Five9, Inc.

Good afternoon and welcome to Five9's second quarter 2026 earnings conference call. I am Tony Rigetti, Senior Vice President of Investor Relations. With me today are Amit Mathuradas, Chief Executive Officer, and Bryan Lee, Chief Financial Officer. During today's conference call, certain statements will be made that are not historical facts and are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding our quarterly and full-year 2026 guidance, expected improvements in operating and financial metrics, industry trends including with respect to AI, our strategy, priorities, and execution, our product roadmap and technology investment, our markets, customer demand trends, our market position and opportunity, our capital allocation strategy, Thank you for watching. Thank you very much. Unsuccessful development or market acceptance of our AI solutions, failure to maintain and develop our contact center solutions, and 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 refer to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and a 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 of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's view as of today and may no longer be accurate at the time of the replay. Lastly, a reminder, unless otherwise indicated, financial figures discussed are non-GAAP. And now, I'd like to turn the call over to 509 CEO.

Please go ahead, Amit. Thank you, Tony, and good afternoon, everyone. We delivered another solid quarter and I am pleased to report that our Q2 revenue was $312 million above the high end of our guidance and subscription revenue grew 14% year-on-year, marking a third consecutive quarter of acceleration. AI revenue grew 78% year-on-year and we are increasing our full-year AI growth outlook from more than 40% to at least 60% year-on-year. Together with the significant enterprise win, which I will discuss in more detail shortly, these results provide tangible evidence of the progress we are making against our priorities and are an indicator of what 5.9 can look like with greater focus, speed, and operating discipline. Last quarter on my first earnings call as CEO, I laid out full priorities for 5.9. Building a performance-driven culture, optimizing operations, strengthening the core business, and winning in AI-powered customer experience. This quarter, we made progress against each of those priorities, measured by the operating indicators we have focused on. The most important point is this. 5.9 is sharpening its position around the opportunity we are built to lead. We are a voice-led enterprise platform for customer experience. And when we say voice-led, we do not mean voice limited to human agents. Voice is the most natural, highest context interface for human integrations where reliability, governance, AI, digital workflows, data, integrations, and human agents all need to work together in production. Thank you for watching. Our review of the market, product portfolio, and go-to-market priorities has reinforced where we should concentrate resources. Complex businesses, especially financial services, healthcare, insurance, and other regulated industries, where voice, compliance, integrations, governance, and human-in-the-loop workflows are not just essential but required. These are environments where Five9's platform depth is critical. The customer interactions are complex, the cost of failure is high, and the buyer needs technology that works reliably in production, not just in a demo. We are aligning our resources behind this view, and we are allocating resources towards the customers, verticals, and use cases where 599's opportunity is greatest, while being more disciplined in other areas. I want to acknowledge that transparency with the investor community remains a central obligation. That means less narrative, more evidence. I believe Q2 continues to demonstrate that. On operations, we announced a significant set of organizational changes during the second quarter. These changes reflect a deliberate effort in product management, AI, automation, architectural organizations together under a single leadership structure, creating cleaner ownership across the full product lifecycle and faster delivery. To lead this unified organization, I am pleased that Niranjan Vijayaragavan joined Five9 as our new Chief Technology Officer to lead this unified organization. Turning to sales, Rob Hornish was appointed Chief Sales Officer to lead our global sales organization with the focus on strengthening go-to-market execution and driving disciplined revenue performance. As we accelerate our transformation, we have recognized the need for a dedicated function to connect our strategy to execution. Sven Linsmaier, joint as EVP Transformation and Strategy, responsible for our highest priority transformation initiatives, disciplined execution across the organization and corporate development, including M&A. Each of these hires brings experience building modern enterprise platforms across AI, automation, digital workflow, and go-to-market execution. This is relevant because, in our opinion, the next phase of customer experience will require more than maintaining a traditional contact center. It will require bringing voice, digital AI, data, and workflows together into one platform. On the core business, we continue to see healthy indicators. Subscription revenue is strong, growing 14% year-on-year in Q2, driven by AI revenue growth acceleration to 78% year-on-year. Our LTM subscription dollar-based retention rate remains steady at 1%. A CX platform that seamlessly connects with other critical systems offering large regulated enterprises a trusted platform that can support customer experience at scale, not a sprawl of solutions. A powerful example is our recent win with the Fortune 100 Financial Services customers. Representing approximately 100 million of total contract value. This was a competitive process against a select group of enterprise-grade CX providers, and we earned it on the strength of our proof of concept and our delivery and execution capabilities. Working as one team with Google and a leading global systems integrator, Notably, it is one of the first large deals transacted for the Google Cloud Marketplace, and our joint go-to-market motion with Google was the key driver of this customer's decision. Five9 was selected as a core CX platform supporting the customer's broader cloud migration strategy. We expect the current five-year agreement will ramp to approximately 25 million of ARR when fully deployed. Now let's turn to why we believe AI is strengthening our platform. Contact centers are going through a major transformation. Service is no longer viewed only as a cost center to contain. Increasingly, enterprises see customer experience as enabling that shift by automating routine work and improving the economics of service. In many customer conversations, the ROI is becoming clearer. Better service, more capacity, faster response times, and stronger customer outcomes. That makes the move to a modern cloud-based CX platform more urgent, not less, and is driving a reallocation of contact center spend away from labor and towards the type of mission-critical software that Fire9 provides. Voice is central to that opportunity. It remains one of the most important channels in customer engagement. and as AI handles more interactions, delivers more insights and improves agent quality, the value of a voice platform increases. It is no longer just about routing calls to people. It is about orchestrating the handoff between people, AI voice agents, AI digital agents, data compliance, security and governance inside one production environment. That is why voice is a starting point for our strategy. The question is not whether AI will penetrate the voice channel. It already has. The question is whether enterprises deploy voice AI as a disconnected point product or inside a trusted CX platform that already manages voice, routing, data, governance, and human handoffs. We believe the enterprise answer favors 5.9. That is why we believe AI can be a catalyst for CCaaS growth. It increases the importance of the platform as critical infrastructure that connects all these elements that enterprises. But in complex enterprise environments, being early with a feature is not the same as being trusted as an operating platform. These customers need AI embedded into the platform they already depend on. That is why our focus is not AI and isolation. It is AI agents and human agents working together across voice and digital channels inside one trusted platform to deliver a humantic CX. Over time, AI agents will handle a larger share of customer interactions, including many routine and multi-step service requests. will remain essential for complexity, judgment, empathy, escalation, and oversight. The value comes from orchestrating both together, so the customer experience is seamless and the platform learns from every interaction. This is where we believe the category is going, and Five9 is built for that future. We are also delivering new products that directly support this strategy. In June, we advanced our AI-powered CX initiative with the release of the next-gen Five9 voice AI agents, a re-architecture of our voice AI capabilities built from the ground up for the human world we believe is upon us. Voice AI agents are designed to reason, act, resolve customer requests with seamless handoffs to human agents when needed. What sets this apart is that it is built natively into Five Nights Camera, knowing when to act, when to escalate, and how to bring in humans with context. It is also about operating inside governed workflows where reliability, control, and oversight are essential. Customer engagement is not an open-ended chatbot environment. It is rules-driven. Operationally sensitive and tied to real workflows. These are the problems we can solve. We are seeing evidence of this strategy working in the quarter. Customers are adopting AI capabilities at an accelerating pace, and we are seeing continued demand from enterprises that need trusted AI infrastructure as they modernize customer experience in the cloud. In closing, we have a strategy that is progressing and a sharper operating focus. The work is not complete, but the progress is real. We are concentrating our resources where 5.9 has the strongest strike to win. We believe AI strengthens the value of our core platform, expands our monetization opportunity, and accelerates the need for a trusted cloud CX infrastructure. With that, I'll turn the call over to Bryan.

Thank you, Ahmed. Good afternoon, everyone. I'll take you through our Q2 financial results and then walk through our updated guidance. 11% and 6% respectively. Our subscription revenue grew 14% year-over-year made up of two components. First, our CCAS revenue grew a stable 7% year-over-year as expected. And second, our AI revenue accelerated to 78% year-over-year growth. This acceleration in AI revenue was driven by several customers in a backlog ramping earlier than forecasted, pulling forward the deployment timeline rather than reflecting an increase in deal scope. As a result, AI revenue reached approximately $39 million in Q2, representing an annual run rate revenue of over $150 million. Additionally, AI revenue now makes up approximately 15% of total subscription revenue, up from approximately 9% a year ago. Also, I'd like to point out that our concurrency count grew in line with our CCAS revenue growth. Looking ahead, we continue to expect CCAS revenue growth to generally track the sequential progression of total revenue growth in our guidance for the remainder of the year. Driven by the timing of backlog converting to revenue. For AI revenue, we now anticipate full year 2026 growth to be at least 60% year-over-year, up from our prior outlook of more than 40%, reflecting the earlier than forecasted ramps I mentioned a moment ago. LTM subscription dollar-based retention rate was 107% in Q2, in line with our expectations. We anticipate this key metric to increase in Q3 by approximately 1% per point, driven by existing backlog. Now turning to profitability. Adjusted gross margin in Q2 was 61%, compared to 63% in Q2 2025. Adjusted EBITDA in Q2 was $70 million, or 22% of revenue, compared to $68 million, or 24% of revenue in Q2 2025. Both metrics were impacted by temporary expansion of professional services capacity, enabling us to address customer demand to deploy their AI solutions earlier than anticipated. We expect the adjusted gross margin to run through the second half of the year. Please note that the sequential comparison of Q226 versus Q126 for both adjusted gross margin and adjusted EBITDA margin was also affected by previously disclosed one-time vendor discount of slightly more than 1% point of margin that benefited Q126 and did not recur in Q226. In terms of cash flow, cash from operations was $42 million, or 13% of revenue, and free cash flow was $15 million, or 5% of revenue. Please note that in addition to Q2 cash flow being seasonally the lowest quarter of each year, there are two non-recurring items, including variability from our transition to annual customer payments and a pull forward of some capital expenditures from the second half of the year into Q2. We ended the quarter with approximately $654 million in cash, cash equivalents, and short-term investments. We continue to be on track for purchase of PP&E to come in at approximately 3.5% of revenue for 2026. As a reminder, this is temporarily elevated at approximately 1 percentage point above last year's rate in order to support our global data center refresh in 2026. On share repurchase, the $90 million ASR is well underway. We received an initial delivery of 3.1 million shares, representing approximately 80% of the total shares expected to be purchased under the program. The remainder is expected before September 30th. The new $200 million board authorization we announced last quarter continues to be available, and we will deploy it opportunistically. Before moving to guidance, I would like to touch on the Fortune 100 financial services customer win that Ahmed highlighted. This is a five-year contract with a total contract value of approximately $100 million, comprised of both subscription and professional services, and we expect this customer to reach approximately $25 million in subscription ARR once fully deployed. Currently, we're in the initial planning phase, and we expect a negligible subscription revenue contribution in 2026, followed by a gradual ramp in 2027, and more meaningful increases thereafter, similar to ramp schedules of prior deals of comparable magnitude. Moving to our outlook. For total revenue in the third quarter, we're guiding to a midpoint of $319 million, with a range of $316 million to $322 million. For the full year of 2026, we're guiding total revenue to a midpoint of $1.266 billion, with the range of $1.26 billion to $1.272 billion, which is up from our prior midpoint guidance of $1.26 billion. Consistent with what we said last quarter, conversion of backlog to revenue is the key driver of our revenue guidance for the remainder of the year with essentially no dependency on go-getter of new business. For non-GIBPS in the third quarter, we're guiding to $3.26 per diluted share in range of $3.22 to $3.30 per diluted share. We continue to anticipate annual adjusted EBITDA margin to exceed 24%, and annual free cash flow to be approximately $175 million. Please keep in mind that our organizational design initiatives, including recent appointments to our leadership team, are expected to generate higher temporary expenses in 2026, but provide longer-term cost efficiencies, along with improved focus, speed, and effectiveness. Thank you for watching. With that, I'd like to open the call for Q&A. Operator, please go ahead.