Subscription revenue grew 20% year-over-year, comprising nearly 80% of total revenue. Adjusted EBITDA margin was 15% of revenue, with $128 million in LTM operating cash flow.
Q1 2024 revenue reached $247 million, a 13% year-over-year increase, with subscription revenue growing by 20%.
Enterprise subscription revenue grew by 23% year-over-year. EMEA subscription revenue increased by 32%.
Recurring revenue accounted for 92% of total Q1 revenue, with a slight mix shift from usage revenue to subscription revenue.
First quarter adjusted gross margins were 16.8%, with adjusted EBITDA at $37.6 million, or a 15.2% margin. Non-GAAP EPS increased by $0.07 per diluted share year-over-year.
LTM operating cash flow was $128 million, equivalent to 14% of revenue.
Market and Product Development
Five9 is capitalizing on the migration to cloud contact centers, improvements in customer experience, and AI advancements.
The company’s AI strategy combines leading engines with contextual data to create customer-specific models, including the introduction of Gen AI Studio.
Five9 signed its largest deal ever with a Fortune 50 financial services company, demonstrating success in targeting larger enterprises.
Strategic Partnerships and Expansion
Increased momentum from large Systems Integrators (SIs) and partnerships with Salesforce and BT are driving upmarket success and international expansion.
Customer Wins and Expansion
Contracted with one of the largest U.S. banks, anticipated to result in over $50 million in subscription ARR.
Secured a new customer in the higher education sector with an initial order expected to result in $3.8 million in ARR.
An American radiology firm chose Five9 for its deep Salesforce integration and AI suite, expecting to result in over $2.8 million in ARR.
Guidance and Outlook
Q2 2024 revenue guidance is set at a midpoint of $240.5 million, with full-year revenue guidance maintained at $1.055 billion.
Non-GAAP EPS guidance for the full year slightly increased from $2.16 to $2.17, reflecting continued investment in growth opportunities.
Question and Answer
Q1 Earnings Beat and Full-Year Outlook
Question
The analyst noted that in previous years, a Q1 earnings beat for Five9 typically resulted in an increase in the full-year outlook, but this time the outlook was reiterated. Does this suggest any potential deterioration in demand or activity in the space?
Answer
The company had a strong Q1 with record logo and seat installations, a robust backlog, and visibility into an inflection point in the second half of the year.
However, the significant reacceleration expected in the second half, with a doubling of growth rate compared to the first half, led to a decision to maintain prudence in the guidance.
Evolution of CCaaS Pricing Models
Question
Will the pricing model in the CCaaS space evolve away from seat-based pricing towards transactional or interaction-driven models, particularly with the increasing use of AI?
Answer
The company is already seeing this shift towards consumption-based pricing models for AI applications that are not tied to seats, such as transcription, voice stream, and insights applications.
However, software that supports human agents will likely remain seat-based for the foreseeable future.
Impact of AI and Automation on MRR and Customer Uptake
Question
What impact is AI and automation having on MRR and seat growth, and what is the uptake of AI tools within the existing customer base?
Answer
AI and automation solutions are driving an uplift in MRR, with the company collecting nearly double the revenue per interaction when interactions are automated.
The adoption of AI and automation is additive, leading to increased wallet share from customers and providing them with additional choices and convenience.
The company’s Gen AI Studio, with its industry-first features, is driving further AI adoption and serving as a differentiator in the market.
Vertical Seasonality and Performance
Question
How does vertical seasonality, particularly in the consumer sector, influence the second-half acceleration, and are there any other verticals that are outperforming or underperforming?
Answer
Vertical seasonality, particularly in the consumer sector, is expected to have a moderate influence on the second-half acceleration due to more normal comparisons and a well-managed installed base.
The consumer vertical was somewhat weaker than expected in Q1, likely due to factors such as credit card debt.
Other verticals performed similarly to prior quarters, with some showing slight growth.
Drivers of Large Enterprise Adoption and Contact Center Complexity
Question
Despite technology changes and the introduction of new AI solutions, Five9 has seen some of its largest deal wins in the past two years. What factors are driving large enterprise customers to move to the cloud, and does increasing contact center complexity benefit Five9 given its track record of handling larger deals?
Answer
The shift to the cloud is driven by the strategic nature of customer experience (CX), the end-of-life of on-premise solutions, and the opportunities presented by AI for reimagining CX.
The increasing complexity of contact centers benefits Five9 as a platform player with AI capabilities and end-to-end visibility powered by Gen AI Studio.
The company’s decision to be engine-agnostic in AI development has been validated by the generative AI revolution, as many competitors who built their own engines are now playing catch-up.
FedRAMP Certification and Impact on Government Deals
Question
What is the status of the FedRAMP certification process, and how is it helping the company win new deals in the federal market and other government sectors?
Answer
The company is in the early stages of the FedRAMP certification process and aims to be certified by the end of 2025.
While the company has not actively marketed its FedRAMP progress yet, it has already played a role in securing business with large financial institutions and others who serve federal-based clients.
Progress of Record Bookings and Go-Live Visibility
Question
How are the go-lives of record bookings from Q4 progressing, and does the company have visibility into their timelines? Has the potential for go-live delays been factored into the guidance?
Answer
Go-lives are progressing well, with a record number of seats turned up in Q1 and a highly metric-driven implementation process.
The timing of go-lives is crucial for the dollar-based retention rate (DBRR) inflection, and the company’s implementation team consistently meets or exceeds its seat deployment targets.
Keys to Winning Large Deals and Backlog Cushion
Question
Can you highlight one or two key factors that contributed to winning the recent mega deal with a Fortune 50 bank, and does the backlog provide any cushion for the sharp growth uptick in the second half of the year?
Answer
Trust, a comprehensive understanding of the customer’s needs, and the ability to deliver and support a solution for a global organization were key factors in winning the mega deal.
The company’s partnerships, particularly with Google for AI applications, and the role of the ACS acquisition in data integration and normalization were also significant.
The backlog provides a cushion for the second-half acceleration, with a substantial portion of the required growth already secured through DBRR and new logo deployments.
Aceyus Integration and Migration Trends
Question
How does the integration of Aceyus impact migration cycles, and are there any trends in the pace of migrations with or without the involvement of service providers or systems integrators?
Answer
Aceyus helps streamline migration by providing data integration and normalization, which accelerates the move-over process and minimizes disruptions to reporting and operations.
The pace of migrations is generally consistent, whether service providers or systems integrators are involved, as the actual configuration and integration work is primarily done by Five9’s professional services team.
Project Pull-Through and SI Contribution
Question
Can you explain the “project pull-through” initiative and its impact on the business, and what is the current and expected contribution of systems integrators to the company’s growth?
Answer
Project pull-through, launched 18 months ago, aims to leverage systems integrators and other partners to drive services revenue while expanding the company’s reach and market share.
The initiative has been successful in increasing third-party implementations, particularly in international markets, and is contributing to the company’s overall growth.
AI’s Role in Mega Deal and Pipeline Development
Question
How important was AI, particularly IVAs, in winning the recent mega deal, and what stood out in Five9’s platform compared to competitors? Additionally, can you provide any color on the pipeline for other large deals?
Answer
AI, especially IVAs, played a crucial role in the mega deal, as the bank was looking to replace its existing automation and self-service solutions with more advanced technology.
The combination of IVA for self-service, agent assist for live interactions, and real-time data interpretation through partnerships like Google set Five9 apart from the competition.
The pipeline for other large deals remains healthy, even without the mega deal, and AI continues to be a key focus for customers.
Salesforce Summit Status and Commercial Opportunities
Question
What does the Salesforce Summit status signify for Five9, and how does it benefit the company beyond early access to technologies? Are there any specific commercial opportunities or advantages associated with this status?
Answer
The Salesforce Summit status is a significant achievement based on the level of business and collaboration between the two companies.
It provides visibility into Salesforce’s technology roadmap and potential areas for integration, as well as opportunities for joint go-to-market initiatives and expanded partnerships.
Key Metric Trough and Financial Visibility
Question
What needs to happen for key metrics to trough, and how much execution is still required to achieve the second-half recovery? Can you also discuss the visibility into financials compared to the initial 2024 outlook?
Answer
The key metrics are expected to trough in Q2, with the dollar-based retention rate (DBRR) declining due to the comparison with a particularly high rate in the previous year.
The second-half recovery is contingent on several factors, including the ramping of new enterprise customers, the overall economic environment, and the impact of professional services.
The company has limited visibility into financials due to the ongoing economic uncertainties and the timing and pace of recovery in customer spending.
AI Monetization and Gross Profit
Question
How does the monetization of AI impact gross profit dollars compared to core subscriptions? Should we expect AI to be a gross profit tailwind, and how will this trend evolve in the coming years?
Answer
While AI and automation solutions generally have higher gross margins than core subscriptions, the primary driver of gross margin improvement is expected to be revenue growth outpacing fixed and semi-fixed costs.
Upsell, cross-sell, and attach rates for AI solutions are significant and contribute to gross margin expansion.
Other factors influencing gross margin improvement include the mix shift towards higher-margin offerings and the resolution of one-time investments and transitory cost issues.
Health Care Expansion and Future Uplifts
Question
Will the recent health care expansion story, which saw ARR increase from $2.3 million to $6 million, be a one-time uplift or a more frequent occurrence? Can you elaborate on the strategy for expanding within the existing customer base?
Answer
The health care expansion represents a one-time uplift due to its significant size, but the company is focused on driving cross-sell and upsell opportunities within the existing customer base through a dedicated team and increased software sales.