Q2 2022 Five9 Inc Earnings Call
While simultaneously consistently generating operating cash flow and maintaining a strong balance sheet.
In a moment I will talk about the drivers of our business, but before I do that I'd like to address a topic, that's probably upper most in your minds, namely the impact of the macro environment on our business to do this let me break it into two parts growth from new logos and growth in the installed base each of which contributes roughly half of our total annual revenue growth. So I'll.
Start with new logos for five reasons, we remain optimistic that despite the macro headwinds, causing customers to be more cautious and deliberate we will continue to enjoy strong growth in new logos.
<unk>.
Prospective customers are faced with the imperative of moving to the cloud as their premise based systems either end of life or require expensive upgrades two out of every three rfps, 68% received this year site moving to the cloud as a primary motivator to issue the RFP and in.
Dependent data from Forrester and others consistently show that making the move to the cloud results in triple digit Rois and payback periods measured in months.
Second is the need to automate manual tasks, particularly in a time when budgets are tight and labor is scarce.
Automation was the primary motivator for a further 20% of the major rfps.
Third the upper end of the market is accelerating their transition to the cloud the largest customers.
While not impervious to the economic environment, often can afford to continue to invest in critical systems, even during downturns.
Fourth we have a massive opportunity internationally, despite macro weakness in Europe , our bookings there more than doubled year over year in the second quarter, and finally, a remarkably efficient and disciplined go to market machine alongside the trusted reputation that we've built up amongst customers with our server.
So for these five reasons and as Dan will elaborate we enjoyed a second quarter record in net new bookings despite the economic turbulence.
Now, let me turn to the other half of the annual revenue growth, namely the installed base as we've repeatedly stressed our installed based bookings will not be immune from an economic downturn. However, keep in mind. The following three points first we believe contact centers are mission critical and arguably become even more critical in a downturn.
Thus when cfos cast about for areas to cut back on spending they'll focus on optional spend areas rather than ones, where they're able to productively interact with customers reduce cost and increase revenues.
Second we have a very diverse customer base spread across all industry sectors. This lack of concentration will likely lessen the impact on our installed base business absent a severe downturn that spreads across the entire economy.
And finally third we enjoy strong retention rates and there are significant untapped opportunities to sell new products and services into our install base, most notably automation in Ibs.
So for these three reasons, we enjoyed a second quarter record in bookings from our installed base.
Despite the economic turbulence is underway.
Now stepping back and looking at both net new and installed base combined and considering our belief in the mission criticality of contact centers, the huge barely penetrated $58 billion Tam and our proven ability to execute we remain cautiously optimistic that despite the macro cross currents there will be no.
No interruption to our continued delivery of.
LTM enterprise subscription revenue in the thirties for the foreseeable future.
Finally.
Mindful of macro environment.
We're being even more cautious than normal and controlling costs and expenses. So that we can continue to deliver not just durable growth, but profitable growth.
Now I will dive into the three main drivers of our business specifically the strength of our platform. Our continued focus up market and the acceleration of our international presence, taking each in turn I'm going to start with our platform.
The decision we made a few years back to significantly increase R&D spending to redesign and re architect our platform to support enterprise grade deployments is clearly paying massive dividends. These large companies need the scale and performance, which we have delivered they want extensive and deep integrations, which we've delivered.
Want a global solution, which we've delivered and they want the assurance that we can support successful large scale implementations, which we have demonstrated.
Today, though I want to comment on the single most important thing to our customers and thats reliability of our platform as.
As a result of the re architecture improved processes and disciplines and importantly disciplined execution.
Over the last two plus years, we've made tremendous strides to cement ourselves as a leader if not the leader.
In enterprise grade <unk> reliability.
In this regard I am very pleased to report that the second quarter. We further improved LTM uptime sequentially from $99 99, 5% to $99 99, 8%.
As a reminder, and to put things into perspective, 90, 999, 8% means that our service was unavailable for just 53 seconds.
Given month on average in the last year.
53, <unk> per month on average for.
For the last year.
Amazing now another key dividend, resulting from our re architecture is the increased pace of innovation and this is best exemplified by the success, we're enjoying on the automation front. So let me dig into that.
During the last quarter, we met with many of our customers that have been using our automation solutions and the overwhelming response from these customers is that the implementation of automation solutions is typically resulting in significant rois, while improving customer and agent experience and.
And customers achieve these rois in multiple ways, such as automated resolution of customer calls improved agent productivity from reduced agent handle time and improved customer satisfaction from lower call abandonment rates.
So let me give you a few examples of these successes. The first is a leader in the weight loss industry, who save costs by leveraging our workflow automation solution to improve a critical sales process being managed by a legacy on premises solution provider.
The legacy on Prem solution was cumbersome to maintain and was costly with workflow automation.
We were able to transform their business by moving them seamlessly to the cloud in under 90 days and reducing their costs by 15% to 20% versus the legacy on Prem solution.
The second is a global company that empowers over $3 5 million small businesses with point of sale technologies and business management tools working closely with our partner and reseller in Latin America. They implemented natural language call routing through our IV solution to eliminate the old press, one experience producing savings of 30.
Seconds per call.
With over $2 5 million calls a year that has equated to over two years of time saved for their customers greatly improving customer satisfaction and business results.
Finally, third is a global shipping and logistics company, which reduce costs and improve customer satisfaction through our IV solution. This customer was facing challenges with average hold times up over 30 minutes, which caused 3000 customers to hang up every day before having there.
Issue was resolved.
They deployed our IV <unk> to offload their significant.
Volume of shipment tracking inquiries from agents to our self service solution. Our IV <unk> was able to successfully self serve over 90% of those customer inquiries, leading to a 95% decrease in customer hold times.
A 96% decrease in customer hang ups, and a 44% reduction in telephony costs, while significantly improving customer satisfaction.
So that's the three examples as a result of the increased customer focus on automation and the comprehensiveness of our solution. We had record bookings for our automation portfolio in Q2, focusing on the largest component of the portfolio, namely the <unk>, we saw year over year bookings growth of 63% and three.
<unk> hundred 35% for new logo and install base respectively.
Our investment in AI and automation is being recognized by customers and industry analysts alike and in Q2, we were named a leader in the 2022 Opus Research decision makers guide to enterprise intelligent assistance, we were honored to be the only <unk> provider featured in the report and to be recognized for our strategic and <unk>.
Holistic approach that champions product completeness and flexibility.
Yeah.
Next.
I'd like to discuss our continued March upmarket.
During in the second quarter, we continued to show strong growth in the upper end of the enterprise market, which remains the fastest growing part of our overall business. Our success here is due to the re architecture of our platform as I talked about earlier.
And organizing our sales teams into clearly defined swim lanes, enabling us to match selling skills with market demand our.
Our strategic enterprise teams have performed especially well with this new focus the alignment has worked particularly well with systems integrators, who tend to focus on the high end of the market.
Partners of course have been a big part of our overall playbook here. So let me share some recent partner highlights.
First we enhanced our partner Advisory board and our partner marketplace and created an all new partner portal.
Next we expanded our relationship with slalom consulting and have seen terrific traction in several key markets, especially in conjunction with our Salesforce partnership.
And finally I'm thrilled to report two new key partnerships for <unk>. The first is Kindle, a strategic technology services and consulting company delivering value to over 4000 customers worldwide.
<unk> was an existing <unk> customer using our services internally and based on their positive experience with $5 nine Kindle decided to expand into a strategic reseller and managed services partnership with $5 nine to deliver holistic and global customer experience too.
To their high end customers.
The second partnership I'm pleased to announce is with Ww T worldwide technologies Ww.
As a $14 billion revenue 8000 employee technology service provider and they have signed to be a global strategic retail partner for $5 nine further expanding our partner ecosystem.
And these initiatives are paying off with second quarter channel bookings growing 52% year over year.
And lastly, our international expansion.
The significant and sustained investments we've made internationally continue to pay off with second quarter LTM International revenue growing 45% year over year.
LTM International revenue was 9% of total revenue and we continue to expect that this will increase to the mid to high teens by 2026.
Our progress in EMEA is particularly noteworthy since our last call in fact, we announced the expansion of our data centers in Frankfurt and Amsterdam to serve 59 customers in the European Union.
We opened up our new innovation center in Porto, we established a Doc and Iberian presence both of which have closed initial orders and have successfully brought the $12 million.
Our European Insurance company live, which is now starting to ramp.
In summary, the familiar and proven building blocks needed to deliver disciplined durable and profitable growth, namely our platform our market market and our global expansion remain solidly in place despite the macro uncertainties.
We continue to believe these building blocks position us well to reach $2 4 billion in revenue and 23% adjusted EBITDA in 2026.
Last but certainly not least I want to recognize and thank the people who have made all of this success possible, namely our employees. We couldnt do any of this without them and it is our employees engagement and dedication to our mission and their incredible execution that make us so successful.
This spirit and motivation our illustrated by $5 nine recently being named as one of the year's best workplaces in the Bay area by Great Places to work and Fortune magazine.
<unk> rewards based on employee feedback collected through America's largest ongoing annual workforce study in that survey, 95% of our employees responded that $5 nine is a great place to work compared to 57% of employees at a typical U S based company.
So.
Huge thank you to our team.
And I'll now turn the call over to our President and Chief Revenue Officer, Dan Burkland, Dan go ahead.
You Rohan and good afternoon, everyone.
As Roeland stated, we had a very strong quarter on both topline and Bottomline financials.
I'm also pleased to report that we had exceptional bookings for Q2 as well.
Setting a record for any Q2.
Had it not been for the $40 million plus a <unk> deal, we announced last quarter. It would have been an all time record in any quarter for bookings.
We continue to grow the pipeline to record levels, and we are getting even greater leverage as Robin mentioned from our partners.
While also strengthening our international presence with the expansion into new markets and.
And now I'd like to share some examples of key wins for the quarter.
First example is a fortune 200 financial services through offering a diverse range of services from life insurance group protection investments and retirement plans.
We had been using a legacy on premises system, which made it difficult for integrations omnichannel and consolidation across various businesses.
They looked at all of the <unk> providers and selected five nine due to our advanced automation solutions, including IV.
Agent assist and Wfl powered by the.
The initial IV self service use cases include built home service cancellation and document requests.
They're implementing the full omnichannel solution from five nine and integrating it to their current proprietary CRM as well as into sales force, which will be rolled out into several departments.
We anticipate this initial order to result in over $7 $3 million in <unk>.
Five nine.
The second example is a fortune 100 financial services company that provides both personal and business insurance as well as investment products.
<unk> been using a legacy premises system.
Which did not support their integrations their omni channel solutions with our <unk>.
Analytics requirements.
After looking at several <unk> solutions that shows five nine for our superior AI and automation offerings, our <unk> suite integration into their Microsoft dynamics, CRM and the direct high touch professional services they knew would be key to their success.
Due to the vast array of products and services that we use agent assist core next best action coaching while also using <unk> to provide status on quotes cases delivery of tax and other documents.
We anticipate this initial order to result in over $4 $5 billion in <unk> to high <unk>.
The third example is a state agency the employment security Department responsible for that state's unemployment system, taking calls and inquiries from residents applying for unemployment benefits updating their employment status and documenting job applications. They were using a legacy on premises system, which lack the autumn.
Nation, and self service options, resulting in excess of two times for inbound callers.
The state and their consultant looked at all the <unk> offerings and selected five nine for our end to end solution and our excellent service offerings, we're supporting them on an ongoing basis, they will be implementing the omnichannel solution with chat and email QM interaction analytics WSI integrations to both Microsoft dynamics.
RM and Microsoft teams UC solutions, we anticipate.
This initial order will result in over $2 $8 million in <unk> to $5 nine.
I'll also setting up other agencies, who we are currently working with to purchase off of the same contract.
And now as they normally do I'd like to share. An example of an installed base customer who has expanded their use of five nine.
This one may sound familiar.
This parcel delivery service company first contracted with 590, <unk> Q1 of 2021 with an anticipated at the time to $5 nine of over $14 million for that initial work.
<unk> Division was waiting to see the level of success that the U S and the Americas Division had.
When they expedited the rollout to more than 10000 agents in time for the 2021 holiday rush.
Once they saw the 509 exceeded their expectations and they had perform their due diligence with their U S Americas teams.
Who provided a glowing endorsement of five nine we've recently signed the add on order with the EU division with an anticipated.
<unk> to $5 nine up more than $12 million.
This add on order includes all of the same advanced solutions, we delivered to the U S and Americas teams, including IV agent.
The agent assist <unk> QM speech analytics.
As well as integration to Salesforce and various other systems.
In addition to other subsequent orders since that initial order in Q1 of 2021.
We now anticipate this add on order will bring their total spend with $5 nine to nearly $50 million and they are.
So as you can see <unk> is continuing to deliver to customers of all sizes throughout the world as we successfully move upmarket deliver innovative automation solutions at an accelerating rate right.
Leverage partners and expand our international footprint.
And with that I'll hand, it over to Barry to review our financials Gary.
First a reminder, 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 Investor presentation.
On our website.
As Ron mentioned earlier, we had another excellent quarter with revenue growing 32% year over year, primarily driven by LTM enterprise subscription revenue growth of 41% year over year.
With regards to revenue composition enterprise made up 85% of LTM revenue and our commercial business represented the remaining 15%.
Our commercial business grew and our <unk> on an LTM basis and 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 business.
Moving upmarket.
Recurring revenue accounted for 91% of our total revenue in the second quarter.
And the other 9% comprised of professional services.
Cam dollar based retention rate was 118%.
According to calculations are inevitable as mega customers come onto the platform at different times and ramp at different rates.
In addition, we will continue to lap the onetime colored benefit to Q4 of 2022.
However.
We expect our retention rate to trend towards the high <unk> by 2020 Asics.
Due to the higher mix of enterprise customers, especially larger ones, which have demonstrated a very high retention rates.
And as a benefit from high offer driven by automation and other offerings.
Second quarter adjusted gross margins were 68, 7%.
A decrease of approximately 260 basis points year over year.
Due to ongoing investments in professional services and public cloud.
As we have been saying.
Accelerated investments in these areas are transitory and.
And began to moderate in the second quarter.
Therefore.
Q2 marked a turning point as gross margin expanded slightly quarter over quarter by 20 basis points.
For the remainder of the year.
We expect further small expansion in the third quarter.
And more so in the fourth quarter with the expectation that the annual adjusted gross margins would be at a minimum of 61%.
Operating expenses as a percentage of revenue decreased by approximately 340 basis points year over year.
Primarily driven by G&A declining 210 basis points.
Making the 30 <unk> consecutive quarter of year over year improvement in G&A expense as a percent of revenue.
Adjusted EBITDA margin was 17, 5% and.
An increase of approximately 80 basis points year over year.
Second quarter non-GAAP EPS was <unk> 34 cents per diluted share a year over year increase of 11 cents per diluted share.
Next I'd like to share some balance sheet and cash flow highlights.
DSO came in at 34 days and.
An improvement from the 36 days, we reported in the prior two quarters as I invoice invoicing process using a new billing system normalized.
Q2, operating cash flow was negative at $3 1 million due.
Due to $5 9 million.
Of the $24 million in earn out payments being reflected in operating cash flow as previously mentioned.
LTM operating cash flow was $41 million.
<unk> $12 million of one time items.
We have now delivered 24 consecutive quarters of positive LTM operating cash flow.
We expect LTM operating cash flow to increase in the second half.
And to increase meaningfully in the longer term.
Given our demonstrated ability to expand adjusted EBITDA margins.
Substantial Nols.
And our low dsos.
Before turning to guidance I would like in addition to our growing talked about earlier to.
To provide some additional color.
On our operating patterns given uncertain macroeconomic conditions.
We believe our long standing commitment to balanced growth.
Centers of well to navigate through these macro challenges.
Our disciplined approach of authorizing new hires based upon bookings and revenue performance enables us to effectively manage expenses.
In this regard I would note in passing that our visibility into our top line allowed us to continue hiring strongly in the second quarter.
And we plan to continue to grow our head count in the second half of this year as well.
It's more cautiously given the macro uncertainties.
I would also like to point out that.
That there is ample cash on our balance sheet.
Consistently generate operating cash flow.
And we have minimal exposure to foreign exchange risks.
And now I'd like to finish today's prepared remarks, with a discussion of our guidance for the third quarter.
And full year 2022.
In terms of top line, we are guiding Q3 revenue to a midpoint of $193 million.
This represents a 2% sequential growth a slightly higher increase in the typical pattern today enterprises third quarters.
<unk> guided to a 1% increase.
Although as I like to point out.
That they implied year over year growth at the midpoint is 25%, which is the highest growth rate, we have guided to in any third quarter.
While we remain optimistic that we will continue to enjoy strong growth in new logos. We are mindful of the macro environment when it comes to our existing customers.
Therefore, we are being more prudent than normal with the raise in our annual guidance.
Raising the midpoint from $771 5 million.
The $781 $5 billion.
Which represents an increase in the year over year growth rate from 27%.
98%.
As for the bottom line.
We are guiding Q3, non-GAAP EPS to come in at a midpoint of 32 cents per diluted share.
Decrease of <unk> <unk> per diluted share sequentially.
This quarter over quarter decrease is in line with a typical pattern for third quarter guidance.
And reflects the continued investments we are making to further drive our enterprise and international momentum.
Five of these investments.
We're raising the midpoint of our full year guidance of $1 23 to $1 89 per diluted share.
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 second quarter performance.
And our ongoing success moving up market and expanding internationally.
We remain laser focused on executing like chocolate.
To deliver durable.
Growth.
Operator, Please go ahead.
Thank you very much as we move into the Q&A portion I would like to ask our analysts to please limit yourselves to one question just to allow time for as many questions as possible.
Thanks, very much and we will start for where the question rather from Ryan Macwilliams at Barclays.
Second question, please to see record bookings for the second quarter, given the relatively longer sales cycles for contact center are you experiencing any changes to new.