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 and cash position of the company, expected improvements in financial and related metrics, expected ARR from certain customers, certain expected revenue mix shifts, customer growth, anticipated customer benefits from our solution, including from AI, company growth, enhancements to and development of our solution, market size and trends, our expectations regarding macroeconomic conditions, company market position initiatives and expectations, technology and product initiatives, including investment in R&D and other future events or results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors, Actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that 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 and uncertainty, including continuing 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, and the other risks discussed under the caption risk factors and elsewhere in five nines 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 that can be found 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 our subscription revenue growing 20% year over year and total revenue exceeding the midpoint of our guidance by three percentage points. As a reminder, our subscription revenue, which others in the industry refer to as cloud revenue, accounts for nearly 80% of our total revenue. Also, this 20% growth in subscription revenue does not include any benefit whatsoever from customers converting from on-premise to cloud since we do not have any on-premise business. And this growth is all organic, except for an immaterial amount. Adjusted EBITDA margin for the first quarter was 15% of revenue, helping drive strong LTM operating cash flow of 128 million, or 14% of revenue. As you all know, we take a balanced approach to delivering top line growth and bottom line profitability. I will begin today by discussing our broader market opportunity, which continues to be propelled by three ongoing trends. First, the migration to cloud contact center platforms continues to be a top priority for enterprises, particularly as many on-premise solutions are being end of life. With current cloud penetration standing at approximately 25 to 30%, we believe there's a multi-year durable growth opportunity ahead. Second, enterprises are laser focused on improving customer experience, which has become a strategic initiative aimed at driving better business outcomes. With our intelligent CX platform and our passionate experts, We're changing the game for some of the largest brands in the world and helping them reimagine their customer experience. And third, AI is revolutionizing the way brands enhance customer experience. With our AI-infused and data-driven intelligent CX platform, we're helping enterprises deliver personalized, connected, and effortless experiences for their customers. These three trends are driving a massive market opportunity. and we are a clear market leader given our platform, our success in marching up market, and our strong international expansion. And now let me take each of those three growth drivers in order, starting with our platform. Five Nights AI leadership has been a key reason why customers choose us. Our AI strategy is simple. We combine the power of the industry's leading engines with contextual data unique to each of our customers. We have always believed it's optimal to leverage the best engines in the industry, and the arrival of generative AI has further validated that strategy. Because of this, we believe we have established a significant lead in this market. By embracing the best engines and expanding them with contextual data, we can easily produce basic industry models. But more importantly, we can go beyond that to produce customer specific models that are setting new standards in providing exceptional customer experience and also doing it responsibly by protecting the privacy of their data. Additionally, empowering customers with this is not just a matter of technology, It's also a matter of people. Five9's experts work hand-in-hand with our customers to gather the right data from the right sources to deliver these customer-specific models, resulting in what really matters, personalized CX and better business outcomes. We believe this strategy has allowed us to be more nimble than our competitors in adopting generative AI and using it across our platform. This has been demonstrated through our recent announcement of GenAI Studio, the industry's first tool that easily allows enterprises to combine best-in-class engines with their unique contextual data and to customize the models on an interaction by interaction basis, allowing for new levels of personalization. GenAI Studio can be customized by integrating any piece of data that our platform accesses during the processing of an interaction. This allows customers to leverage investments they've already made in integrations on our platform, which is one of the more complex and time consuming aspects of implementation. This enables us to supercharge their results when they attach our AI products. Feedback from customers has been overwhelmingly positive as they will begin to gain these benefits in just a few days, given the ease of use of GenAI Studio. And it's not just customers saying we're ahead. We continue to earn awards and industry recognition from marquee analysts. And of course, nothing speaks to the success of our strategy more than numbers. For example, our AI and automation ARR bookings grew 15X year over year in the first quarter. And now I'd like to focus on our March Up Market and international expansion. We're very excited to share that we signed our largest deal ever, a Fortune 50 financial services company, which is a testament to our continuing success in Marching Up Market. Dan will share more details in a moment, but I just want to say we're thrilled to add this win to our previously announced mega deals, such as the Parcel Delivery Company, the Healthcare Conglomerate, and the Global Healthcare Insurance Company. Additionally, as a result of this win, enterprises in the financial services industry are taking notice, and they're already pulling us into large financial services opportunities. As a reminder, our success at Market is not just due to our award-winning platform, but also because of our people and our partners. Our customer success model remains a key differentiator. as we have hundreds of CX experts globally at Five9 who execute a repeatable large enterprise playbook that focuses on transformation, migration, implementation, and ongoing optimization. Additionally, our collaboration with premier CX partners around the world is driving our upmarket success and international expansion, as demonstrated by the following three examples. First, we are seeing increased momentum from large SIs. We have an ongoing initiative called Project Pull-Through, which enables and certifies a select group of partners to take on implementation and support services. And it's incentivizing these SIs to lead with Five9 in some of the largest global opportunities. Second, our Salesforce partnership continues to gain momentum, where we have become the first and only CCaaS partner of Salesforce to reach summit status. This is a major step forward for our partnership and it gives us early access to releases and APIs so that we can stay at the forefront with Salesforce. Our advanced BYOT integration for Service Cloud Voice is a great testament to this partnership. And third, our BT partnership is taking hold. As a reminder, we have a go-to-market reciprocal arrangement where they resell our 5.9 solutions and we also resell BT connectivity. This is not only proving itself in the UK and Ireland markets, but also in other parts of the world where they've been instrumental in helping introduce and secure 5.9 business. These are just a few examples of our partners helping pull 5.9 upmarket and also helping expand our global footprint. Before I turn it over to Dan, I'd like to make a few comments on our journey as a public company. As many of you may have seen, a few weeks ago on April 4th, we celebrated the 10-year anniversary of Five9's IPO by ringing the opening bell at NASDAQ. It was a perfect opportunity to reflect on our journey as a public company. Over these last 10 years, we've made significant progress on multiple vectors, including the following five examples. We grew revenue by 10x in that 10-year period, virtually all organically. We increased EBITDA margins by 43 percentage points. We increased the number of $1 million plus ARR customers from three to 183. We were one of the early pioneers of Cloud Contact Center and had become a clear market leader and the largest pure play cloud provider in our industry. And more recently, we have been leading the AI revolution in Contact Center and CX. Today, we're changing the game for many of the largest brands in the world as we help them reimagine CX with our AI-infused data-centric platform, combined with our passionate experts. In addition to reflecting on our progress, I'd like to take a moment to thank our team of Five Niners. Our success over the last decade has been driven by their teamwork, commitment, and passion. And I want to personally thank every Five Niner for all you do. We are still in the early stages of a massive transformation in CX, and I'm super excited about what we can achieve over the next 10 years. And with that, I will turn it over to our president and CRO, Dan Berkman. Dan, please go ahead.

Thank you, Mike, and good afternoon, everyone. I'm pleased to report that we had a record booking supporter, and our partner and channel momentum has never been better. Our market leading platform, the expertise of our people, and our relentless focus on helping customers achieve their CX business goals continue to propel us forward in this tremendous market opportunity. And now I'd like to share some examples of key wins for the quarter. As Mike mentioned, we're very excited to announce that we have contracted with one of the largest US banks serving nearly 70 million customers worldwide. The bank has been using a variety of legacy systems that acquired directly as well as through M&A. They spent several years looking for a strategic partner who could help them transform and consolidate CX across their global footprint with a modern, innovative, secure, and scalable CCaaS solution. A key part of this migration to 5.9 will include our recently acquired ACS solution. allowing them to centralize and normalize all of their data from many different disparate systems. They chose Five9 arguably for one reason, trust. They trust that Five9 has the platform, the people, and the partners to deliver an unparalleled CX solution. They purchased our full omni-channel solution, our IVAs, our WEM suite powered by Verint, and integration to over two dozen CRM systems. including Salesforce and ServiceNow. We anticipate this initial order will roll out and ramp over several years and will ultimately result in over $50 million in subscription ARR to Five9. The second one I'd like to highlight is a company that specializes in higher education, helping universities with recruitment, enrollment services, guidance counseling, and alumni fundraising activities. They had been using another cloud vendor, which was not meeting their needs. They will be using Five9 for a full omni-channel solution for both inbound engagements and proactive outreach, our full WEM suite powered by Varon, our agent assist solution for call transcripts and summaries, and our performance dashboards, along with Microsoft Dynamics integration. We anticipate this initial order to result in over $3.8 million in ARR to Five9. The third example is an American radiology firm specializing in outpatient diagnostic imaging centers throughout the US. They have been using Cisco, which lacks the deep integration and functionality with Salesforce, which they had just rolled out last year. They chose Five9 for our end-to-end functionality, our deep integration and partnership with Salesforce, and our industry-leading AI and automation suite. They will start with our IVA and chatbots to intelligently route inbound inquiries to the best resources, while also using transcription, call summaries, Five9 insights and analytics to identify where best to introduce even more automation and self-service applications. We anticipate this initial order to result in over $2.8 million in ARR to Five9. And now, as I normally do, I'd like to share an example of an existing customer who expanded with us. This customer is in the healthcare industry, where they provide non-emergency transportation services to and from many hospital networks throughout the U.S. They have been our customer for nearly three years, and we're spending approximately $2.3 million in ARR. In Q1, they expanded their operation both in number of human seats, as well as adding several hundred IVA ports. with additional use cases and languages. With this Q1 expansion, we anticipate that ARR will increase from approximately $2.3 million to over $6 million. So as you can see, we continue to execute very successfully on our go-to-market initiatives, including our march-up market, our international expansion, and our growth of our partner ecosystem. And with that, I'll hand it over to Barry to cover the financials. Barry?

Thank you, Dan. We are pleased to report that first quarter revenue reached a record $247 million, growing 13% year-over-year and exceeding the midpoint of our guidance by 3 percentage points. Subscription revenue was the strongest driver, growing 20% year-over-year in the first quarter, and now makes up nearly 80% of total revenue. Altium Enterprise subscription revenue grew 23% year-over-year. Our new logo deployments remained robust, with seat turn-ups sitting at Q1 record, demonstrating our focus on executing against a substantial backlog of booked seats. On a geographic basis, our investments in EMEA are paying dividends. EMEA subscription revenue, which represents over 40% of international subscription revenue, grew 32% year-over-year in the quarter. Our enterprise business made up 88% of LTM revenue, And our commercial business, which represented the remaining 12%, grew again in the single digits on an LTM basis. Recurring revenue made up 93% of total Q1 revenue. As a reminder, recurring revenue is made up of subscription revenue and usage revenue. Usage revenue grows slower than subscription revenue. As a result, each year we see a mixed shift within recurring revenue of approximately one to three percentage points from the share coming from usage revenue to the share contributed by subscription revenue. The main reason usage revenue grows slow is because as we move up market, our larger customers often use the existing carriers for usage. Additionally, our channel partners like BT and AT&T are also carriers and we will not take business away from them. We see the continuing makeshift away from usage to subscription as a positive long-term trend for two reasons. First, given that subscription revenue consistently grows faster than usage revenue over time, this makeshift reduces the usage drag on total corporate revenue growth. Second, the mix shift delivers an uplift to total corporate gross margins over time, given that the subscription delivers higher gross margin than usage. Professional services made up the other 7% of total Q1 revenue. I'd like to remind you that our long-term strategy is to enable our partners to deliver these services. This will gradually result in a mix shift away from PS revenue to subscription revenue. We also see this as a positive long-term trend overall because our subscription delivers higher gross margins than Pierce. Additionally, Pierce revenue continues to be more lumpy, partly due to large mega deals. Our LTM dollar-based retention rate declined slightly to 109%, as anticipated, given the macro conditions over the last several quarters. We expect Q2 LTM dollar-based retention rate to be either flat or very slightly down, And we continue to expect a positive inflection in the second half of the year, mainly because of customers with more than 12 month ramps. Longer term, our retention rate is expected to trend towards a high 120s by 2027 due to a higher mix of larger customers who have higher retention rates and to a continuation of the trend towards selling more and more software, including AI and automation to our customers. First quarter adjusted gross margins were 60.8%, increasing by approximately 40 basis points year over year, despite the lower than normal revenue growth and the substantial transitory investments we are making to support both our successful march up market and our successful international expansion. First quarter adjusted EBITDA was $37.6 million, representing a 15.2% margin, a decrease of approximately 90 basis points year-over-year, primarily driven by our strategic investments, most notably FedRAMP and India, both of which we expect to deliver significant long-term opportunities for us. First quarter non-GAAP EPS was 48 cents per diluted share, a year-over-year increase of 7 cents per diluted share, Before turning to balance sheet and cash flow, I would like to draw your attention to the progress being made on reducing stock-based compensation as a percent of revenue, which decreased from 24% three quarters ago to 18% in the first quarter. With regards to our balance sheet and cash flow highlights, in the first quarter, we continued a strong cash flow generation, delivering $128 million of LTM operating cash flow equivalent to 14% of revenue. This is driven by our EBITDA and by strong DSO performance, which came in at 33 days. We have now delivered 31 consecutive quarters of positive LTM operating cash flow, and we remain optimistic about our potential for continuing cash flow generation, given our long-term model, our substantial NOLs, and our low DSO. As a reminder, we further strengthened our balance sheet with the issuance of new five-year convertible notes in the amount of $747.5 million. After paying down a portion of existing June 2025 notes, we added 330 million of net proceeds to our cash balance. We are pleased to have successfully completed the oversubscribed offering, obtaining favorable terms. We locked in a coupon of 1% an effective fixed interest rate of 3.8%, including the cost of the cap calls that protect us from dilution until our stock price exceeds $122.18. We believe we are nicely positioned for many years to come. And now I'd like to finish today's prepared remarks with a discussion of our guidance for the second quarter and full year 2024. In terms of top line, we are guiding Q2 revenue to a midpoint of $244.5 million, which is in line with the commentary we gave a quarter ago during our index call. This represents a 1% sequential decline in line with our typical negative growth guidance pattern heading into Q2. For the full year, we are maintaining the midpoint of our revenue guidance at $1.55 billion. Given the still considerable acceleration in the second half, we are being prudent and not putting through the Q1 beat to our annual guidance. Also, please note, we are not expecting any 2024 subscription revenue from the Fortune 50 financial services customer previously mentioned, and only a moderate amount of PS revenue. As for the bottom line, we are guiding Q2 non-GAAP EPS to come in at a midpoint of 43 cents, which is in line with the outlook we provided last quarter. For the full year, we are slightly increasing the midpoint of our non-GAAP EPS guidance from $2.16 to $2.17 per diluted share, reflecting our plans to continue investing in key growth opportunities to build upon our momentum upmarket and internationally. 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 2024. We expect revenue to increase sequentially in the third quarter and more in the fourth quarter. Given the shape of this revenue curve, we expect non-GAAP EVs to improve 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 pleased with our first quarter performance. Many of the largest contact centers in the world are making mission critical decisions to migrate to the cloud. And the strategic investments we have been making are paying dividends as customers select our trusted CX platform to leverage the power of AI and deliver the best customer experience. This is only the beginning of our journey in defining the path for the CX market. And we believe the strength of our platform, our people, and our partners will pave the way for continued success. Operator, please go ahead.

Thank you so much, Barry. And everyone, before we move into the Q&A session, we do want to ask our analysts to please limit yourselves to one question to allow for as many questions as time permits. We do thank you for your cooperation in advance. And our first question is going to come from DJ. DJ Hines with Canaccord. DJ, please go ahead with your question.

Yeah. Hey, guys. Good to see everyone. Congrats on the mega deal. That's great to see. Barry, I'm going to start with you. One of the numbers, I'm going to break the rules right up front. That's a quick follow-up as well. So the last few years when you beat Q1, you've typically raised the full year outlook as well. This year was a beat and reiterate, which you mentioned on the call. Should we read anything into that in terms of further deterioration of demand or activity in this space? Just any comments there would be helpful.

Absolutely, DJ. So let me just frame it for you a little bit. Where are we sitting? We're sitting, we're coming off a quarter. We've had record for first quarter in terms of seed installs. A very strong backlog that gives us great visibility. We're going to talk at some point on this call about the inflection in DBRR that we're seeing in the second half and why we're seeing that. And to tell Breeze from our professional services as well. So overall, we feel pretty good. At the same time, we can't ignore the fact that we are talking about a very considerable re-acceleration in the second half. The first half year-on-year, based on our guidance, is 11.4. We're basically doubling that in the second half per our guidance to 20.1%. That's pretty aggressive, and we want to be prudent. And so for that reason, for prudence, we are not going to be putting through, we didn't put through the Q1 piece.

Okay, fair enough. And then Dan, for you, maybe a more strategic question, like, do you envision a future in which the pricing model in the sea cast space may, you know, significantly evolve away from seat based pricing and more towards kind of transactional or interaction driven pricing models. I mean, it feels like AI has a potential to move us in that direction, but we'd love to get your thoughts, like how that might be in the next three to five years.

Yeah, thanks, DJ. We absolutely are seeing that and we're seeing it already. As you mentioned, with many of the AI applications, they're not really tied to a seat and they're not really correlated to a seat. They can be like, as an example, even IVA at the front end. We do that per port, which we kind of equate as offsetting a seat. But there's many other applications like insight, right? You're pulling insights across an enterprise and getting information to make valuable decisions off of. And those are already being tracked. Things like transcription and our voice stream application, those are all priced based on either per minute or per gigabyte or consumption, some other consumption measurements. So we're seeing that evolve and take place as we speak. But there's still software that sits in front of the agent that helps the human agent. That's the most prevalent. That will remain to be typically a seat-based model. but you're absolutely right over time we'll see that evolve and have more consumption based yeah makes sense okay thank you guys our next question will come from terry tillman with truist

Yeah, thanks for taking my question as well, and congrats on the record transaction. Kind of like DJ, I'm going to have one question, but it might actually slightly be two parts. In terms of the AI and automation, what I'm curious about is what kind of impact is it having, not to be myopic, but on a seed or kind of an MRR basis per user? And then the second part is, because you have these interesting tools in the Gen AI side, I think you all had some efforts more recently to kind of programmatically go back to the base to really have them discover these tools. And what are you seeing in terms of uptake there? Thank you. Yeah.

So if I if I look first at the question regarding the the seats and how much is being impacted or how much that's being affected by AI and automation, what we're seeing is an uplift. You know, we've talked for many quarters about the fact that our AI applications, when you start to automate interactions, we actually collect more revenue for those. You know, whether it's a like for like or you're taking... calls that are 100% self-served through an IVA that used to be handled through an agent, we're getting twice the revenue. Think of it as per interaction, but it's really on a per seat basis or per port basis. But we're collecting, rather than just north of $200 per seat for the human agent software, as we've talked, we get nearly double revenue. in the 400 range when we automate those interactions. And then you talk about the rest of the AI portfolio, that's incremental add-on revenue that we achieve. So the wallet share that we achieve from our customers as they increase the automation and move more towards AI goes up. not down. And we're seeing our customer base from a seat perspective when they do adopt AI and automation, it's additive. It's usually giving customer added convenience, one more choice to interact with that brand, driving more and more time that an individual will spend with that brand. not taking it as a cannibalization of the human seats.

And Terry, I'll pile on. Our Gen AI studio is an industry first, as I mentioned in my remarks. And again, we're going to continue to out-innovate the competition, deliver more and more AI products across our platform. And most of those are upsell opportunities to our base, as you mentioned in your question. Thank you. Thanks, Terry.

We'll now move on to Taylor McGinnis with UBS.

Thanks for the question. It's Seth Gilbert on for Taylor. We'd love to know maybe a little bit about the vertical seasonality. As you mentioned before, Barry, the guide still assumes a recovery to growth of about 20% for the year. So how do verticals like consumer kind of influence the second half acceleration?

Yes, it influences it moderately in the sense that we don't have this deterioration taking place like we saw in the fourth quarter of 2023 when, for the first time ever, a subset of the consumer vertical, namely consumer discretionary, contracted for the first time ever, as I said. we're coming into more normal compares and we've got an installed base that is being extremely well managed that would also help. And yeah, as far as the verticals are concerned, it really comes down to the overall macro economy. And we're seeing an economy that's, we're not macroeconomists, but we're not blind to the fact that there are challenges out there. But we've allowed for that to the best of our ability in our art book.

Thanks, Barry. Maybe just a quick follow-up then. Are there any verticals that are outperforming or underperforming, conversely, that you would call out if it's not consumer?

So if I can, I can't speak about the end of the year, Seth, but take Q1 2024. the third biggest, namely consumer, was expected to be somewhat weaker, and it was. And that's confirmed so closely by this JP Morgan debit and credit card data. If I could just take a moment, you know, this is a consumer-led economy. Maybe two-thirds to a bit higher is consumer. And people use cash occasionally. They use Bitcoin, but most of that is credit and debit card data. And we see it even by month that attracts JP Morgan, the largest issue, but you can pick UBS as well. They've got credit cards and you'll see similar data. And so the consumer one was somewhat weaker as expected. The rest of the vertical were similar to prior quarters, namely slightly up in the first quarter. The other 16.

Thank you, Barry.

Sure. Our next question will come from Ryan McWilliams with Barclays.

Hey, guys. Thanks for taking the question. So despite the changes in technology and some of these new AI solutions being introduced, Five9 has now seen some of its largest deal wins over the last two years. So even with these technology changes, why do you think these large enterprise customers are choosing to move to the cloud now? And does this increase contact center complexity? Does that benefit Five9, given your track record of deploying these larger deals? Are you seeing these customers want to have a one-stop shop for your one source of truth for data for a lot of these AI solutions?

Yeah, I'll start. And Dan, you can chime in. Ryan, great question. We've talked about this before. The shift to the cloud is the strategic nature of CX, the end of life of these on-premise legacy solutions, AI, and the opportunities that that provides these large brands to change the game and reimagine their CX. So yes, it's way more complex. And that helps us. That's a huge tailwind for us over the next 10 years as complexity almost always accrues to the platform players. And Again, you have to have the breadth of platform to not just deliver the applications across that platform, but again, to have that end-to-end visibility that powers the AI. And we talk about GenAI Studio in my prepared remarks. I talked about it. It is a unique differentiator that allows us to leverage the most advanced engines, whether they're LLMs or small language models or whatever they are. We're an engine agnostic, but it's the combination of Combining those engines, the best in the world, the best of the time, and those are going to continue to advance with contextual data. And the only way you get to all the contextual data across an enterprise and a brand is by having the platform. So this GenAI Studio is a game changer. It is putting us out ahead of our competition. And by the way, again, we don't spend a lot of time talking about competition. I'll just say this. We talked about it in my prepared remarks. Generative AI revolution validated our decision long ago to be engine agnostic. A lot of our competitors didn't take that approach. They built their own engines. And guess what? They're having to throw away all that investment they made and pivot and play catch up to 5.9.

Appreciate the cover. Thanks, guys. Thanks, Ron.

And moving on to Matt VanVleet with BTIG.

Hey, good afternoon. Thanks for taking the question here. I wanted to check in on sort of where you're at on the FedRAMP process, and maybe more importantly, how that's helping you win new deals, both in the federal market, but also the trickle down into the state and local, maybe even higher ed as well. Just kind of what you're seeing in those verticals.

Yeah, Matt, we're very, very early in that process. We're... Aiming at the end of 2025 to be FedRAMP certified. We haven't really begun a go-to-market motion in earnest yet. We're still doing state and local government business. We've been doing that for quite a while. But again, it's going to be another year and a half or so by the time we're truly in that market.

Having said that, it does help us in a go-to-market perspective where we have some of these large financial institutions and others that want to make sure that we're on a path to get that authorization in FedRAMP because they serve clients that are federal-based clients and agencies. that they want to make sure we're on the path for that. So it's played a role in us securing that business. But we, as Mike says, we haven't really gone to market yet. We'll be in what's considered in process at the end of this year. And that process, once you get in process with a sponsor, then it's typically about a 12 month period before you get authorization to proceed.

And I would like to add one thing, Matt, because we are going to at some point talk about We are washed with investment opportunities, which we're taking advantage of. And I believe this management team has demonstrated this, their astuteness in some ways to be able to pick the right investments. And this is clearly one of them FedRAMP, but it's a lot of money, a lot of money. And we will give you a quarterly track on what it is. And starting now with Q1, 2024, the cost was $1.9 million. with 77 basis points of EBITDA.

All right, great. Thank you.

And CT Panagrahi with Mizuho has the next question.

Thanks for taking my question. I know you guys talked about Q4 as a record booking, and you're expecting some of those go-lives that's embedded in your guidance in the second half. So wondering, how is the go-live going, and do you have visibility into the go-live And have you baked in any kind of conservatism in terms of, you know, in case any go-live slips, let's say, a quarter or two?

Yeah. Hi, CT. I'll start. Feel free to chime in, Barry. But the go-lives are going great. We turned up a record number of seats in Q1. And, again, we managed that backlog of, you know, product seats, subscriptions, and other, you know, AI products included. We manage it like a pipeline. It's, you know, once we've booked that business, our PS team, our implementation team is very, very metrics driven and our turnups, we track them very closely. In fact, we're just presented at our board meeting recently. So we're very, it has, we have great visibility on it.

Let me just put it that way. And if I could just add two things to that, what you're asking about is very important. in the sense that it's key to the dollar-based retention rate inflection. So in terms, CD, of our spot rate, we give you the LTM rate, but it's been flat for the spot rate for the last three quarters. What would take it up is the ramping of our bigger customers, and the go-lives are so key in that. And we've got a really high-stepping team. Every quarter, quarter in, quarter out, they at least meet, but typically beat the number of seats that they said they will bring up. And they're not dealing with wishes and hopes. It's actually there in the background. It's not, of course, customer things can intrude or something like that. But most of the time, the customers are pretty motivated.

That's great. Thank you.

Thomas Blakey with KeyBank has the next question. Please go ahead.

hey guys uh thanks for taking my question again uh congratulations on the mega deal i just i a two-part question again i think most people have had the fan for you just if you could highlight one or two key reasons for winning this deal um i know you talked about trust and whatnot but just trying to uh view how this could impact uh future wins uh down the road as we're seeing deals get larger and larger here And then, Barry, for you on backlog, you mentioned that I think in your preamble, maybe talk about any type of cushion you might have there as it relates to the sharp uptick in growth into the second half. That'd be helpful. Thank you.

Yeah, great question. So regarding the large bank, as I mentioned in the prepared remarks, the trust, but if you look at the process that they went through, they're looking at, you know, when you look across the global footprint that they have, they did a very thorough inspection and audit of us and our competitors. And I mean, like no other, I'll say that. Spending days here with us at our corporate offices and inspecting not just the product and the platform, but really understanding our ability to deliver and our ability to support an operation of their size and complexity. And so while we talk about product and we talk about the innovation, absolutely those things are critically important, but they really wanted to understand how would we help them deliver the business outcomes that they were wanting to achieve? And you have to demonstrate that. You can't just, you know, put up slides and talk about what you've done before or what you're going to do for them. You've got to get into the trenches. And so we had dozens of literally dozens of people, technical folks from the bank that spent several consecutive days here on multiple occasions to really understand that and understand, as I mentioned, the partnerships. Can we leverage the partners that we have? When you look at the AI and automation solutions, as we talked earlier about why are these large organizations moving to the cloud now? A big part of it when you look at the AI functionality is It's cloud to cloud integrations. You know, you're taking data and shooting it over to a hyperscale or to get some underlying engine that they have and be able to get back data that can then be leveraged and utilized to deliver an experience that hasn't been realized before. And so understanding who our partners were. And how we're working with them to deliver a joint solution. And the example is Google, right? That was a big factor, right? How do we leverage Google in much of the AI applications that we're going to deliver for them? So it comes down to the comprehensiveness and our ability to deliver and support for a global organization like that. As you can imagine, they had many, many systems, hundreds of different systems. They've got dozens, as I mentioned in the prepared remarks, CRM systems. They want to make sure that we've got the platform, but really the expertise and wherewithal. Mike has mentioned several times about our professional services team. That team comes with experience. Many have worked on their side of the table for customers, for large financial institutions. Putting in and operating on the customer side, large, complex solutions such as this. They just felt very comfortable that we were the right fit and had the right direction to help them for decades. Yeah, our acquisition of ACS played a role as well. So when you look at that, that takes information, the data that's coming from all the disparate systems that they have across those divisions and brings it together, normalizes it and displays it so that the operator of the contact centers and the management that are making the strategic decisions don't need to worry about what systems are behind that. I've oftentimes been in with those ACS customers and said, well, what data am I looking at? Is that coming off of a Navaya or Cisco or Genesis or 5.9 if we're in the middle of a migration? And frankly, the operator doesn't know and doesn't care. So it helps us accelerate the move over. They don't have to say, whoa, whoa, whoa, time out. I can't let you cut over this division because it's going to skew all my reporting. And I do my payroll based on certain metrics that come out of that reporting. Well, guess what? It doesn't matter. We can go behind the curtain and make that transition happen, and it's invisible to the user on the floor.

And then, Tom, thanks, Dan. And to answer the second part of the question, so for that re-acceleration, taking out three quarters, not just the second half, just for ease of arithmetic, we need $116 million extra year-over-year growth. That 116 is bifurcated, as we've talked about in the past when we were talking about the full year, between the DBRR at 64 million of that 116, and then the remaining part, the 52 million, comes from new logo deployments that you're asking about. So the majority is the DBRR. And that, by the way, is prior to inflection. I'm using 110. The 52 is largely in backlog, not totally. There are what we refer to in the past as go-gets in the next month or two that we still need to complement that to some extent, but largely it's all in backlog. And we talked earlier about the expertise and competence of our professional services team.

Thank you, Bear.

Thank you, guys.

Mita Marshall with Morgan Stanley has the next question. I think Mita might be joining us audio only today.

Yeah, apologies. No video is better than frozen video. So I guess the question is, you know, time to migration, obviously, as you get these longer and longer or larger and larger deals is, you know, a consideration. And obviously ACS helps with that, you know, I just wanted to get a sense of, you know, is there any way to quantify like how much ACS can shorten those migration cycles or, you know, and just on the service provider channel or service system integrator channel, as we've used those guys to kind of help with migration, you know, are there, is the pace of those migrations kind of the same, um, as you've seen with your own channel. Just trying to get a sense of what trends are on pace of migration.

Yeah, I'll take the last part of that first. Thanks, Meeta. When you look at the migration, it's very much in sync. Whether there's a systems integrator involved or not, they tend to help and take and offload a lot of the project management and program management and help work with the customer through a large-scale migration. But most of the actual work of the configuration and of the integration effort is done by our professional services team. Now, we're in the process of enabling those SIs to get certified and really get their skill set to where ours is. We have a very, very high bar that we set for what we require and demand, and we're starting to get leverage from those. The goal is to ultimately move more and more of that off of our personal and onto theirs for obvious reasons. But that's something that it's really hard to shorten it too much. Yeah, the tools help, like I said, in that last example, like ACS, but for the most part, it's a matter of going as quickly as the customer can. We'd like to obviously move as quickly as they're able so that we can get to revenue sooner. But there's a lot of planning and oftentimes there's a lot of changes that they're doing. And so they have to have a lot of internal meetings themselves in order to make some important decisions.

Great. Thank you. We'll move on to Jim Fish with Piper Sandler.

Hey, guys. Nice to get the win on the board here. And I'm sure you're sick of answering the question about stage coaches, Barry. But, you know, actually building off of that last question, you guys mentioned incentivizing these SIs to lead with 5.9 through, I think you called it Project Pull-Through. Can you just walk us through what you're changing in terms of these incentives and any go-to-market changes outside of this that you're planning on this year? And with that SI aspect, kind of how we should think about SI contribution today in terms of how much it's pulling you guys in versus where you expect it could be over the next couple of years. Thanks, guys.

Yeah, Fish, I'll start and Dan, feel free to chime in. But, you know, we kicked off project pull through, boy, close to 18 months ago. And that was really designed to lean into a lot of the SIs and other resellers that want the services revenue as part of this equation. And If you look at our business, we talked about subscription revenue. Subscription revenue is the key metric that everybody should be paying attention to. And as we offload some of these services to SIs and other partners, you know, we're not going to get that revenue. And that, you know, that's why there's a disproportionate growth rate in our revenue and our usage revenue compared to subscription. But that is our strategy. It's part of our business model. We think is a very good thing from a margin perspective. But it's also the reason we named it Project Pull Through was because we know that there's an incentive on these size and other resellers if they've got the services revenue, you know, in a deal. they're more likely to bring us into a deal. And we were quite frankly missing out on that opportunity 18 months ago. So that's why we kicked it off. It's been a very nice impact up market. And again, it's still somewhat early days, but we're getting third parties are doing a very good proportion of our implementations these days, especially internationally and a very good growth in our US implementations as well. Thanks, Beth.

Baird's Willpower has the next question.

Great. Thank you. Maybe you come back to the Fortune 50 win. Great to see that. Congratulations. It sounds like professional services and your ability to execute are big pieces of that, but I'd love to get some color as to how important AI was. How focused were they on the IVAs and the capabilities you had there, and what kind of stood out your platform on that front, perhaps, you know, versus others. And I guess kind of tied to this kind of mega, you know, deal, you know, thought process. I mean, any

qualitative color as to how the pipeline is building for other you know dolphins and whales i guess as you look forward yeah yeah thanks will um when you look i'll start with that one the dolphins and whales you know when you take that large bank out of the equation um you know the the the pipeline is a record uh we're still at a record if you take that out of the equation obviously that that because of the size of the deal, but otherwise very, very healthy pipeline striving towards that. But if you look at AI, it was very key front and center for them in their decision. In fact, if you think about it, most banks, including this one, have a lot of automation and self-service already on their legacy platforms. And it just isn't as good, right? It doesn't have the accuracy rate. When you have speech-enabled, I'll call it speech-enabled IVR from 10 or 15 years ago, you can do some basic things. You can call in and do some banking by phone and check your balance and see if your check's cleared and But it's just not as robust and not what you can get in today's technology. And so a big, big, big part of it was how they would replace that with today's next generation IVAs. And thank goodness we have inference of that acquisition and the enhancements we've made to that platform to be able to then deliver what they felt was the market leading platform. uh, IBA solution, uh, for, for not just self-service, but for, and then when you combine, when you take the IBA for self-service, of course, but then you combine that with, uh, our agent assist and our ability, like I said, with that Google partnership to be able to take real-time conversational data and be able to interpret it, um, and then fetch the right data from the right source. If you think about a large bank with, you know, dozens of CRM systems, we've got to go fetch the right data to be able to answer that customer's question. And those types of functions are way down in the weeds technically, but we came out very superior compared to our competition because of some of the things Mike said, the engine agnostic, the speed at which we've been able to work with these other engines, and then the flexibility. They actually were able to come to us and say, hey, in this particular use case, we want to use this engine. In that particular use case, we want to use another one. And oh, by the way, in this one, we may want to build our own small one with just our data because it's faster at getting to the data. You don't want to go search 23 databases. But if you know you have a specific use case, you want to build one that's very personalized and customer specific so that you can get the data very quickly.

Sounds good. Thank you.

We'll now hear from Scott Berg with Needham.

Hey, everyone. Really nice quarter. No thanks for taking the question here. Mike, you'd made a comment on the summit status with Salesforce. I think that's an interesting comment because they effectively partner with all your competitors in the space as well. And whether they've made investments in them or they're really partnered supposedly tightly, if you're a company based in Seattle, you're... you uh you you if you're the first one to the status i think that's kind of interesting help us understand a little bit more maybe what this can give you outside of you know an early look on technologies etc my guess is there's some other commercial opportunities but just would like to understand that better thanks yeah scott i think it's visibility uh it's technology as we mentioned in the prepared remarks um and summit status is very uh objective it's based on uh business we've done together

frankly. So in the end of the day, that's how they measure that. And that's who gets that status. And we're the only ones that have it. It's essentially a good metric to kind of get a sense for how much business we've done together with Salesforce. It's a big deal. It's a real big deal. And it's a big deal to them. It's a big deal to us.

That's all I have. Thanks for taking my questions. Thanks, Scott.

Thanks.

Moving on to Michael Turn with Wells Fargo.

Hey, thanks, guys. Some encouraging commentary throughout here. I want to go back to the key metrics, Barry, and what needs to happen for those to trough. It sounded like flat to slightly down in terms of retention for Q2, but you've been talking about the second half move up. I mean, how much do you still need to execute to get there? And maybe you and Dan can just speak through confidence, visibility, how that's progressed from when you initially framed the 24 outlook to where we currently sit.

Yeah, so it's easiest to break it into three buckets. New, established in PS, installed based in PS. In terms of new, The backlog was largely there. It's been added to somewhat in the intervening three months. Nothing dramatic there in change. Also, with respect, Michael, to the inflection that we've been referring to in the dollar-based retention rate, yes, it did, as expected, go down one percentage point this last quarter. And that is simply a fact of that while the spot rates have been flat for the last three quarters, we now dropped off one of the higher ones and we now had a higher one that we had to compare with, now we're down slightly. But we can see now clearly that we've, you know, flaw we expect, can't guarantee, is in. And just by the way, the last time that we had an increase in the dollar-based retention rate was all the way back to the second quarter of 2021, so a long time ago. So we're really, really looking forward to that and hoping that the economy cooperates because it really does tie very closely to that. But that's not all. What our analysis shows is that we've got a number, not just five, 10, but more of big companies, enterprises that came into the base starting in Q2 of 2023 that are ramping. And I'm not just talking about the healthcare companies and so on, a lot of them. And those mechanically will also help given the flaw in the spot rate, if you see what I mean. um then uh the last one is this tail breeze that we have from professional services um we will get a moderate amount from this uh major fortune 50 uh institution financial service company um and um that will help as well okay very helpful barry thanks samad samana with jeffries has the next question

Great. Thanks for squeezing me in. Barry, I have a question for you. Just thinking about the monetization of AI, I think someone earlier had asked about maybe a pricing model shift. And when I think about maybe gross profit dollars for a dollar of AI revenue versus maybe what you would get for core subscription, if it's obviously double the revenue, you should get more gross profit dollars. But When you factor in maybe WFO as well, I guess what I'm trying to figure out is, should we think about AI being a gross profit dollar tailwind as well, and not maybe just on the pipeline? And how should we think about that flowing through maybe over the next year or two? Yes.

So I'm going to resist the temptation to talk about it for the next year. And the reason I'm going to resist that temptation is that We've got five reasons why gross margins are going to go up, but they're going to go up over time. And the biggest of those is not what you've just been referring to, that's number two. It is the fact that revenue growth against fixed and semi-fixed costs is by far the biggest one. And we actually, I don't know how to put this without sounding boastful, but we're pretty happy with the fact that we've maintained the gross margins where we have, despite the somewhat soggy revenue growth currently. And so I'm not going to get into, I don't want us to get into a corner with the revenue. But in terms of yours, the number two is the upsell and the cross-sell and the attach rates from these AI automation solutions. And they clearly, clearly have higher gross margins. And these attach rates, both in the new bookings and in the install base are non-trivial. I'm not talking about 1%, 2% increases. A component of the total is more than that. And then just in case with that teaser, you're wondering what the other items are, it's what we talked about in the prepared remarks, namely the makeshift away over time from both usage, which has margins in the 50s rather than the 70s, and professional services, which has negative gross margins, Thirdly, that was the number three one. We've also got one-time investments. FedRAMP features prominently there. Those are transitory. India is another one. The cost is there. The revenue is not there. And then we have a number of initiatives in the professional service organization. Of course, there's no need why that needs to run at a negative gross margin.

Great. Thanks as always for putting me in. Appreciate it.

We have time for one additional question. So our final question is going to come from Peter Levine with Evercore.

This is Bill on for Peter and thanks for taking my question. With the healthcare expansion story going from 2.3 million to 6 million of ARR, how often will this kind of increase be the norm? Or should we think of this kind of uplift as an every now and then?

You know, at that amount, I would say it's an every now and then. That's why I highlighted it. But we get our install-based customer. We talked about, I think last quarter, about the folks that are focused on our install base. We had individuals that were wearing both hats of CSM. and seller so they were taking care of day-to-day issues with the customers and then putting their sales hat on and trying to do cross-sell upsell we've actually taken that team and divided it into separate individuals for each customer so they now have a CSM that's responsible for the day-to-day and they have a seller that's there to upsell cross-sell that carries a bookings quota and they're primarily focused on these applications the cross-sell upsell applications and so take effect and show itself over time. But that's what typical most software companies about our size go to, you know, that mix of hunter and farmer, even in the install base. And that should contribute nicely to it. And we're seeing, you know, software being sold to our install base at good rates. And that will only increase as we roll out more and more of these.

Great. Thanks for taking my question.

Yeah.

Thanks, Bill.

And again, this does conclude our Q&A session, so I'll turn it back to you, Mike, for closing comments.

Yeah, thank you very much for joining us today. As I said in my prepared remarks, it's been an amazing journey, 10 years as a public company. I really look forward to the next 10 years and seeing what we're able to achieve as a team. I want to thank all the Five Niners one more time, and thanks again for joining the call.