Yahoo Finance Five9, Inc. (NASDAQ:FIVN) Q4 2023 Earnings Call Transcript
Five9, Inc. (NASDAQ:FIVN) Q4 2023 Earnings Call Transcript February 21, 2024
Five9, Inc. beats earnings expectations. Reported EPS is $0.61, expectations were $0.48. Five9, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for joining us today. On the call are Mike Burkland, Chairman and CEO; Dan Burkland, President, and Barry Zwarenstein, 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, expected ARR from certain customers, customer growth, anticipated customer benefit, 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 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 could 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 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 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 Burkland.
Mike Burkland: Thanks, Emily, and thanks, everyone, for joining our call this afternoon. I'm pleased to share that we finished the year with strong results. Fourth quarter revenue grew 15% year-over-year and full-year revenue grew 17%. This increase continues to be primarily driven by our Enterprise business, with LTM subscription revenue growing 25% year-over-year. Adjusted EBITDA margin for the fourth quarter was 20% of revenue, helping drive a Q4 record for operating cash flow of $37 million, or 15% of revenue. As you all know, we take a balanced approach to delivering top-line growth and bottom-line profitability. Today I'd like to start off by commenting on the market opportunity ahead for Five9. We believe the market has never been better for large enterprises to move to the cloud.
We are continuing to see strong momentum upmarket with new logos, as evidenced by our Q4 record in Enterprise bookings. In addition, our pipeline continues to grow, hitting another record high. We are seeing acceleration at the top of the funnel with Enterprise's strategic RFPs more than doubling year-over-year, which is a strong indicator of our market being at an inflection point. This market opportunity is being driven by three key ongoing trends. First, migration to cloud contact center platforms is becoming one of the highest priorities for enterprises, especially as many on-premise solutions are being end of life. With cloud penetration at approximately 20%, we believe there is a significant runway ahead. Second, Enterprises are laser-focused on improving customer experience and cloud contact centers are at the heart of enabling these businesses to reimagine their CX.
And third, enterprises are increasingly leveraging AI to empower their businesses and cloud contact centers are becoming an imperative to deliver on their AI and automation initiatives. This market remains massive and underpenetrated and we believe this is a durable, multiyear opportunity. Now I'd like to remind you of the three main growth drivers of our business: our platform, our march up market and our international expansion. I'll start with the platform. We continue to strengthen our AI leadership in CX by infusing AI throughout our platform. We have been leveraging the power of generative AI to further expand AI-powered solutions such as Five9 chatbots and IVA. In addition, generative AI is enhancing many other offerings in our AI and automation portfolio, including AI insights and AI summaries, which are gaining meaningful traction.
For example, year-over-year bookings growth for Agent Assist which includes AI Summaries accelerated in each of the last three quarters, culminating in a 6x increase in Q4. We believe much of this rapid growth can be attributed to the value we deliver to customers with our leading generative AI capabilities and our successful Try Before You Buy program. Our leadership in AI is also being widely recognized by the industry. We are excited to report that Five9 was named a global leader in the just released 2024 Aragon Research Globe for Conversational AI. The report provides an in-depth analysis of leading contact center vendor strategy and product strengths in conversational and generative AI. Additionally, in the most recent Baird channel survey from late December, we were named as the contact center provider with the best AI solutions.
Overall, we continue to see significant momentum in this area with AI and automation making up 17% of our total ACV new logo bookings for enterprise in Q4. Additionally, AI and automation products now make up 7% of our Enterprise subscription revenue. Next, I'd like to talk about our data strategy. Data has become more important than ever in unlocking value in CX. How much data is collected, the number of data sources, the explosion of data types, and the secure and responsible use of that data are all becoming critical buying considerations for contact center decision-makers. The benefits of having a strong data strategy are clear. More personalization to create an amazing and differentiated customer experience is just the tip of the iceberg.
Richer insights for key stakeholders in the contact center, including agents, managers and operators, make for better decisions. Leveraging data with AI drives critical improvements for self-service and up-leveling every agent to deliver the optimal customer experience. Five9 is the platform where customer experience data is created, utilized and actioned. We recognized this opportunity early on with the addition of Five9 data lake. To build upon this, we recently acquired Aceyus, a leading solution to accumulate, normalize and present rich and diverse data sources. We also integrate our data with other leading data sources in order to deliver exceptional customer experiences. We see data as the key to delivering a more personalized customer experience and this continues to be an important pillar of our platform strategy.
As you can see, we significantly strengthened our platform throughout 2023 and we are continuing to make key investments to enhance our leadership position in the market. A good example is FedRAMP, which will be a multi-year investment. However, we believe it will ultimately open up a huge market opportunity, not just at the federal level, but also with the state and local governments that we believe will help us generate a meaningful new revenue stream long term. And now I'd like to focus on our march up market and international expansion. We continue to see strong momentum which Dan will touch on in a moment. As I mentioned earlier, enterprise and strategic RFPs are continuing to increase at a significant rate, which give us confidence in our ability to continue marching up market in 2024 and beyond.
Also, I want to point to one of the key reasons we have been so successful in winning and deploying some of the largest enterprise accounts. We continue to get feedback from our customers that they chose us not only for our market -leading platform, but also because of our people. Our customer success model is a key differentiator. The vendor they choose must have the experts to ensure a smooth transition to the cloud, an improved customer experience and better business outcomes. And we have hundreds of CX experts globally that focus on transformation, migration, implementation and ongoing optimization. We also collaborate with some of the best CX partners in the world who also deliver a similar best-in-class experience. Our international expansion continues to be a growth driver.
In 2023, international revenue grew 29% year-over-year. This strong growth was driven by the ongoing investments we are making, particularly in Europe. For instance, we expanded our footprint in the dock region by turning up local data centers and scaling our strong go-to-market team in that region. Also, we continued to strengthen our Porto engineering hub, increasing our headcount there by nearly 50% last year. Our success in marching up market and expanding internationally are increasingly being driven by our ever growing network of global partners and their dedication to leading with Five9. For example, we recently announced the listing of our intelligent CX platform on Google Cloud Marketplace, which simplifies the procurement of Five9 and helps Google customers retire their GCP spend commitments.
Also, we recently launched our new and enhanced Five9 University for partners, which provides comprehensive product training and certification programs to enable these partners in sales, implementation and services. As a result, in 2023, the number of global partner sales certifications tripled year-over-year and partner implementations doubled during that same period. In addition, we had 51 partners who booked more than $1 million in ACV in 2023. Before I turn it over to Dan, I'd like to say that we remain extremely optimistic about the opportunities in this massive and underpenetrated market. We have the right platform and the right team to capitalize on this long-term and durable growth opportunity. And with that, I'll turn it over to our president and CRO, Dan Burkland.
Dan, please go ahead.
Dan Burkland: Thanks, Mike, and good afternoon, everyone. I'm pleased to report that we had a record for enterprise bookings for any Q4 adding to our strong momentum up market as we continue to expand our go-to-market and technology partnerships. We exited the year with 183 customers that generate over $1 million in ARR to Five9, representing more than 50% of our recurring revenue. In terms of large global partnerships, BT, TELUS International, IBM and Deloitte, just to name a few, continue to invest and build global practices around customer experience and have chosen to lead with Five9. And now I'd like to share some examples of key wins for the quarter. The first example is a non-profit healthcare organization based here in the U.S. They had been using Avaya which was reaching end-of-life and lacked the innovation to deliver great customer and patient experience.
We competed with the leading CCaaS providers and were chosen as the most comprehensive end-to-end solution with the best services offerings to accomplish their goals. With Five9, they will access a complete omnichannel solution deeply integrated to both Epic and ServiceNow CRMs. They will also be using our advanced IVA for both intelligent routing and self-service. Our Agent Assist for transcription and summaries, and our workflow automation to insert a whole set of conversational data into their CRMs. We're also providing a complete WEM suite powered by Verint including WFM, QM, speech analytics and performance management. We anticipate this initial order to result in over $3.6 million in ARR to Five9. The next example is a prominent university where we are providing contact center solutions for their education, research and healthcare facilities.
They had been using Cisco, which did not meet their digital transformation initiatives, including giving the business more control over delivering exceptional experience to their students, prospective students, healthcare patients and alumni. They evaluated all of the major CCaaS players and chose Five9 for our superior end-to-end technology solutions as well as our deep vertical expertise and strong references in education and healthcare. They will be using our proven IVA and chatbots for both education and healthcare groups. They'll be leveraging our Agent Assist to generate transcripts and summaries with deep integration to Salesforce, Epic and ServiceNow CRMs. They'll also be using our WEM suite powered by Verint for AQM, interaction analytics and WFM for automated scheduling and forecasting.
We anticipate this initial order to result in approximately $2 million in ARR to Five9. The third example is a healthcare services network of acute care hospitals, rehabilitation, physician groups and retail pharmacies. They have been using a variety of solutions, including Cisco and Avaya, and we're looking for a single consolidated and innovative platform in the cloud. With Five9, they will access a full omnichannel inbound and outbound solution, including proactive outreach via digital channels for appointment reminders, prescription refills and test result notifications. Likewise, patients will be able to use our IVA for scheduling appointments, refilling prescriptions and locating a nearby specialty provider. Five9 will be deeply integrated to their Epic CRM and we also included the Five9 WEM solution including QM, WFM and interaction analytics.
Once they are migrated over to Five9, they plan to add Agent Assist for agent coaching, transcriptions and call summaries. We anticipate this initial order to result in approximately $1.6 million in ARR to Five9. And now, as I normally do, I'll share an example of a customer who has expanded their use of Five9. This customer started with Five9 several years ago as a relatively small regional bank with about 50 seats. They grew organically to about 200 seats and then merged with another bank in 2022 where we expanded and replaced the Cisco system at the other bank. This brought their annual spend to over $1 million in ARR. Then after the full rollout in Q4 of 2023, we added the final business unit, which also added our WEM suite powered by Verint and our chatbot and IVA solutions.
This customer will now generate over $1.9 million in ARR to Five9. So as we enter 2024, we feel very strongly that our go-to-market engine is hitting on all cylinders to take advantage of the massive CX transformation underway, the accelerating migration to the cloud, and the increasing adoption of AI and automation. And with that, over to Barry for the financials. Barry?
Barry Zwarenstein: Thank you, Dan. We are pleased to report fourth quarter revenue growth of 15% year-over-year. This is despite the ongoing macro headwinds on our install base, which slowed growth in our normally seasonally strong consumer vertical. By way of illustration, a number of clients in the consumer discretionary subcategory experienced for the first time since coming onto the Five9 platform, a fourth quarter sequential recurring revenue decline. In addition, we had a tough compare internationally with a separately strong new lower speeds turn-ups in the fourth quarter of 2022. Our LTM Enterprise subscription review, which now accounts for over 65% of total revenue, grew 25% year-over-year. Our Enterprise business made up 87% of LTM revenue and our Commercial business, which represents the remaining 13%, grew again in the single digits on an LTM basis.
Also, recurring revenue accounted for 92% of our total revenue in the fourth quarter and the other 8% was comprised of professional services. Our LTM dollar base retention rate remained the same as last quarter at 110%. We expect Q1 LTM dollar base retention rate to be either flat or very slightly down, and we expect a positive inflection in the latter part of the year assuming no major changes in the economy. Longer term, we continue to expect our retention rate to trend towards the high 120s by 2027 due to a higher mix of Enterprise customers, especially larger ones which have higher retention rates. Fourth quarter adjusted gross margins were 61.3%, a decrease of approximately 100 basis points year-over-year, but a quarter-over-quarter improvement of approximately 70 basis points.
Fourth quarter adjusted EBITDA was $48.3 million, representing a 20.2% margin, a decrease of approximately 200 basis points year-over-year, but a quarter-over-quarter increase of approximately 230 basis points. Fourth quarter non-GAAP EPS was $0.61 per diluted share, a year-over-year increase of $0.07 per diluted share. Now, I would like to share our average concurrent seat count for the fourth quarter which grew 19% year-over-year to 349,675 seats. This is equivalent to approximately 525,000 seats on a named seat basis, a unit of measure that some others in the industry cite. As a reminder, we will continue to provide these metrics only on an annual basis. Finally, before turning to guidance, some balance sheet and cash flow highlights. I'm pleased to report that we achieved a Q4 record for operating cash flows of $36.5 million, driven in part by continued strength in our DSO performance, which came in at 32 days.
We have now delivered 30 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. I'd like to finish today's prepared remarks with the discussion of our full year 2024 and the first quarter guidance. As a reminder, for the last seven out of nine years, we've started with prudent revenue guidance of 16% year-over-year growth. For 2024, we are doing the same by guiding to a growth of 16% year-over-year at the midpoint, or $1.055 billion in revenue, which is in line with the high-level outlook we provided last quarter. This 16% year-over-year growth is, of course, a starting point and we will update our outlook as the year progresses.
With regards to the bottom line, we are guiding 2024 non-GAAP EPS to a midpoint of $2.16 per diluted share, same as the outlook we provided for 2024 during the last earnings call. As a reminder, we plan to continue making strategic investments in innovation and go-to-market initiatives to enhance our leading position in the market. As for the first quarter, we are guiding revenue to a midpoint of $239.5 million. This represents a relatively flat sequential change, similar to last quarter's Q1 guide, but better than the prior historical range of 1% to 4% decline. Despite the ongoing macro headwinds, we are guiding to a better quarter-over-quarter change due to the muted seasonal uptick in the fourth quarter, which we expect to result in a less seasonal downtick in the first quarter.
As for the remainder of the year, we expect a very small sequential growth in the second quarter and larger sequential increases in the second half. As a result, we anticipate slightly more than 50% of our annual revenue being generated in the second half of 2024. We expect first quarter non-GAAP EPS to come in at $0.38 per diluted share at the midpoint, a decline of $0.23 per diluted share sequentially. I would like to point out that the first quarter non-GAAP EPS is always the weakest of the year and the $0.23 per diluted share quarter-over-quarter decrease is within our historical range of prior first quarter guidance. For the remainder year, we expect non-GAAP EPS to increase to approximately $0.43 per diluted share in the second quarter and further improve in the second half.
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 fourth quarter performance. We will continue to invest strategically throughout the year to enhance our leading position by further innovating on our platform, marching up market and expanding internationally. Operator, please go ahead.
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