Q1 2022 Five9 Inc Earnings Call
We use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and available in the Investor Relations section of five nines website at investors thought five night Dot com.
And now I'd like to turn the call over to 590 CEO Rowan Trollope. Please go ahead.
Thanks, Lauren and thanks to all of you for joining our call. This afternoon.
Im extremely pleased to report a strong start to the year.
First quarter revenue grew 33% year over year. This growth continues to be driven primarily by the strength of our enterprise business enterprise.
Subscription revenue, which accounted for approximately 60% of total corporate revenue increased 46% on an LTM basis. Additionally, our quarter over quarter growth rate of 5% continued to outpace pre pandemic levels of sequential growth demonstrating the ongoing retention of the COVID-19 benefit we experienced through Q1 'twenty one.
We continue to see many more years of LTM enterprise subscription growth in the thirties as we tap into the barely penetrated $58 billion Tam in the contact center space.
The penetration of this Tam I remind you is being driven by three immutable trends digital transformation the shift from premise to cloud and the imperative of improving efficiency via AI and automation as labor becomes scarcer and more costly.
Continuing our commitment to a balanced and efficient growth adjusted EBITDA for the first quarter came in at 13, 4% of revenue. Despite the significantly increased investments to both expand our professional services organization worldwide and to grow our public cloud footprint.
This attractive combination of high growth and strong margins as the result of three factors our platform our market market and our global expansion.
Taking each in turn starting with our platform with.
With approximately a quarter of a million concurrent seats on our platform with our largest clients individually deploying over 10000 seats with 99, 995% LTM uptime with the highest levels of security certifications five ninth platform is built for scale reliability and security.
That enterprise customers demand. In addition to these fundamentals what differentiates our platform is the increased cadence of innovation in particular the success, we're enjoying as enterprises start to understand the practical value of AI and automation for instance, last year one of our biggest customers was experienced high average handle times and call abandonment rates, which were.
Further exacerbated by labor shortage problems of recurring.
Recruiting and retaining agents.
They needed to automate in order to improve customer experience and meet service delivery requirements. So they decided to implement our IV solution. In just 10 months through March of this year Theyre deflecting more than 40000 calls per month, which would require 36 human agents to perform this work manually resulting in.
$2 $2 million of annualized savings or approximately 10% total labor costs we.
We continue to see this traction building as customers expand the use cases for AI and automation in the contact center at a base level customers are using <unk> to deflect mundane tasks, leaving the live agents to handle the more nuanced and complicated interactions.
The continued need for this is seen in our record IV bookings.
As customers increase their level of comfort with AI and automation, they're now moving on to additional use cases, such as using AI to assist and guide live agents as we stated last quarter. We will soon be releasing the latest version of <unk>, which offers new capabilities around AI checklists and automated compliance.
<unk> AI capabilities to ensure that not only does the agent have the information they need when they need it but we've also seen our customers looking to adopt these features to help support agent Onboarding training and Upskilling. For example, one customer a leader in prepaid broadband services uses real time guidance and reminder.
During calls, allowing for upsell opportunities for increasing data plans turning their agents from support agents to sales agents.
Similarly, another customer who focuses on enabling digital workplaces uses agent assist to improve <unk> and reduce the time needed to onboard their agents.
We're continuing to focus on how we make AI practical for our customers and continue to bring on going innovation to this space expanding our capabilities to better meet growing customer demand.
This is not only through our product, but also through our partner ecosystem and professional services positioning <unk> as an AI enabled platform is gaining traction since the launch of our voice stream API as referenced in our last earnings call. We are onboarding more than 24 partners to the platform in.
In addition in Q1, we expanded the availability of the voice cream API to enable customers to access to real time stream stream of data directly without the need for a third party.
We see this as a growing area of interest amongst customers as they look to invest more in contact center analytics and insights a trend we see accelerated by AI, but not exclusive to AI use cases only.
Finally on the professional services side, we're improving the operational aspects of our AI and automation go to market for.
For example, our increased investments in professional services have enabled us over the last six months to reduce by approximately 50% the number of days between IV, a sale and starting the IV implementation, allowing clients a faster time to value and a faster time to revenue for $5 nine.
Another illustration is our recently launched <unk> service offering virtual agents need to be trained just as human agents do existing use cases need to be tuned and new use cases are constantly being added or platform is simple to use so customers can and mostly do perform these services by themselves. However, many customers have.
Asked us to manage this with them and hence this launch in just a matter of weeks, we've closed several opportunities and have a very solid pipeline builds out.
I'll now secondly, going to discuss our March upmarket.
As you know for several years, we've been investing to fulfill our vision to move upmarket and win larger and larger contact centers, you've seen concrete evidence of the success, we're having in pursuit of this vision, winning megadeals and achieving a significant increase in the trajectory of customers with over $1 million in.
This cohort, including a total of 134 customers in the fourth quarter of 2021 is the fastest growing part of our business with an average CAGR since inception of 93%.
Today, we're going to absolutely and Incontrovertibly demonstrates the success, we're having in our ability to reach the very very top end of the market went Dan talks about a landmark win that places slide nine amongst the leaders when it comes to large enterprise deployments globally, so stay tuned for that.
And we confidently expect that we will continue to show strong growth in the enterprise market.
Five factors give us the confidence to make this prediction. The first one is at the upper end of the market is comfortable now with accelerating their transition to the cloud you don't have to look any further than our bookings to know that this is happening.
Our platform has demonstrated now that it can meet the needs of the largest customers and.
And I mentioned, a moment ago theres going to be more on this one Dan presents his section.
Third our Li our industry, leading efficient go to market machine or for sales team strategic enterprise mid enterprise and commercial enable us to match selling skills with market demand. Our strategic theme in particular has been doing extremely well. These teams are complemented by an increasingly mature and committed set of channel partners.
Leading systems integrators service providers technology solution brokers borrowers and also ISP partners in fact first quarter channel bookings grew 68% year over year driven in large part by the size, we're increasingly helping five nine in large strategic engagements as our customers execute their digital transformation programs.
Fourth success breeds success the decision makers on these mega contact center investments often consult with each other and prospects seek validation from the companies, which we've already implemented our solutions and Theyre getting excellent references and finally fifth and this is crucially important is the trust that.
We've built up over the years and at the end of the day, we are a service organization, providing 24 by seven 365 days a year service globally.
And the mission critical software our customers know that we have and will deliver through thick and thin. This commitment continues to be evidenced by our industry, leading NPS scores of over 80% for both professional services and customer support.
So as you can see our momentum up market is stronger than ever.
And lastly, the success, we're having with expanding internationally.
As many of you know about two years ago, we decided to aggressively step our investments step up our investments outside the U S where the majority of agents are located we have done that are public cloud instances outside the U S have gone from zero, a little two years ago to over five today with more coming in the near future or head count outside the U S has more than doubled over the.
The last two years from 455 to 962 now.
And we've seen significant increases in other areas, including channel partners marketing spend localization and alike. These investments are clearly paying off with first first quarter LTM revenue from non U S companies growing 46% year over year, you should expect more of the same as we increase the percentage of international revenue from <unk>.
9% LTM in the first quarter to the mid to high teens by 2026, and I should hasten to add that while the direct.
Result of strong international growth is gratifying the indirect benefit is even bigger by indirect benefit I'm simply referring to the U S. Mega deals that were booking there is no chance zero that we could have won the mega global deals without the increased international footprint.
In summary, the three fundamental building blocks needed to continue delivering balanced growth our platform our March up market and our global expansion are firmly and solidly in place. We continue to expect these building blocks to position us well to reach two $4 billion in revenue and 23%.
Adjusted EBITDA by 2026.
I'd now like to directly address our employees.
I want you to know that our success is the result of your laser focus on pursuing our mission and Youre clockwork like execution. None of this would have been possible without you. So thank you very much and one last matter before I turn the call over to Dan The Russia, Ukraine conflict has prompted us to shutdown our Russian.
Satellite office in Nizhny Novgorod, where we currently employ some 176 people.
And establish a new European development site in Portugal, which among other benefits has a base of technology and contact center talent.
We anticipate that many of our Russian staff will relocate to our new facilities in Portugal.
I'll now turn the call over to our President Dan Burkland, Dan go ahead.
Thank you Rohan once again, we continue to execute upmarket with unprecedented success by bringing unique innovation health customers across the globe differentiate how they deliver customer experience. We've proven this with record performances in Q1 and bookings as well as pipeline growth and.
Channel contributions, while also setting bookings records for our AI and automation solutions.
And now for some key wins for the quarter.
The first example, I'd like to share some HR and payroll software company their previous solution had no ability to provide AI automation and analytics to improve and optimize the customer experience.
<unk> nine and have opted in for our full omnichannel offering as well as our IV <unk>.
Agent assist WMO workflow automation and performance dashboards.
This will all be integrated with Salesforce and several other CRM and we anticipate this initial order to result in over $3 $7 million <unk> to $5 90.
The second example, I'd like to share is a European insurance company based in the U K with over 38 million members and taking inquiries from patients medical care providers claims and collections. They looked at all the <unk> providers and chose <unk> for our full suite of solutions, including Omnichannel or IV.
And our full suite of W. W. Also powered by parents for QM and speech analytics, WSI and performance management.
We are integrated to their Microsoft dynamics, CRM, along with E Jane for knowledge management.
Anticipate this initial order to result in over $3 $1 million <unk> to five nine.
And now as we normally do I'll share an expansion example win from one of our installed base of customers.
This is a true example of our land and expand story.
The insurance broker started with 593 years ago with less than 10 seats. They recognize the value. We had brought to that one department and the potential to transform and automate their customer experience. So in 2021, they expanded and added several hundred seats.
Now in Q1 of 2022, he added our WSI suite powered by parents for QM WSI and speech analytics.
Also added our performance dashboards IV.
And the agent assist adding over $700000 in <unk>.
Bringing them to well above a $1 million of anticipated they are to finalize this.
This is a great example of truly bringing automation and AI into an environment and raising the ARPA grew significantly due to its compelling value and ROI.
To wrap it up I'd like to share our most significant win for the quarter.
May recall, just a few quarters ago, we shared a record win for the global parcel delivery service company, who is now ramping towards an anticipated <unk>.
Of over $30 million with 509.
Knowing the sheer size and scope of this customer I was reluctant to say that this record would ever be broke.
While today I'm very pleased to announce that that record has been broken.
After competing with all of the players in our industry, we signed one of the largest companies in the world the healthcare conglomerate with retail pharmacy health insurance, along with many other divisions and brands.
This customer will be rolling out tens of thousands of seats with five nine starting.
Starting towards the latter part of this year and throughout next year, bringing their anticipated <unk> to $5 90 to over $40 million in software subscription alone.
They were very siloed through many years of acquisitions and expansions and are now replacing all of their legacy on premises solutions from Avaya, Cisco Genesys and nice with five nine.
<unk> was chosen for five key areas of expertise.
Our ability to help them transform and deliver a re imagined consistent and highly differentiated customer experience.
Two our ability to provide valuable insights and analytics, allowing them to continuously evolve and optimize their contact center operations.
Third our deep and proven integration with Salesforce.
Our complete <unk> suite powered by parents and fifth we were the only provider they felt could service them effectively across all of their subsidiaries and businesses.
We believe this to be one of the largest if not the largest see cash requirements in the world.
As you can see we continue to execute successfully with companies of all sizes with all of our products and in all geographies.
And with that I'll hand, it over to Barry to show in our financials Barry.
Thank you Dan.
First I'll remind you that unless otherwise indicated financial figures I will discuss our non-GAAP reconciliations of GAAP to non-GAAP results are included in the appendix of our vessel presentation on our website.
We had another strong quarter with.
Both top and bottom line results exceeding our expectations.
As Robin mentioned revenue grew 33% year over year.
On top of the all time record growth of 45% we reported in Q1 of last year, driven primarily by the strength of our enterprise visits.
Additionally, our quarter over quarter growth rate of 5% continue to outpace pay pandemic levels, a sequential growth of 3% we.
We reported for both tier one <unk> and.
In Q1 19.
Demonstrating the ongoing retention of the Covid benefit we experienced through Q1 'twenty one.
In terms of revenue composition enterprise made up 85% of LTM revenue.
And our commercial business represented the remaining 15%.
Our commercial business grew in the teens on an LTM basis.
As a reminder.
We expect our commercial business to grow in the teens for the next several years as we continue to focus the majority of our investments are moving upmarket.
Recurring revenue accounted for 91% of our total revenue in the first quarter and the other 9% was comprised of professional services.
LTM dollar based retention rate was 120%.
Quarterly fluctuations are inevitable as mega customers come onto the platform at different times and ramp at different rates and particularly in the near term as we lap the onetime COVID-19 benefit.
I'd like to remind you that.
That our dollar based retention rate is an LTM figure.
Which means that we own we will only fully lap the one time benefit once Q1 'twenty one is out of the denominator.
Which will not happen until Q1 'twenty three.
Over time, however, we expect the retention rate to trend towards the high <unk> by 2026.
Due to a higher mix of enterprise customers.
Basically the larger ones, which have demonstrated really higher retention rates and higher op.
The automation and other offerings.
First quarter adjusted gross margins were 65% a decrease of approximately 360 basis points year over year.
Due to the ongoing investments we have mentioned previously.
These investments are in two areas.
First a step function increase in professional services, where head count grew more than 50% year over year.
We are scaling up and building a worldwide PS organization to successfully implement the larger and larger customers we have been winning.
And expect to continue winning.
Second we have also continued we also continue to invest aggressively in public cloud to build out new sites for global expansion.
Which are which are currently only partially utilized.
I would like to point out that on a sequential basis first quarter adjusted gross margin decreased 230 basis points.
Similar to the 240 basis points sequential decline, we saw a year ago.
First quarter gross margins typically declined sequentially due to the FICA resets and this year, we have added headwind of increased investments.
As we have been saying the accelerated investments in professional services and public cloud are transitory.
We are forecasting that the peak as a percent of revenue in the second quarter.
Therefore, we expect gross margins to decline slightly in the second quarter and start improving in the second half of 2022 with annual gross margin is expected to finish at or above the 65% for the full year 2022 and.
And continue improving in 2023 and beyond.
First quarter adjusted EBITDA was $24 5 million, representing a 13, 4% margin.
Approximately 270 basis points below the Q1 'twenty one margin.
Due to lower gross margins.
Expenses as a percentage of revenue decreased by 90 basis points year over year.
Driven by G&A decreased by 120 basis points, marking the third consecutive quarter of year over year improvement in G&A expense.
As a percent of revenue.
First quarter non-GAAP EPS was <unk> 22 cents per diluted share.
Which was relatively flat year over year.
Before turning to guidance.
From a balance sheet and cash flow highlights.
During our last earnings call, we mentioned that DSO was higher than normal at 36 days as a result of implementing a new billing system.
Invoices is a days or even weeks later than normal as we carefully validated E invoice before issuing them to our customers.
To illustrate this concretely.
We typically post approximately 50% of our invoices by dollar value on the first day of the quarter.
After we implemented a new billing system in October .
Less than 31% of day, one invoices went out on November 1st.
<unk> the first in January the third.
The rate increase in February .
And by March 1st.
Right at almost at recent almost normal 47%.
As a result.
I am very pleased to share that while the three months average DSO for the first quarter was as I've. Just mentioned 36 days, we saw meaningful improvements each month in the quarter.
And spot rate DSO for March was a normal 32 days.
This resulted in us reporting a record quarter over quarter reduction in.
Accounts receivable.
This DSO performance in turn helped drive exceptionally strong first quarter operating cash flow, which came in at $28 7 million.
We continue to expect operating cash flow margin to increase meaningfully in the longer term.
Driven by our demonstrated ability to expand adjusted EBITDA margins.
Essentially Nols.
And our low dsos.
One other item in overall cash flow can note in your modeling.
Last quarter, I mentioned that we plan to make a $24 million payment.
Payment to <unk> shareholders by March 31, 2020 to.
Due to a delay in the response from the infant shareholder representative.
There's only been state paid in the first half of April with approximately 6 million reflected in operating cash flow.
And another 18 million affected and financing cash flow.
Before discussing our guidance, let me share with you the financial impact on pipeline, resulting from the Russia, Ukraine conflict.
We estimate the one time costs.
Closing, our Russian office.
And the associated onetime costs to attract and move Russian employees, who would like to immigrate enjoying the new development center in Portugal.
To be between $8 million and $12 million.
Of which $2 7 million.
Included in our first quarter results.
We have excluded these onetime direct incremental costs from our non-GAAP results.
We have a large with a higher ongoing operating expense in Portugal now.
Bottom line guidance.
And now I'd like to finish today's prepared remarks, with a discussion of our guidance for the second quarter and the full year 2022.
In terms of top line, we're guiding Q2 revenue to a midpoint of $179 5 million.
Which represented 2% sequential decline slightly smaller.
The decrease than the typical pattern hitting into Q2, when we guided in the past to declines of between three and 4%.
I would also like to point out that the implied year over year growth at the midpoint is 25%.
Which is the highest growth rate, we've ever guided to when compared to pre pandemic second quarters.
For the full year, we are raising the midpoint of our revenue guidance from $756 million.
Two $771 5 million.
Which represents an increase in the year over year growth rates from 24%.
87%.
As for the bottom line.
We are guiding Q2, non-GAAP EPS to come in at the midpoint.
<unk> 18.
A decline of four cents per diluted share sequentially.
The quarter over quarter decrease.
He is in line with the typical pattern for Q2 guidance and reflects a strong seasonal headwinds we faced on revenue in the second quarter.
As well as the continued investments, we're making in professional services and public cloud to further drive our enterprise and international momentum.
Despite these investments.
And the incremental run rate in Portugal, we are raising the midpoint of our full year guidance from $1 14 to $1 23.
Sure.
Additionally, I would like to provide more color on the quarterly profile of both the top and bottom line for the second half of 2022.
For revenue consistent with guidance in past years, we expect it to increase sequentially in the third quarter and more strongly in the fourth quarter.
Given the shape of this revenue curve.
We expect third quarter non-GAAP EPS to improve to approximately 30.
And improved further and most significantly in the fourth quarter.
Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count taxes and capital expenditures.
In summary, we are very pleased with our first quarter performance.
And our ongoing success in moving upmarket.
Which will continue to help.
Drive LTM enterprise subscription growth.
In the thirties.
The long run.
Operator, Please go ahead.
Okay.
Alright. Thank you very much we will begin our question and answer session by going first to DJ Hynes.
Hey, guys. Congrats on the great quarter awesome to see about $40 million customer that's awesome.
We don't want to ask a question for you on AI.
Like how would you characterize your lead there versus direct competition in this space like what do you look for how do you measure that just curious like what kind of data you can use in a sales pitch.
Well, it's tough P. J. Thanks for the question because our comp.
If you were if you were sort of asking me maybe I misunderstood the question, but if you are asking.
How we stand up to the competition Nobody reports this as a separate line item.
In terms of the.
Revenue or anything like that so competitively we don't really know how that stands is not broken out as a separate category, but when we do get into I think I think the framing of your question at the end was more around customer when we engage with the customer how do we compete and how do we win and how do we get Electrotechnical differentiate yes, yes look we number one we bought what we thought was the best company in the World.
That would sort of backed up by analysts top right in the magic quadrant and all that that was in France systems and they so I think we started with the best technology in the world as the starting place and we've continued to invest in that so they had been working on for several years.
Completely brand new release called studio seven that is now launching to our customer base, which is a massive leap forward.
A big part of it is just innovation on the technology side, and then I think fundamentally.
Why are they number one is because the approach is very different than any of our competitors I'm not aware of any of our competitors who are built the way that we built we have a different perspective and inference had a different perspective on this which is.
Sort of stand on the shoulders of Giants leverage the underlying technologies that were being built by the googles and Amazons and the Hyperscale <unk> of the world. So that customers can make their own choice and then we build that layer that sits above all of those technologies and you can reflect back on many conversations DJ that we've had which is exactly this point this was our.
<unk> also was to say, let's not use our R&D resources trying to spend a lot of money keeping up with the competition on automatic speech recognition and natural language processing or text to speech are the two big ones.
<unk> and text to speech and as a result, we've been able to apply those resources to take those kind of commodity technologies and apply them to the contact center in unique and different ways and thats, giving us our technology lead. So look the product stands up extremely well and demonstrations and proof of concepts with customers it's clear.
The leader.
It's demonstrated in the success that we're having and we're now starting to generate real customer references and use cases, one of our largest customers in the health care space.
Drove.
10% labor savings by implementing our solution completely replace our AVR.
And had I think they had.
$2 $2 million savings per year, which represented 10% of their total labor costs or 36 agents just by implementing this technology. So it's those kinds of references in the large enterprise that our customers are going well you guys. Clearly do have the best technology, and we wanted to get a piece of it.
Great great color.
Follow up along those lines kind of a crystal ball question, but you take a contact center today, let's say.
1000 seats manned by people today in.
In five years like how many seats do you think that same contact center has made by people.
Well doing what theyre doing today much less.
How much less.
It's hard to say right out of the gate, we're seeing numbers like I'd just share with you, 10% I would anticipate that number goes up fairly dramatically.
When you look at the average contact center.
And look at what are their low volume, but very high volume, but very low value kinds of calls I mean that could be $50 $60, 70% of the volume into a contact center and it depends on your industry is hard to give a kind of a general answer, but I'd say the contact center in five years looks radically different than it looks today in terms of like think about the <unk> cubicles.
And the people on had like we're replacing that with automation and putting those humans to work at what they are really really good at so I Couldnt give you an exact number of crystal ball wise like you asked but it's going to be I think it's going to be fairly dramatic in the next five to 10 years.
Super helpful. Thanks, guys congrats.
P J.
We'll move on to a question now from Ryan Macwilliams at Barclays.
Yeah.
Thanks, guys drilling at this time last year, we're talking about five nine when a mega customer and now after some of these deals the kind of questions like how many mega customers could barb niland. So now congrats on the move up market Rowan what do you see your perspective on these mega deals kind of like why now right. Mike are they ready for it from a technology stack.
Endpoint or is it the shifts.
To work from home is really driving.
Larger cloud adoption of the contact center and then Eric just as these larger deals maybe make revenue a little lumpier just in terms of your guide where could we see a little more upside from these deals turning on like second quarter second half starting next year ultimately.
Yeah, I'll take the first part.
It's a perfect storm.
I think of four factors.
One is our readiness so four years ago, we werent ready to take on the size of the $44 million customer.
Im just talked about.
We are technology wasn't ready four years ago. We are now ready so were able to land those customers and.
As we land them, we get those customer references like Dan mentioned in this particular, one they called the parcel deliveries are Pat channel and got a great reference. So that's the second thing is success breeds success number three I think customers are ready.
The market is and I don't know if this is post pandemic I don't know if this is.
What exactly is driving it but the the pipeline on the megadeals is really there in the way that it hasnt been over the last few years. So I think it's just market, becoming ready to move and then the fourth thing and I wouldn't I think this is really important is the breadth of our portfolio and the fact that we now have technologies that you can get in the cloud.
That you cannot get on premises. So if you are an on premises customer today.
Can't get an IV. They don't work on premises you must go to the cloud and so that factor that there is now some extremely compelling reason beyond the normal cloud stuff.
For a large enterprise to move to the cloud. That's another good reason so I think it's a combination of those four factors, they're all kind of hitting at once and it's creating this again a perfect storm scenario and look we invested ahead of a Dan.
We started Dan's team started this two years ago restructuring of creating the team in anticipation of these investments are paying off and they are paying off now and you see that in the in the $44 million out of our customer we just landed.
And.
Brian I'm going to respond to your question and for parts. If you don't mind.
The first part.
Is the parcel delivery service.
That is currently the biggest contributor of the megas.
And that is still continuing to ramp this year.
The second one is the size that were spun out that too is also contributing currently and is also ramping for the rest of the year.
The third one which is the British insurance company that we announced almost 18 months ago now.
That.
<unk> is going to is going live this quarter and will ramp throughout the rest of the year.
And then finally, the latest one that Dan talked about Iran.
That will ramp probably starting in the fourth quarter and there will be a small contribution from it but the majority of that will be next year.
Appreciate the clarity. Thank you Barry squeezing one more in maybe for Rowan or Dan, but Rowan just when the IPA on.
And we're hearing about <unk> wins, and some avaya and Cisco deployments, how does like that new logo growth seed future contact center win for five months.
Is it a no brainer to go with bottom line for the rest of the contact center after that or is it still kind of up for grabs after the influence at all it is a no brainer to go with $5 nine but.
Ill give it to Dan to answer that directly.
The softball, Ryan sorry.
So Brian Thanks for the questions and great way to get your foot in the door not all companies are ready to make their transition to the cloud right now, but they can do so with IBM.
And if you are in there at the front end with the IV agents are natural youre in the pole position when they do come around to transform and migrate to the cloud. So we think it puts us in a very advantageous position.
Thanks, guys. Thanks, Brian .
And we'll take our next question from meta Marshall at Morgan Stanley .
Great. Thanks, a couple of questions for me, maybe first just some differentiation.
Additional color you could give on the partner traction clearly you were seeing a lot of.
You noted kind of the 68% growth, but just any differentiation between maybe some of the newer partners that you brought on versus some other ones that you've had for a while.
And then just kind of given the difficulty of the hiring environment, just where you're kind of finding the professional services add or are you able to add as many professional services people as you would like.
I'll take the first part of me to thank you for that when you look across our channel partners as Rowan mentioned in the prepared remarks.
We've got five or six categories.
All were not only hitting on all cylinders and signing up new ones, which are great for the long term.
Maturing the ones that we've signed up over the last several years.
It should not be underestimated.
At the beginning with complex solutions like we offer.
They can introduce us into those opportunities when they are in their infancy as a partner, but as they get smarter and smarter and certified from.
Professional services standpoint, and even on the pre sell side and get more knowledgeable and have reference accounts have their own we can leverage them to take on more and more responsibility and not only helps us from a productivity standpoint on our side as far as the hiring piece professional services wise we have.
No problem finding labor there is certainly no shortage in that sense. If you think about all of the legacy on Prem.
Binders that have had professional services organizations typically with platforms that require a whole lot more services than ours.
Those folks are looking to make that same move over to the cloud because they see the future and so we've been able to hand pick some vary not only senior high performing leaders, but the bank can hand pick and select the best and the best to come over to five months.
We have no issues with hiring.
However, and that goes both on professional services and on the sales side.
Great. Thanks.
And before we take our next question will ask the analysts to please limit yourselves to one question just to help us get through all questions as possible in the time that we have having said that I'd like to move on to our next question from I'm, sorry that Scott Berg of Needham.
Hi, everyone congrats on a fantastic quarter.
Throw at a 30% fixed part single question, so better get ready.
No I wanted to follow up on some of <unk> commentary around the cost to move some of your Russian employees out pivot that maybe.
Two general sales question within Europe , I know you all made a big push in into the European Theater over the last couple of years heavy partner sales over there, but from what Youre seeing right now in that environment is there any I guess headwinds to either sales cycles or demand for the five nine platform over there.
So it's kind of business as usual.
Okay, well that was multipart wasn't it.
I'll, let Barry comment on operations.
And from a cost perspective, but.
I'll kind of give the high level here number one our European our European business is doing great.
We invested there we've said that that's a big focus for US we've made some really good hires.
Including in the mainline on the mainline content, Germany going after that so Europe's doing great and this is actually going to bolster that even further so we're going to use a good chunk of the Russian employees as a seed team to establish an R&D center in Portugal, and so were going right into Portugal, establishing a large R&D.
Center low cost R&D center for $5 nine and there is as you know our local base of talent there that we plan to go after aggressively.
And move into the $5 nine into the 509 culture, and we think that that's going to really help from from an ability to expand and having local resources in Europe is going to be very helpful.
That said, we're kind of using this as a jumpstart if you will.
And a great opportunity financially I'll, let Barry comment on that.
Real briefly Scott that $8 million to $12 million, we don't quite know yet.
Exactly how many people are going to come over this is a major life decisions for these people that are caught in the middle of this.
Hence the range of eight to 12, the major components in that.
Are the severance because we actually shutting down an office and that comes with severance costs and then the cost to move and attract and retain the people in a new country.
And also mundane things that add up like.
Immigration costs and legal fees and so on but.
This has been extremely well run.
We are very optimistic that we will be able to get the majority well a meaningful number to come over.
Yes, just to be clear that $8 million to $12 million of one time expense associated with restructuring that's somewhere in the 45 to 60 8-K per employee. So it's a small it's a very small number when you think about it and when you just think about establishing a new R&D center, right hiring and ramping and training new employees, we actually couldnt have done this at this level in the.
Successful away before that sort of conflict in Ukraine broke out in the war broke out because our employees in Russia wouldn't have been as willing to move but given the current situation. We've got a lot more interest in actually relocating out of Russia. So we're using that to our advantage and also just to emphasize what I said on the call Scott.
Slightly higher costs in Portugal, and we've absorbed that in our bottom line guidance.
You're on mute.
Congrats and thanks again, everyone alright, Thank you Scott.
Yeah.
Moving onto the next question is from Taylor Mcginnis at UBS.
Yeah, hi, thanks, so much for taking my question.
If I look at the implied recurring revenue growth in the quarter. It looks like sequential growth of 3% was actually in line with the pre pandemic level.
Barry is is it fair to assume that the quarter might not or might have been a little bit light in terms of some of those larger deals ramping and falling into place.
As we look ahead, how should we think about sequential growth relative to the pre pandemic levels and recurring revenue as some of these mega deals really start to start to ramp.
Yeah. So the first part clearly we benefited from the ramping of these mega deals as I've described in the earlier question.
Taylor in terms of the future growth rate.
Sequentially.
We have given.
Our guidance, which I emphasize is prudent guidance is customarily provide.
But if you want to do some scenarios with.
Basically arithmetic.
In terms of.
Sequential growth.
On the one hand.
You could assume that everything goes extremely well.
And these mega is all.
Come on stream on time, and et cetera, et cetera, and you have 512, 2014% sequential growth in the next three quarters.
And that then I'll save you that arithmetic gets you to the 37% growth year over year on that another example, though.
That's $5 12, 14 years from 'twenty, 'twenty, where we recovered benefited.
On the other hand, if you use growth rates.
That are not covered benefits like in 2021, 2019, 2018, you get instead for seven five and 11.
And then that gives you a 32% growth.
So we are speaking with.
Our prudent guidance and we'll update it so early in the year as the quarters unfold, but in the meantime, you're going to need to make your own conclusions.
And our guidance.
Perfect. Thanks, that's helpful. Congrats on the quarter. Thank you.
Moving on to Jefferies and Samad Samana.
Great Hey, good evening.
Got it congrats on the strong results.
Maybe this one is for Dan.
It sounds like the quarter itself was very strong the guidance reflects that sustaining but just can you help us understand what youre seeing in terms of deal cycles are they getting longer shorter same theme versus maybe the last couple of years as we've all been at home and then maybe also preparing that debt.
Pre pandemic timeframe, then same for close rates of law on deals, yes, thanks for that regarding sales cycles.
They are continuing.
And actually getting condensed slightly as time goes through whether COVID-19 or not.
It's we're not evangelizing cloud any longer we're also working with more channel driven opportunities, where they bring us and they have already set.
Set the tone and perhaps in the first several leading so we tend to be brought in more midstream of a processor.
Not trying to engage and to create a process to create the ROI to begin a process. So that overall means a reduction in the cycle at the high end of the market, which is where we're really seeing the biggest the largest momentum up in those mega deals and even the higher end of the enterprise and the strategic deals.
In that case, those are starting to come down slightly as well the very first time you go into that market.
Do have to start and evangelize and be able to position all.
All the technology is proved to them why we believe <unk> and <unk> in particular is a viable alternative for their large enterprise should they go disrupt their enterprise or in some cases over a year in order to get these benefits.
They scratch their head Brian alluded to it earlier.
There is all the benefits of moving to the cloud, but if youre going to disrupt your environment per year, whereas the incremental value. So we've got a really position and set forth to the business case and the ROI for them.
Once they start seeing that and once we start seeing other enterprises go first.
Success breeds success, and we see that momentum continuing if not accelerating.
Great I appreciate the color thanks, guys.
We'll take a question now from Jim fish with Piper Sandler.
Hey, guys congrats on the quarter.
Last quarter, we were talking about you guys lock in your team from these larger deals on its clear you guys have.
Just how should we think about the competitive environment for these larger deals respectfully.
Obviously, you've had the AWS connect but it really hasn't been part of the bake offs that you guys have been part of.
Microsoft and Google now entering the space and just secondly, Dan you mentioned 40 million IRR on just the software subscription.
What could the use of jargon of that contract to be given a typical contract is $75 25, let's call. It or is this kind of pricing and usage already.
Yes.
Maybe I'll take the first part.
Around.
Competitive.
And there no we're not seeing in the Amazon or Google or certainly not Google I mean, they just have a partnership with a very small startup in this space.
And Microsoft to have announced a product so it really it's us and Genesis a nice.
In these deals.
And Dan said previously and ill reiterate.
Amazon does show up like if were in the last stage, where we're fighting against Amazon something has gone horribly wrong, but it doesn't happen because the companies make a decision early on do they want to buy a product or they want to go build their own sort of platform using Amazon and we're not we're just not seeing that very much to be honest, but we are seeing genesis and nice in terms of cloud.
Competitors.
Realistically in these very large it's genesys and $5 nine in terms of ability to essentially serve the customer and obviously, we think we're winning more than our fair share of these deals.
Dan.
No I think you said it spot on I mean, if you if you take the competition.
All of those Mega deals do evaluate and looking at Amazon connect.
They either have the appetite and the wherewithal on the.
R&D shop.
Shop to go to build and create and customized for years before they're ready to go into production or they recognize that we have a finished product that they can enhance with all of our AI and automation on top of it and that's really what they're eager to get their hands on it.
So they can they can hit the ground running with us much sooner and much quicker.
I also think the investments and the scale and the platform that we built we really re architected our platform over the last few years, that's been a big focus on the R&D side.
What's paying off right now that investment in R&D, we re architected, the entire platform and thats, allowing us to land. These mega deals and frankly I think we've jumped ahead of the competitors in terms of ability to execute here and ability to scale with these largest of the large customers. So that's also helping as well.
Hi, Dan.
Dan.
Following up on that March.
Rami you can start.
Usage, sorry, yes that customer is not going to put usage through five nine.
No.
Sometimes these large large companies have.
Long distance, calling contracts for multiyear with large carriers, some of whom may be a partner of ours.
We're very careful to make sure we honor that and.
And the good news there at the end of the day is over $40 million in subscription revenue alone.
And that's margin accretive because we don't have that.
The lower margin usage, calling that down.
Congrats guys. Thanks, Thank you Kim.
Taking our next question now from Terry Tillman Altruist.
Yeah.
Yes, Thanks for taking my question as well I'm not going to ask Dan if theres, a $50 million IRR deal this upcoming quarter Thats not one of my prepared questions.
I'll go with my prepared questions.
Slide two parter on so Iga, where do you think you are in terms of like earnings in terms of traction with the installed base going back to them and just the attach rate on new deals I'm, just kind of curious how long of a tail we have because it seems like it's a real new.
Product cycle and then the second part of it is how the agent assist compare to <unk> in terms of impacting IRR in general. Thank you. Yeah. So great. Great question. We are in the very very early innings and we're just getting started with <unk>. So if you really look at the market, we talked about attach rate of 10% to our enterprise business.
Since the last quarterly meeting and if you think about it.
The folks that are saying, great. We love the story, we're going to $5 nine and we're going to start with probably our initial use case, which is kind of the obvious high volume low complexity let.
Bring that onto the platform, but as we've talked about over the years those customers are going to start adding use cases, what else can we automate one else our customers getting comfortable with speaking to a voice interface, that's not a human being.
And I think that comfort level, we've already seen it.
In our own behaviors.
In the Siri and Alexa and other voice interfaces, it's getting more and more comfortable for people I think if we introduce the same technology five six years ago before those interfaces were prevalent throughout our host people would've been scared off by them. So I think timing was critical.
Accuracy is getting better and better.
And so as we can implement these and more streamlined and bring it down market in many cases to be kind of the the standard you'll see more adoption. So that's one and then if you look at our installed base, yes, just the opportunity is there with it.
In Spain, and we have yet to really penetrate that to any meaningful level to where it starts being truly incremental revenue.
Coming in so.
So stay tuned I think this is an industry.
Particularly the automation, whether it's IV or agent assist and it's just getting started and thats, probably a decade or more.
Adoption, that's going to continue to increase as companies and individuals get more comfortable with it as far as agent assist versus the Ida contribution on revenue I think.
Agent assist is one where you can apply if you think about it.
The automation.
Listening to conversations and transcribing into tax and the question is that's the base level.
And as Ron said, we're leveraging other companies to do those functions and the question is what do you do with that data.
And there's so many new.
Opportunities and use cases that can leverage that data whether it's in real time to coach agents, whether it's historical to pull out insights and delivered to management to say Hey. These are the most common things being either ask for an unaddressed on your phone calls or just being asked for that or Monday, and repeatable questions well wait a minute why don't we.
Prescribed automation, 26% of your calls are asking this question and it's the same answer every time lets go apply iga to automate that so a lot of this is consultation and it's a combination of agent assist and I think they both feed each other the agent assist will help us feed more IPA opportunities.
Thank you congrats.
Yes.
Moving on now to Willpower RW Baird.
Great. Thanks for taking the question I know you all referenced record bookings.
Bookings again in the quarter I'd love to just understand better understand.
How you see the key drivers there are the key components of that anyway to further breakout Iga and virtual observer I mean honestly those seem like very strong growers, how important now of those two.
Bookings, so any more color on that front would be great.
Barry if you want take financial Atlanta that one.
On the bookings side.
Well it is.
It is pretty much.
Cut and dice it.
Reasonably strong.
A very strong they in the case of.
Enterprise.
<unk> it.
As Dan mentioned in the prepared remarks, the bookings were a record.
<unk>.
<unk> installed base.
Is not seeing the likes of what they had obviously during COVID-19 .
And.
And so.
So the momentum is there.
And in terms of.
As we mentioned will those.
Where.
Doing very very well in the prepared remarks to say that with the ramp up bookings.
Alright, well you had asked about bookings I thought you asked about revenue, but Dan Medina, probably comment on the bookings side.
Sorry about that.
That's a director problem.
Looking at the bookings what are the drivers you ask for the bookings the record bookings and I think the key here is we talked about hitting on all cylinders and cliche, but when you think about that.
The drivers, having the automation technology being brought into the contact center for the very first time.
In the 20 plus years, almost 30 years I've been in this space.
Really is driving decisions and the fact that you can only get these from the cloud is driving folks to make that transition to the cloud and so that's.
Number one absolutely is having this technology available whether they implemented day, one or not and I say that because when we talk about our 10% attach rate and folks are trying.
The agent assist what we're finding is the majority of the decisions are being made because they hear the story they see the demonstrations and actually this is fabulous. Okay. First step is let's get everything off of our premise into the cloud and then we will start adding these automation. So it's helping five nine win deals because of the story.
As well as the technology itself and then I think dovetail that it's what you do with technology.
I talked to a customer just this morning, we shared the fact that what the vendors that they were looking at our suppliers.
All three of US had way more technology than they would ever exploit take advantage of that.
It's overkill for what maybe a question is which one is going to optimize and implemented to extract the most value from what they are trying to accomplish and thats, where the partnership not just the technology, but the partnership. So do we have a professional services team that will consult and come out and optimize it and do we have an ongoing support model that allows them to take advantage of the.
Changes that theyre going to have on their business and how they can tailor the solution to that and that's not us.
Area and that oftentimes gets overlooked or neglected in the selling process, but we emphasize that heavily because we believe we're the best at it.
That's great. Thank you.
Next is Mike Latimore Northland capital markets.
Great.
Alright, great. Thanks.
Just on the <unk> pricing is that still kind of consistent with what <unk> been thinking in the past given just the strength in IV bookings should we think about <unk> continuing to grow this year.
I'm going to handle this census.
Go ahead, Dave.
Sure.
So I view pricing, what we've got if you think about.
We've come out with roughly a $450 per IEA.
Think about that as the software and the.
The virtual agent itself versus.
Climbed $200 to human agent, plus probably 10 times that for the human the human cost. So what we have found the ROI is extremely compelling Rowan alluded to the to the example earlier the health care company that just basically were offsetting 36 humans.
Roughly 10% of their workforce with the Ipi.
And so that becomes a very compelling.
New dynamic in our industry that we just haven't had in the past.
Having that contribute to the new to the <unk>.
We talk about attach rates oftentimes, though we will get a 500 seat customer that might say I don't know what my adoption rate is going to be.
We talked about well, what's the adoption rate how what percentage can you really deflect over 225 years. It totally depends on so many factors one is the industry or in the types of questions you're handling in your contact center the comfort level of your customers and the type of demographic youre dealing with there. So there's all of these factors that weigh into it so a lot of the big.
<unk> hundreds of seats of humans may just try it and see how it takes and then design will it expand from there. So when you look at the <unk>, it's starting to contribute an incremental increase to that.
But again the volumes are high enough across the entire base until we start really penetrating that base that is.
When youll start to see increased will go up sure to what degree hard to say at this point.
Alright got it.
And ladies and gentlemen that is all the time, we have for questions today I'll turn it back to our speakers.
Thank you very much we really appreciate the time that you are joining us today.
Another great quarter for $5 nine behind US again, the strength continued strength to strength.
We are in this sort of a perfect storm of growth opportunities with the strategic enterprise and you can see that in our numbers and we're looking forward to a fantastic rest of the year. Thank you all very much.
Okay.
Okay.
Right.
Rowan or Dan.
Victor.
I say to myself I have a choice standby, we're still life.
Okay.
Yeah.
Yeah.
Okay.