, and we'll be ramping up their sales capacity and their knowledge there to enable them to go out and really represent Five9 on a global basis. Now, this may have sounded like a brand new partnership. That part of it was. their ability to go to market with reselling of 5.9. But we've been partners. Some of the largest mega deals that you've heard about already that we've implemented, we're in partnership with BT behind the scenes being a service provider to us for the carrier services. So the global parcel delivery service company is an example. They provide all the global telco and all that LD dialing around the world, both inbound and outbound for us. a large insurance company based in Europe. They're front and center in delivering all those network services, if you will, for that too. So we had the partnership in place. This is just an expansion of it. And it's great because it's now a bi-directional, you know, symbiotic relationship.

Great. Thank you very much.

Moving on to Scott Burke with Needham.

Hi, everyone. Congrats on a really nice quarter. I guess I wanted to dig into the AI component a little bit more here. Mike, you talked about in your strategy around AI about how you're embedding it into the platform for different areas. And the summaries is obviously a good example of that. But I guess it's a multi-part question within that is how should we think about pricing for that module relative to the other module and functionality within the platform? Because it is a little different. And then two, just as you think about functionality kind of going forward, what else in the contact center could these technologies, you know, ultimately impact versus the, what some may see as a pretty narrow product, you know, today, but long-term, you know, what does that look like? Thanks.

Yeah, Scott, happy to spend a little time talking about that. So, you know, relative to summaries and pricing, this will be an additional per seat price for that product, that SKU, if you will. And it's early days, but we're very, very encouraged by kind of the early signs and early data points in terms of how much revenue per seat we're going to be able to generate. that we're continuing to provide. There's a roadmap that, you know, we have. We're developing new products in this AI portfolio. We've talked about the eight products that we've got today. Another one, you talked about embedding AI throughout our solution. We now have, you know, WFA that is embedded and available to all of our customers. It's a massive opportunity for workflow automation, WFA, and it applies to so many use cases across the board, across our customers in terms of back office and front office integration and actions. So in other words, let's say you want to do a follow-up SMS on an appointment, for example, WFA capability that we've now embedded across our entire platform is a tremendous opportunity for our customers to take advantage of automation and AI, for example.

Thank you very much.

You got it, Scott.

And Sterling Auti with Moffitt Nathanson has the next question.

Yeah, thanks. Hi guys. Maybe just building on the answer that you just gave to Scott, specifically around that $400 price point that you have, what's your confidence in the durability in that price as you move forward? Because I could see kind of maybe a bull and a bear on the bull case. The added features maybe could drive that pricing even higher, or I shouldn't say pricing, but revenue opportunity higher per seat. But on the flip side, the AI capabilities might make it easier for competitors to get into the market that weren't there previously and maybe erode that pricing. So maybe help us understand how you're thinking about the price direction within the AI and automation space as you look forward a couple of years.

Yeah, Sterling, great question. And Dan, you should probably chime in on the kind of the field perspective on this. But I'll tell you, you know, that $400, that $400 is just specific to our IDA, right? So that's just for the virtual agency. Some of these other products are applicable to a live agency. So summaries, for example, AI summaries, which takes, again, leverages LLM to summarize the transcripted call, which we're doing the transcript. We're using GPT to summarize that and put it into the CRM, saving huge minutes on average handle time. I mean, it's a major ROI for our enterprise customers. That applies to not the 400 per seat in a virtual agent, right? That virtual agent is a subset of the total agents, if you will. the majority of the agents that are live agents benefit from products like AI summaries. And this is an upcharge. So think of about as an upcharge above the 200 per seat that we're getting on average across our base today. And then again, when it comes to the 400 and the potential upward pressure or downward pressure on that 400, this is a no-brainer. I expect that price to go up, if anything, because of the ROI. If you think about $4,000 savings per month for an agent versus the 400 cost for this virtual agent, one could argue that that 400 should be 800. And so it's all about ROI and value delivery to our customers And it's not as if a standalone virtual agent solution is ever going to permeate the large enterprise. You have to have the entire platform, which is what we provide.

So I'll leave it there. And if you step back from the ROI on the summaries, you may ask, well, how valuable is that? Think about it. If you have a typical contact center that has an average handle time of six minutes, In many cases, two minutes of the six are spent after the call with the agent inputting their notes and then putting that in the CRM for historical record. And that's what we're saying will automate. So you can go from a two minute wrap up period, that wrap up time is what they call it, to all the way down to seconds. And the agent can just look at the summary real quick, check the machine, make sure it got it right, and then hit submit. And by inputting that into the CRM, you've just created a great savings on how many agents you'll now need to take those same calls. However, I'll also say that that same technology can be applied to the automated. In fact, one could argue where I have a IVA having a conversation with a consumer, I definitely want to summarize that call because nobody was observing it. They don't have a witness to the call. So I want to summarize that call and push that into the CRM so that, again, I have a nice track record or a thread of all the interactions of that customer that I can refer to later, including the ones that were made with the virtual agent, as well as the ones that were made with human agents. So you can take the $400 virtual agent and start stacking on top of it more and more of these AI technologies to get more. Makes sense. Thank you. Thanks, Sterling.

And our next question will come from Matt VanVleet with BTIG.

Hey, good afternoon. Thanks for taking the question. I guess probably more directed to Barry, but curious on sort of the overall outlook for headcount throughout the year, obviously being a little more prudent on the second half, given the macro, are you still adding to the go-to-market team? And then maybe a sub-question under there, with such strong growth on the international front, especially in Europe, how much Should we think about headcount sort of needing to go up there to continue to capture the opportunity specifically in that market as well?

Yeah, Matt, we're walking a tightrope. We see this tremendous interest, especially in the mega deals and international, as you just referred to. And we're investing for the long term. There are so many great opportunities. The same time, as you alluded to in your question, there is these uncertainties, simply put, for the second half. So we're continuing to do what Five9 has always done, which is to be very prudent, looking at the pipeline, looking at the bookings, looking at our partners' needs. And we are continuing to hire. I know that the street has its way of tracking what the job openings are and what the hirings are, and you'll see that. But it'll be very moderate, including across the board on go-to-market, R&D, et cetera.

All right, great. Thank you.

Moving on to Michael Turum with Wells Fargo.

Hey, great. Thanks. Appreciate you squeezing me on and taking the question. Nice to see everyone. Some of the trailing 12 months, Metrics are still moving down a touch. I think that's expected given some of the windows, but it does seem like some of the key indicators are picking up. If we look at subscription revenue, particularly given a Q1, some of the metrics on the move up market and international. So any commentary just helping us square those two things? Are we getting closer to a point where the 12 month windows are starting to stabilize at least for now? Or is that too optimistic given the macro? You know, any characterization is helpful because we're obviously just thinking through a lot of the good things that you're showing and want to understand the conversion there.

Thanks. Barry, go ahead. You start and I'll finish. Well, Michael, first of all, congratulations on picking up on that recurring point. It is too early to say that we've reached an inflection point, especially given this environment that we're in. We know when things are good, we know when things are bad, we know when they're in between, and right now they're in between. And, you know, for example, the LTM enterprise, excuse me, the dollar-based retention rate, we, as I think I said in the prepared remarks, it's more likely to go down in the near term than up, even despite it being an LTM calculation. Why? Because of the macro. Please bear in mind on that particular statistic, The local retention is extremely good. It's just that they're expanding at a slower pace and when the macro comes back, they'll come back pretty strongly. We've said on the LTM Enterprise subscription that it will likely go down into the high 20s rather than staying with a three handle. So it's too early to call it a new dawn. But there is a sort of light that's there a little bit down the road.

And I'll just add, Michael, that what I really look at are the leading indicators. Our pipeline for strategic deals, as Dan mentioned, has doubled. growth in the last year, one year over year. That is the metric I care most about. This is a long-term play in an underpenetrated, massive market. The large enterprise market is opening up. The macro backdrop that we're in today creates some noise, if you will, in the equation. But I would encourage everybody not to get too caught up before. I've never been more excited about this opportunity. I've never seen our team more excited about this opportunity across the board, from sales to R&D to marketing, you name it. It is just an exciting time for our industry. And I'm sure you'll hear the same things from our peers, others in this space. This is a wonderful market opportunity that, again, we'll get through this macro backdrop sooner or later, and it's off to the races.

That's great. Thanks, Barry. I think you wrote the title for us, so appreciate that.

Great. And our next question will come from Baird's Will Power.

All right, great. Thanks for taking the question. I'm going to come back to the AI theme of the day. So I think one of the seeming advantages you all have, and probably the CCaaS industry generally, as you're sitting on a trove of customer data, can you maybe talk about where we are in the evolution of being able to really use that data to help inform large language models down the road. What does the roadmap look like for better incorporating that? What does the customer buy-in kind of look like on that? Because the customers ultimately I think still own that data. Kind of where are we in that roadmap and what does that opportunity look like for you?

Yeah. Well, and Will, I'll take that. This is Dan. When you look at large language models, they're actually... occurring, there's two things. You can feed it data and feed it information and a lot of customer data in order to have it come back with more accurate summaries for specific industries, if you will, specific companies that are within those industries. But you also now have the luxury of leveraging the large language models that have that knowledge and have an ability to extract data from anywhere on the internet. So It's actually not quite as critically important that you have all this data transcribed and that you use that data to train your models. You can now eliminate or vastly reduce the training time it takes for that machine learning to get more and more accurate. So we're actually looking at this as seeing it as there's value in current customer data, but there's also value that can be extracted without having to interrogate that customer data. So we're still in those periods of figuring out which are most applicable and most valuable for the particular applications. So when you look at our eight different modules, some are still using that customer data. Some are using large language models and some are using, you know, a combination of the two. So it's early days for making that to work most effectively in each of the different categories. But always important, having the data and having the specific data for industries. We see the customer data actually being utilized and leveraged for a couple other purposes that are very useful. Two examples, one is what we call the insights. So we can take the existing customer interaction data for a particular customer or industry, pull that data together and show those customers this is what's being said most or asked for most in your conversations in the contact center. This may be a candidate for an automation choice or an automation alternative for your customers. That's one. We also may take aggregate data across an industry and be able to benchmark within an industry. This is what's being done and this is what's being performed. That's where you really got to be careful and get permission from customers to be able to use their data in an aggregate fashion because you're kind of disclosing, hey, this is the typical industry average. Here's where you are. This may be an area for improvement. So we're working on ways to leverage that data and use it.

And we will now hear from Samad Samana with Jefferies.

Good evening. It's great to see you. My question, Barry, is not going to be on AI. It's going to be more on in your alley, which is really great expense discipline, great margin upside of a quarter. So I'm just curious, how should we think about that in terms of the hiring that you saw, hiring linearity? Are you ahead of plan, behind plan? Is this a good way to maybe think about the potential leverage we could see with the current kind of growth trajectory? Just trying to understand maybe both the upside and how we should think about it in context of where you are from a higher end.

Yes, so I'm going to be fairly brief on this. We're not going to give specific gross or EBITDA margin guidance. We've given the net income just the net income guidance, 13%, similar to what we had, almost identical to what we had last year. The reason for that is very simple. Those margins are very, very dependent upon the revenue growth, and we don't yet know what the revenue growth is going to be for sure. We know the fall, but we don't know what it's going to be potentially beyond our guidance in the second half, potentially. And we're not willing to give a number that we know we can't make. So in terms of gross margin percentage. In terms of our hiring plan, we were a little bit behind in the first quarter. We largely caught up with that at the beginning of April.

However, I will add to that on the go-to-market side, in the two areas we talked about, because we're We've doubled our pipeline in strategic accounts. We continue to grow that team proportionate to that demand as we're seeing it come at us at an accelerated rate of market, as well as in some international markets where we see that opportunity growing. And that's reflecting in both our bookings and revenue as well.

Gotcha. Great to see these strong top and follow my results. Thank you. Thank you.

And we'll now hear from Matthew Nicknam with Deutsche Bank.

Hey, guys, thank you for taking the question. Just wondering if you can talk about linearity of activity and new deals in the quarter, any deal slippage into the second quarter, and then also just in terms of the competitive landscape, any change in terms of where you're winning new logos from? Thanks.

Yeah, great question. Thanks. If you look at the pipeline, as we mentioned, upmarket, clearly, international, clearly. If you look at the cycle, I mentioned that we still have some cases where sales cycles are elongating and that's natural, right? In this type of environment, you tend to get more scrutinizing of budgets. Things tend to have to get more approvals. They're making sure that ROI is a strong business case. in a lot of situations. Q1 is particularly difficult every year. When I say that, we had one year where we had a mega deal that kind of overshadowed or masked a typical Q1. But remember, in Q4 every year, we're always pulling deals forward and trying to end the year as strong as possible, qualify as many people for President's Club as we can. And that results in fewer Q1 mega deals or big deals. The regional bank that I mentioned that happened early Q2 was scheduled for Q1 and it was forecasted and we anticipated it to be Q1. So if you look at my three mega deals or three large deals that I've highlighted in the prepared remarks, that one would have and should have been in Q1. With all the turmoil going on in the regional banks, that caused it to slip naturally. I mean, as we got into the last couple of weeks of last quarter, we thought there was a chance that could happen because of what was going on in the regional banks. So that's where we stand. But as far as the linearity of day-to-day business, we're seeing very solid lead flow. We're seeing very solid growth. You know projects we do our diligence to make sure that they're real and it's not just folks kicking the tires. You know we're continuing to see momentum like I said, especially up market, especially in the international markets very consistent in our commercial and mid market spaces.

And we will now hear from Jim fish with Piper Sandler.

Hey guys, this is Quinton on for Jim fish thanks for taking our question. So like everybody else, we have to ask about AI. You know, how is the team thinking about its competitive mode versus the other cloud contact center vendors related specifically to AI? Because, you know, a fear that some has is the adoption of LLMs can kind of speed up some of the newer platforms' ability to compete with players like Five9 that have been in the space longer. Have you seen any sort of material change in these new platforms' kind of AI competitiveness? Thank you.

Yeah, Quentin, very appropriate question. And the bottom line is, look, we acquired Inference two years ago. That put us way ahead of our competitors in terms of AI and automation. We've developed several products since that acquisition. Again, remember, we're building these technologies and these products on top of these LLMs as engines. Yes, everybody has access to that engine. what you do on top of it. And it's not that simple. You don't just create a new product just because you have LLM technology. You still have to build great products that are practical. They have to be embedded and ingrained and part of the platform that we're providing. There's a wonderful example of this, which is it's not just in those products that our customers are using that are helping them relative to automation, for example. The analytics, the ability to understand where those opportunities are in the contact center, for example, the analytics power within our products and our platform cannot be replicated easily. So there's lots of barriers to entry, lots of competitive moat there. So it's not just like a foot race without significant technology barriers. And I'll kind of leave it at that.

And we have time for one additional question, which will come from Catherine Trebnick with Rosenblatt.

Hi, thank you for taking my question. Could you put a finer point on the new strategy you have with the pull-through? Is that just going to be targeted to your global system integrators, or will you be including any of the tele-assists or some of the telecom brokers here in the U.S.?

Yeah, Catherine, thank you for asking that question. Project pull-through is a really exciting project that we not as if partnerships are new to us. We've built out a huge ecosystem of multiple routes to market. What pull-through is about is enabling a subset of them to do the implementation services if they're willing to invest significantly in keeping the NPS scores where our internal PS organization has set the bar in the 80s to 90s. So it's all about continuing to provide that great implementation experience, but we're going to do it with The answer is it is not just the SIs that will be involved in this. We've got an initial set of partners that are leaning in really hard. We've been working with them over the last several weeks and months to enable them to not just sell but implement. For example, in the case of SIs, they may not sell, but they will implement. So it's a mix across our multiple routes to the market.

And it's not just for improved margins by giving the services to those organizations. The reason we call it Project Pull-Through is we know when they get enabled and they're doing services on a regular and daily basis with our product, it's going to put us in the pull position for when they want to bring their prospects and their opportunities to us. So it's a top of funnel long-term play, even though it's enabling the services immediately.

All right. Thank you very much. And again, that does conclude our Q&A for today. I'll turn it back to Mike for closing comments.

Yeah, thank you. In closing, I'll just say, look, I'm so pleased with the strong start to our year. We've made great progress on our strategic priorities. We're just excited as heck about these recent developments in AI. I know that's counterintuitive to some of you, but I think you'll understand in the long run. We at Five9, as well as the whole industry, are going to benefit from this. It's creating a TAM expansion, but it's also that catalyst for large the energy and the passion amongst our team. So thank you for joining the call today.