Q3 2022 Five9 Inc Earnings Call
Berry's warrants being CFO.
Certain statements made during the course of this conference call that are not historical facts, including those regarding future financial performance of the company industry trends company initiatives and other future events are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 such.
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 <unk> future results and cause. These forward looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration, including increased inflation increased interest rates.
Supply chain disruptions decrease economic output and fluctuations in currency exchange rates lowered growth rates within our installed base of customers the impact of the Russia, Ukraine conflict the impact of the COVID-19 pandemic and the other risks discussed under the caption risk factors and elsewhere in <unk>.
<unk> 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 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 on <unk> website at investors at five nine.
<unk> com.
And now I'd like to turn the call over to five nine chairman and incoming CEO Mike Burkland.
Thanks, Emily and thanks to everyone for joining our call shafter before we jump into today's call given the original announcement.
I'd first like to turn it over to Rowan for a few comments Rowan.
Thanks, Mike.
I want to reiterate my strong belief in the market opportunities ahead, and I'm optimistic that five nine is well positioned to capitalize on those opportunities.
<unk> is in great hands, given Mike's proven track record of success.
During his 10 years as CEO he established a vision to move the contact center to the cloud long before it became conventional wisdom.
Company's revenue increased by 20 times, becoming one of the largest and fastest growing public companies in the <unk> market.
Mike and I have built a terrific partnership and we're committed to ensuring that the CEO transition is as seamless as it was four and a half years ago. When he pass the torch to me.
As well as in the appendix of our investor deck and available in the Investor Relations section on five nine website on investors that five nine dot com.
And now I'd like to turn the call over to five nine chairman and incoming CEO Mike Burkland.
It's been my privilege to serve five nine investors customers and employees.
Team here is truly best in class to.
Thanks, Emily and thanks to everyone for joining our call structure before we jump into today's call given the recent announcement.
To the investors and analysts on the call I've always valued your feedback antitrust and five nine and I wish you all the best and finally I'd like to express my gratitude to Mike and the rest of the $5 nine board for the opportunity to lead this terrific company.
First I'd like to turn it over to Rowan for a few comments Rowan.
Thanks, Mike.
I want to reiterate my strong belief in the market opportunities ahead, and I'm optimistic that <unk> is well positioned to capitalize on those opportunities.
Thank you very much.
With that I'll turn it back over to Mike.
<unk> is in great hands, given Mike's proven track record of success.
Ron I want to express what she shared gratitude for your dedication and leadership over these last four and a half years. We wish you the very best in your next chapter as many of you know I was CEO here for nearly 10 years and have been active as chairman for the last five years.
During his 10 years as CEO he established a vision to move the contact center to the cloud long before it became conventional wisdom.
The company's revenue increased by 20 times, becoming one of the largest and fastest growing public companies in the <unk> market.
<unk> is a truly exceptional company driven by our passionate employees, whose collective mission is to help businesses re imagine the way they deliver customer experience couldnt be more thrilled to be back on the field with this team to continue fulfilling this commitment to our clients.
And Mike and I have built a terrific partnership and we are committed to ensuring that the CEO transition is as seamless as it was four and a half years ago. When he pass the torch to me.
It's been my privilege to serve five nine investors customers and employees. The team here is truly best in class to.
I believe <unk> is extremely well positioned in this massive market as we continue to execute our product innovation our March upmarket.
To the investors and analysts on the call I've always valued your feedback antitrust and $5 nine and I wish you all the best and finally I'd like to express my gratitude to Mike and the rest of the five nine board for the opportunity to lead this terrific company.
Our national expansion.
We're still in the early innings of this long term shift to the cloud driven by the following three market trends that we are seeing.
First the viability of desirability of cloud solutions is no longer question, even in the largest contact center cloud.
Thank you very much.
With that I'll turn it back over to Mike.
Cloud solutions now offer proven scalability reliability security and innovation in.
Ron I want to express my sincere gratitude for your dedication and leadership over these last four and a half years. We wish you the very best in your next chapter as many of you know I was CEO here for nearly 10 years and have been active as chairman for the last five years $5 of truly exceptional company driven by our passionate employees whose collect.
In addition premise based solutions are increasingly being end of life or a prohibitively expensive to maintain giving companies more reasons to move to the cloud.
Second in order to avoid being disrupted companies are vigorously pursuing digital transformation initiatives to enhance their customer experience.
<unk> mission is to help businesses re imagine the way they deliver a customer experience couldnt be more thrilled to be back on the field with this team to continue fulfilling this commitment to our clients.
Interim aspect of any such transformation has been mission critical contact center.
No longer is the key to success just shaving seconds off average handle time, but also to achieve strategic differentiation via a superior customer experience third we believe are already huge Tam has more than doubled with the maturation and economic viability of AI, driven automation solutions, which can most easily be provided.
I believe <unk> is extremely well positioned in this massive market as we continue to execute our product innovation, our March up market and international expansion.
We are still in the early innings of this long term shift to the cloud driven by the following three market trends that we're seeing.
Wow.
In a tight labor market with agents turning over rapidly automating mundane routine tasks as an imperative.
First the viability of desirability of cloud solutions is no longer question, even in our largest contact centers.
We believe these trends are gathering steam and we will be with us for many years to come despite the current macro choppiness.
Cloud solutions now offer proven scalability reliability security and innovation.
Now I would like to discuss what we view as the three main growth drivers for our business, namely our platform our March upmarket and our international expansion.
In addition premise based solutions are increasingly being end of life or a prohibitively expensive to maintain giving companies more reasons to move to the cloud.
Second in order to avoid being disrupted companies are vigorously pursuing digital transformation initiatives to enhance their customer experience.
Let's begin with our platform as discussed on prior calls the re architecture of our platform is paid and is paying massive dividends. We have made great strides along a number of fronts our ability to scale to serve some of the largest cloud contact center deployments has clearly been demonstrated.
Central aspect of any such transformation is mission critical contact center.
No longer is the key to success just shaving seconds off average handle time, but also to achieve strategic differentiation be a superior customer experience third we believe are already huge tam has more than doubled with the maturation and economic viability of AI, driven automation solutions, which can most easily be provided.
Our ability to deliver our services either in our own data centers or via the public cloud has allowed us to rapidly extend our global reach and offers the potential of gross margin improvements in the future.
We have continued to make improvements and uptime, a crucial metric for customers I am extremely pleased to report that over the past 12 months, we achieved an important milestone for <unk> system availability in other words 99, 999% uptime. This is a significant achievement and Mike.
Cloud.
In a tight labor market with agents turning over rapidly automating mundane routine tasks as an imperative.
We believe these trends are gathering steam and will be with us for many years to come despite the current macro choppiness.
Now I'd like to discuss what we view as the three main growth drivers for our business, namely our platform our March upmarket and our international expansion.
Thanks go out to the entire team that enabled us to reach this milestone in.
In addition, this re architecture of the platform allows us to innovate at a faster pace as illustrated by the three major new product capabilities introduced at our recent CX summit.
Let's begin with our platform as discussed on prior calls the re architecture of our platform is paid and is paying massive dividends. We have made great strides along a number of fronts our ability to scale to serve some of the largest cloud contact center deployments has clearly been demonstrated.
First our new web based administration currently provides our clients the ability to manage their contact center more effectively and we will also provide access to our full range of applications and the ability to customize features to their specifications and needs.
Our ability to deliver our services either in our own data centers or via the public cloud has allowed us to rapidly extend our global reach and offers the potential of gross margin improvements in the future.
Second our AI insights offering a brand new product, resulting from our investments in AI addresses a key challenge felt by contact center operators today. Many contact center managers are flying blind due to a lack of timely insights into conversational data.
We have continued to make improvements and uptime, a crucial metric for customers I am extremely pleased to report that over the past 12 months, we achieved an important milestone for <unk> system availability in other words 99, 999% uptime.
This new offering gives operators access to data once considered inaccessible, allowing them to pull insights and identify emerging trends.
This is a significant achievement and my thanks go out to the entire team that enabled us to reach this key milestone in.
These insights can in turn be used to make more informed decisions on investments to improve customer and employee experience and the overall contact center Ottawa.
In addition, this re architecture of the platform allows us to innovate at a faster pace as illustrated by the three major new product capabilities introduced at our recent CX summit.
Third our advanced five nine analytics, which gives customers the ability to design and customize reports on their own contact center data and a true self service manner.
First our new web based administration currently provides our clients the ability to manage their contact center more effectively and will also provide access to our full range of applications and the ability to customize features to their specifications and needs.
Conversational insights and analytics are critical and any modern contact center platform and these innovations are designed to enable customer success.
Finally, we continue to make excellent progress with our IV.
Second our AI insights offering a brand new product, resulting from our investments in AI addresses a key challenge felt by contact center operators today. Many contact center managers are flying blind due to a lack of timely insights into conversational data.
Which has strong market acceptance, especially given the tight labor market and high agent turnover.
Illustrate the traction we are enjoying now that the number of minutes of <unk> usage in the third quarter nearly doubled year over year.
This new offering gives operators access to data once considered inaccessible, allowing them to pull insights and identify emerging trends.
Next I'd like to discuss our March upmarket.
During the third quarter, we continued to show strong growth in the upper end of our enterprise business. This traction is best illustrated by the record number of $1 million plus IRR, new logos added in the quarter.
These insights can in turn be used to make more informed decisions on investments to improve customer and employee experience and the overall contact center Ottawa.
These million dollar plus customers, which now represent approximately half of our recurring revenue.
Third our advanced <unk> analytics, which gives customers the ability to design and customize reports on their own contact center data and a true self service manner.
Continue to be the fastest growing part of our business and have a DVR that is significantly higher than the corporate average of 118%.
Conversational insight and analytics are critical and any modern contact center platform and these innovations are designed to enable customer success.
Our traction with these bigger customers is in large part due to what I have been talking about that is the re architected platform, but also from the focus of our strategic sales team, which continues to be supported by a record pipeline. Another key factor that has benefited us greatly as the increasing broadening and deepening.
Finally, we continue to make excellent progress with our IV.
Which has strong market acceptance, especially given the tight labor market and high agent turnover.
Illustrate the traction we are enjoying note that the number of minutes of <unk> usage in the third quarter nearly doubled year over year.
Earnings of our partner network. These partnerships often serves as a force multiplier in our ability to fully satisfy our customers' transformational objectives. One key aspect I would like to emphasize with respect to partners as the expansive set of integrations, we have developed over the years.
Next I'd like to discuss our March upmarket.
During the third quarter, we continued to show strong growth in the upper end of our enterprise business. This traction is best illustrated by the record number of $1 million plus IRR, new logos added in the quarter.
Five nine of several hundred modern feature rich API for ISP partners and developers can use to integrate with the <unk> platform. The extensive suite of Apis covers virtually every area of the portfolio for integration with CRM WSI, though you see AI voice biometric speech analytics business intelligence and many other applications.
<unk> million dollars, plus customers, which now represent approximately half of our recurring revenue.
Continue to be the fastest growing part of our business and have a DVR that is significantly higher than the corporate average of 118%.
These and other certified integrations enable our enterprise customers to make the conversion to <unk> nine and easily integrates with their existing systems.
Our traction with these bigger customers is in large part due to what I have been talking about that is the re architected platform, but also from the focus of our strategic sales team, which continues to be supported by a record pipeline. Another key factor that has benefited us greatly as the increasing broadening and deepening.
Lastly, I'll cover our international expansion.
As you know we have been investing aggressively outside of the U S. It has been a considerable investment our international go to market headcount has tripled since the end of 2020.
Earnings of our partner network. These partnerships often serve as a force multiplier in our ability to fully satisfy our customers' transformational objectives. One key aspect I would like to emphasize with respect to partners as the expansive set of integrations, we have developed over the years.
We have also recently established a new research and development Center in Portugal.
These international investments are paying off our international bookings in the third quarter grew 78% year over year and our international revenue grew 40% year over year.
Several hundred modern feature rich API for ISP partners and developers can use to integrate with the <unk> platform. The extensive suite of Apis covers virtually every area of the portfolio for integration with CRM WSI, though you see AI voice biometric speech analytics business intelligence and many other applications.
International revenue has grown at 40% or more for seven over the last nine quarters. We expect to deliver continued strong international growth as we plan to increase the percentage of international revenue from 10% to the mid to high teens in the coming years before I hand, the call over to Dan I would like to reiterate my.
These and other certified integrations enable our enterprise customers to make the conversion to <unk> nine and easily integrates their existing systems.
<unk> be back working closely with this amazing team.
I couldnt be more optimistic about the opportunity ahead for $5.
I will now turn the call over to our President Chief Revenue Officer, Dan Burkland, Dan go ahead.
Lastly, I'll cover our international expansion.
As you know we have been investing aggressively outside of the U S. It has been a considerable investment our international go to market head count has tripled since the end of 2020 and we have also recently established a new research and development Center in Portugal.
Thank you, Mike and good afternoon, everyone I'm pleased to report that as we continue to move upmarket expand internationally and deliver industry, leading innovation, our new logo bookings once again set a Q3 record.
We continue to get great leverage from our channels systems integrators, and our ecosystem of partners, which helped us build our pipeline to an all time high.
These international investments are paying off our international bookings in the third quarter grew 78% year over year and our international revenue grew 40% year over year.
However, we are seeing the macro headwinds, causing some customers to be more cautious and deliberate leading to some areas of softness on the new logo side, particularly in the Midmarket.
International revenue has grown at 40% or more for the seven over the last nine quarters. We expect to deliver continued strong international growth as we plan to increase the percentage of international revenue from 10% to the mid to high teens in the coming years before I hand, the call over to Dan.
And also on the installed base part of our business, which Barry will discuss in detail.
On the new logo side, the mid market softness is being offset by over achievement in strategic accounts in international bookings.
To reiterate my enthusiasm to be back working closely with this amazing team I couldnt be more optimistic about the opportunity ahead for five months.
And now as I normally do I would like to share. Some examples of key wins for the quarter.
I will now turn the call over to our President Chief Revenue Officer, Dan Burkland, Dan go ahead.
The first example is a global BPL headquartered in Spain with their primary operations in EMEA and Latin America.
Thank you, Mike and good afternoon, everyone I'm pleased to report that as we continue to move upmarket expand internationally and deliver industry, leading innovation, our new logo bookings once again set a Q3 record.
They had been using an avaya solution with very limited visibility and flexibility for them to tailor the system for each of their clients' needs.
They looked at other cloud providers and chose five nine for our global presence scalability open API platform and ease of use.
We continue to get great leverage from our channels systems integrators, and our ecosystem of partners, which helped us build our pipeline to an all time high.
However, we are seeing the macro headwinds, causing some customers to be more cautious and deliberate leading to some areas of softness on the new logo side, particularly in the Midmarket.
In addition to five nine we will integrate to a vast array of various CRM used by their clients from the typical brands to homegrown proprietary solutions.
They are also adding IPA on a client by client basis for self service to help alleviate repetitive mundane tasks currently being handled by human agents.
And also on the installed base part of our business, which Barry will discuss in detail.
On the new logo side, the mid market softness is being offset by over achievement in strategic accounts in international bookings.
We anticipate this initial order to result in approximately $4 7 million an.
And now as I normally do I would like to share. Some examples of key wins for the quarter.
To five nine.
The second example is a fortune 200 global leader in heating ventilation and air conditioning or HVAC systems with operations in over 160 countries.
The first example is a global BPL headquartered in Spain with their primary operations in EMEA and Latin America.
Two we're coming off of the <unk> system and looked at other cloud competitors. They chose five nine as they discovered that much of the customization required extensive development on competing solutions, but we're standard out of the box capabilities on slide nine.
They had been using in our buyer solution with very limited visibility and flexibility for them to tailor the system for each of their clients' needs.
They looked at other cloud providers and chose five nine for our global presence scalability open API platform and ease of use.
They are moving forward with an extensive omnichannel solution with voice chat email SMS, along with the full <unk> suite, including WSI QM and interaction analytics, they're also using our ibi IV a self service for warranty claim status and order status while integrating.
In addition to five nine we will integrate to a vast array of various CRM used by their clients from the typical brands to homegrown proprietary solutions.
They are also adding IPA on a client by client basis for self service to help alleviate repetitive mundane tasks currently being handled by human agents.
Salesforce and service now CRM, we anticipate this initial order to also result in approximately $4 $7 million <unk> to five months.
We anticipate this initial order to result in approximately $4 7 million an.
<unk> to $5 nine.
The third example is the northeastern United States medical practice with over 350 locations, including clinics physician offices aspects for contact centers receive inquiries covering everything from patient scheduling prescription refills doctor to patient connections and so on.
The second example is a fortune 200 global leader in heating ventilation and air conditioning or HVAC systems with operations in over 160 countries.
Two we're coming off of an avaya system and looked at other cloud competitors. They chose five nine as they discovered that much of the customization required extensive development on competing solutions, but we're standard out of the box capabilities on slide nine.
And they have been using an on premise solution and we're looking for the scalability reliability and security along with flexibility of the club.
They chose <unk> for those reasons as well as our proven integrations with several CRM, including Athena epic and Salesforce, along with integration to Microsoft teams UC to give them a visual directory with status to easily engage non contact center resources. They also are using IPA self service for scheduling appointments.
They are moving forward with an extensive omnichannel solution with voice chat email SMS, along with the full <unk> suite, including WSI QM and interaction analytics, they're also using our IP <unk> service for warranty claim status and order status while integrating.
Checking invoice status and making payments.
Salesforce and service now CRM, we anticipate this initial order to also result in approximately $4 $7 million <unk> to five months.
They are using our workflow automation solutions to perform proactive outbound notification for appointment reminders and overdue invoice reminders. We anticipate this initial order to once again result in approximately $4 7 million an IRR to <unk>.
The third example is the northeastern United States medical practice with over 350 locations, including clinics physician offices aspects for contact centers receive inquiries covering everything from patient scheduling prescription refills doctor to patient connections and so on.
And now I'd like to focus on existing customers, who have increased their use of five nine.
Despite the growing macro headwind not on the install base side of our business. We continue to see sizable expansions at certain segments, especially in the strategic accounts.
And they have been using an on premise solution and we're looking for the scalability reliability and security along with flexibility of the club.
First the parcel delivery service company that we've spoken of in the past added approximately $5 million to their anticipated. They are the $5 nine to add on there APAC division, bringing the total anticipated <unk> to nearly $55 million.
They chose <unk> for those reasons as well as our proven integrations with several CRM, including Athena epic and Salesforce, along with integration to Microsoft teams UC to give them a visual directory with status to easily engage non contact center resources. They also are using IPA self service for scheduling appointments.
A second example is a regional bank, who has been a 509 customer for more than two years and was in the process of merging with another regional bank.
Checking invoice status and making payments.
That other bank have been using premises space Cisco solution and due to the many advantages we have over that solution. The customer is migrating all of their agents over $5 nine and also adding the full wfl Barrett suite as well as voice biometrics for customer authentication.
They are using our workflow automation solution to perform proactive outbound notification for appointment reminders and overdue invoice reminders. We anticipate this initial order to once again results in approximately $4 7 million an IRR to five nine.
This customer has gone from in a figure of approximately $600000 to over $1 6 million with five nine.
And now I'd like to focus on existing customers, who have increased their use of <unk>.
Despite the growing macro headwind not on the install base side of our business, we continue to see sizable expansions certain segments, especially in the strategic accounts.
In summary, as you can see we continue to see strong demand up market increased expansion internationally and excellent momentum with our channel partners.
First the parcel delivery service company that we've spoken of in the past added approximately $5 million to their anticipated.
And now I hand, it over to Barry to cover the financials.
Thank you Dan.
First a reminder, that unless otherwise indicated financial figures I will discuss some non-GAAP reconciliations.
The $5 nine to add on there APAC division.
The total anticipated to nearly $55 million.
Reconciliations from GAAP to non-GAAP results are included in the appendix of our disciplined patient on our website.
A second example is a regional bank, who has been a $5 nine customer for more than two years and was in the process of merging with another regional bank.
We had a strong third quarter with revenue growing 29% year over year.
Other banks have been using premises space Cisco solution and due to the many advantages we have over that solution. The customer is migrating all of their agents over $5 nine and also adding the full <unk> suite as well as voice biometrics for customer authentication.
The LTM revenue split was 86% enterprise.
And 14% commercial while the recurring revenue versus professional services mix was 91% and 9% respectively.
<unk> database retention rate remained at 118% sequentially.
This customer has gone from in a figure of approximately $600000 to over $1 6 million with five nine.
Recurring revenue.
Again increase by low to mid single digits year over year as it has in eight out of the last nine quarters.
In summary, as you can see we continue to see strong demand up market increased expansion internationally and excellent momentum with our channel partners.
Given that we are facing uncertain times.
And now I hand, it over to Barry to cover the financials.
Due to the macro.
Thank you Dan.
Cannot be conditions and due to the fact that we are in the most seasonal quarter today, we are.
First a reminder, that unless otherwise indicated financial figures I will discuss some non-GAAP reconciliations.
Going to provide more detail into the revenue guidance that we customarily do.
Reconciliations from GAAP to non-GAAP results are included in the appendix of anticipated page on our website.
Please bear in mind.
We had a strong third quarter with revenue growing 29% year over year.
And we do not intend to routinely continue making these more detailed disclosures.
As we have mentioned on our last call.
The LTM revenue split was 86% enterprise.
Half of our revenue growth comes from what we referred to as the new logo side of our business, namely landing and training of new logos.
And 14% commercial while the recurring revenue versus professional services mix was 91% and 9% respectively.
You can take several quarters or even longer to move from bookings to revenue.
<unk> database retention rate remained at 118% sequentially.
Approximately half of the revenue growth comes from installed base bookings, which promptly turning to women.
Recurring revenue.
Again increased by low to mid single digits year over year as it has in eight out of the last nine quarters.
The new logo side of the business remained solid during the third quarter, we turned up 46% more new enterprise seats, and we did a year ago.
Given that we are facing uncertain times.
To the macro economic conditions and due to the fact that we are in a nice seasonal quarter. Today, we are going to provide more detail into the revenue guidance that we customarily do.
The second highest number of new enterprise seats for any cologuard.
Incidentally now any quarter, where we had hired 10 minutes, whereas in the fourth quarter of last year, when we ramp the parcel delivery service in advance of the holiday season.
Please bear in mind.
Turning now to the deployment profile of the two new logo Mega deals that we discussed in recent calls.
And we do not intend to routinely continue making these more detailed disclosures.
As we have mentioned on our last call about half of our revenue growth comes from what we refer to as the new logo side of our business, namely landing and training of new logos.
The parcel delivery service company is approximately 70% deployed and we expect the remaining 50% to be substantially deployed by the end of 2023.
Can take several quarters or even longer to move from bookings to revenue.
Secondly, the healthcare conglomerate deal will start to be deployed in a limited way this quarter and we expect full deployment by early 2024.
Yeah that approximately half of the revenue growth comes from installed base bookings, which promptly turning to women.
Bottom line, we believe that despite the softness Dan mentioned in the mid market.
The new logo side of the business remains solid.
During the third quarter, we turned up 46% more new enterprise seats, and we did a year ago.
Overall, we had a good combination of visibility and confidence when it comes to the new logo side of the business.
The second highest number of new enterprise seats for any cologuard.
Turning now to our installed base.
Incidentally now any accordingly, we had highest turnouts, whereas.
This part of our business is going to be facing slower growth and see that due to increased macro headwinds and in some cases customers specific business challenges.
It was in the fourth quarter of last year, when we ramp the parcel delivery service in advance of the holiday season.
Turning now to the deployment profile of the two new logo Mega deals that we discussed in recent calls.
We saw a solid growth rate, mainly in five verticals, namely financial services.
The parcel delivery service company is approximately 70% deployed.
Human health.
Health care.
Sources, and real estate, which accounted for 61% of Q3 recurring revenue.
And we expect the remaining 50% to be substantially complete by the end of 2023.
These industries in total.
Secondly.
Stayed flat sequentially in Q3 of this year.
The healthcare component deal will start to be deployed in a limited way this quarter.
As compared to a 6% sequential growth in Q3 of last year.
Full deployment.
Early in 2024.
Within each of these five vehicles, a common denominator, but the macro environment with the customers with tightening budgets due to the slowdown in that business.
We believe that despite the softness Dan mentioned in the mid market.
Overall, we had a good combination of visibility and confidence when it comes to the new logo side of the business.
And of course company specific drivers as well.
For example in health care, we saw a laser and smaller sequential increases in open enrollment and telehealth activities.
Turning now to our installed base.
This part of our business is going to be facing slower growth and see that due to increased macro headwinds and in some cases customers specific business challenges.
For the remaining 39% in Q3 recurring revenue, we saw a slightly higher sequential growth rate compared to last year.
We saw a solid growth rate, mainly in five verticals, namely financial services.
But it was not enough to compensate for the southern 5 million Boes facing headwinds.
Human health.
Health care.
Turning now to the rest of the income statement.
Sources, and real estate, which accounted for 61% of Q3 recurring revenue.
Third quarter adjusted gross margins were 61, 4% a decrease of 270 basis points year over year.
These industries in total.
Stayed flat sequentially in Q3 of this year.
Quarter over quarter improvement of 70 basis points due to the moderation of our accelerated investment in professional services and public town.
As compared to a 6% sequential growth in Q3 of last year.
Within each of these five vehicles comment and nominated by the macro environment, where the customers with tightening budgets due to the slowdown in that business.
We expect gross margins to increase sequentially by a small amount in the fourth quarter with the continued expectation at the annual gross margins for 2022 will be at a minimum of 61%.
And of course company specific drivers as well.
For example in health care, we saw later and smaller sequential increases in open enrollment and telehealth activities.
Third quarter adjusted EBITDA margin was 18, 5% an increase of 70 basis points year over year, driven by continued operating leverage.
For the remaining 39% in Q3 recurring revenue, we saw a slightly higher sequential growth rate compared to last year.
Third quarter non-GAAP EPS was <unk> 39 per diluted share a year over year increase of 11 cents per diluted share.
But it was not enough to compensate for the sub notes 5 million boes facing headwinds.
Next I'd like to share some balance sheet and cash flow highlights.
Turning now to the rest of the income statement.
I am pleased to report that in the third quarter, we achieved record highs for both operating and free cash flow of 35 and $17 $9 million respectively.
Third quarter adjusted gross margins were 61, 4% a decrease of 270 basis points year over year, but a quota liquidity improvement of 70 basis points due to the moderation of our accelerated investment in professional services and public time.
And in part by the continued strength of our DSO performance, which came in again at 34 days.
We have now delivered 25 consecutive quarters of positive LTM operating cash flow and we expect it to decrease meaningfully in the longer term given our ability to expand adjusted EBITDA margins are substantial Nols.
We expect gross margins to increase sequentially by a small amount in the fourth quarter with the continued expectation.
Annual gross margins for 2022 will be at a minimum of 61%.
And I'll, let woody as owners.
Third quarter adjusted EBITDA margin was 18, 5% an increase of 70 basis points year over year, driven by continued operating leverage.
And now I'd like to discuss our guidance for the fourth quarter.
And for the full year 2022.
As well as to provide high level commentary.
Third quarter non-GAAP EPS was <unk> 39 per diluted share a year over year increase of 11%.
In 2023.
In terms of topline.
Hindering the macro and seasonal uncertainties, we are guiding Q4 revenue to a midpoint of $204 $5 million.
Sure.
Next I'd like to share some balance sheet and cash flow highlights.
I am pleased to report that in the third quarter.
All 3% sequential growth.
Record highs for both operating and free cash flow of 35, and $17 $9 million respectively.
Which is within the pre pandemic range of 2% two 4% that we've guided to in prior fourth quarters.
And in part by the continued strength of our DSO performance, which came in again at 34 days.
For the full year 2022 revenue, we're guiding to 27% year over year growth.
$775 million at the midpoint.
We have now delivered 25 consecutive quarters of positive LTM operating cash flow and we expect it to decrease meaningfully in the longer term given our ability to expand adjusted EBITDA margins are substantially in islands.
As for the bottom line, we are guiding fourth quarter non-GAAP net income per share to midpoint of 41.
This represents a <unk> <unk> quarter over quarter increase.
Which is at the high end of the peak pandemic range.
And nobody is zones.
And now I'd like to discuss our guidance for the fourth quarter.
For 2022, we are guiding non-GAAP.
Net income per share to a midpoint of $1 36.
And for the full year 2022.
As well as provide high level commentary.
I would now like to provide some memory high level commentary on our current thinking for 2023.
On 2023.
In terms of topline.
Assuming the macro and seasonal uncertainties, we are guiding Q4 revenue to a midpoint of $204 $5 million.
For those of you who have been following <unk> nine for some time.
We know that for the six years through 2020, we started each new year with prudent revenue guidance of 16% year over year growth at the midpoint mainly.
All 3% sequential growth.
It is within the pre pandemic range of 2% to focus in that we've got it.
Mainly due to the uncertainties around the magnitude of the seasonal impact on our business.
We set this up to 20% in the beginning of 2021.
Primarily due to COVID-19 benefits.
And then further to 24% at the beginning of 2020 to drill.
Driven by strong momentum in the business and a healthy macro and microeconomic environment at that time.
For 2023.
Given the macro headwinds and uncertainty and we are assuming will persist throughout next year.
We will once again begin 2023 with an argument of 16% year over year growth or $900 million in revenue.
This of course is a starting point.
And we will update our outlook at the year progresses, we expect revenue to continue putting our typical pattern with slightly more than 50% of annual revenue being generated.
In the seasonally stronger second half of 2023.
Also.
Given that the installed base typically contributes approximately half of the annual revenue.
Next year, we may see a drop in the LTM enterprise subscription revenue growth rate.
37%, we achieved in the third quarter.
The higher <unk> due to the macroeconomic challenges.
We believe this will be temporary and will improve as macroeconomic macroeconomic conditions improve.
Note that the enterprise subscription currently makes up over 60% of total revenue.
In terms of the bottom line, we expect 2023 and non-GAAP net income per share to increase at a similar rate to the 16% revenue growth also an increase year over year from the midpoint of our 2022 guidance at $1 86 to $1 58 in 2023.
In addition, we would like to provide an outlook on the quarterly profile of our bottom line.
If you look at our historical financials non-GAAP net income per share is typically amongst the lowest of the year in the first quarter and.
And we expect this to.
Be the case again in 2023.
Therefore, we expect non-GAAP net income per share to be in the mid teens in Q1 2023.
We expect bottomline to improve slightly in the second quarter and more meaningfully in the second half, especially in the fourth quarter.
Lastly, beyond 2023.
And now expect to.
To achieve the $2 4 billion revenue target in 2027.
One year later than what we had previously predicted due to the current macro headwinds.
We did not an awful originally.
This target date assumes more robust macroeconomic conditions in 2024 and beyond.
As a reminder, the drivers for this $2 4 billion 2027 Tommy.
Based on our expectation and our dollar based retention rate will tend towards the high 100 <unk>.
That we will achieve continued momentum in our module market.
And then our international revenue will increase from the current 10% of total revenue.
To the mid to high teens.
Finally, please refer to our presentation posted in our Investor Relations website.
For four additional instruments, including share count taxes and capital expenditures.
In summary, we are pleased with our third quarter performance and.
While we expect to experience some volatility in the near term due to macro headwinds we remain very optimistic about ability to continue executing against this massive market to deliver balanced growth.
Operator, Please go ahead.
Alright, Thank you very much and ladies and gentlemen, we will move into the question and answer portion of today's call I will I'll ask the analysts. Please limit yourself to one question. So that we can take as many questions as time permits today.
Give us just a moment and we will queue up our first question.
First of all today, Ryan Macwilliams has a question from Barclays.
Okay. Thanks for taking the question, Mike glad to see you're back and looking forward to the path ahead around wishing you well in the next endeavor, Mike any changes youre anticipating as you step back in the CEO role how are you framing five nine's current opportunity in this environment and how is it different from your previous tenure.
Yes, Thanks, Ryan good decision nothing's changed in terms of strategy.
Ron and I and the rest of the board had been extremely well aligned in terms of our strategy.
As you guys know I've been chairman for the last five years and we've been very very close to rone and the rest of the team during that time. So no change in strategy. Obviously, one of the highlights of <unk> history for the last 15 years has been our ability to execute and.
We expect that to just be our strength going forward, so it's onward and upward.
Yeah.
Yeah.
Thanks, very much well take our next question from DJ Hynes with Canaccord.
Hey, guys, Mike Great to see you in a row and we will Miss you, but good luck with everything.
I'm going to ask one of Dan So.
Therefore for buyers that are delaying their cloud upgrade decision.
What can they do to make their legacy systems worked for them for the time being is it is it just operate status quo or.
Are they looking at other like workflow technologies are upgrades around the edges to kind of extend the life of their systems I'm, just trying to get a sense for like what you are selling against.
So DJ that's great question.
The big thing that customers that do have the legacy premises based system says how much longer can they continue to squeeze out yet another year from their current systems and it's difficult because they don't have the innovation available to them, they're typically siloed by location, so they're not giving them the greatest economies of scale and.
And they oftentimes arent being upgraded at the rate. They once were in fact, many have been listed as being end of life here and we will have very little if any investment going into them. So that's the decision that enterprises need to make and so we're still seeing a nice uptake of customers that want to move to the cloud need to move to the cloud for that matter.
And so that's why our pipeline hit another all time high this quarter as I mentioned in the prepared remarks, and we see this trend continuing we had some soft soft spots if you will.
But customers are still very very motivated to to really embarking booths their contact centers to the cloud for those reasons, especially on the innovation front, we continue to get in and around 10% of our customers that are opting in for the IV and other automation solutions and you just can't do that effectively when youre on prep. So so we'll continue to see this trend.
For the foreseeable future and as Mike mentioned, we're still in the very early innings of that.
The upgrade to the cloud started occurring you know you can say 10 to 15 years ago.
<unk> with the small end of the market and we're just now getting that very high end of the enterprise market.
Once we establish reliability scalability and.
And the innovation.
That they require and so that's a whole whole new market and really the biggest part of the market and Thats what were saying, yes, okay forget a couple of color I mean, it seems like the the new large enterprise stuff continues to go pretty well.
Great. Thanks.
Yes.
Next up from Needham we have Scott Berg.
Yeah.
Okay.
Alright, hi, everyone, Mike I Echo the welcome back comment enrolling and look forward to catching up with future and best of luck. Thanks.
Yeah I guess.
Barry I wanted to.
Spanned upon the.
Slower customer expansion that you talked about and I don't know if this question for you or maybe Dan or someone else, but you.
Your customer expansion is really break down into kind of three categories as I see them one customers that are moving your product from maybe one division or department to another one two theres some seasonal hiring around.
The holiday kind of Timeframes and then three it's just general hiring obviously within their businesses were to dissect the floor expansions what would you kind of put the.
Know what categories would you put those headwinds it too thank you.
Yeah.
We don't have that analysis. So this is somewhat anecdotal I hope you understand that.
But.
Based upon everything that we've seen and heard.
It's between the second and third categories that you mentioned.
In particular.
Seasonally expansion.
Meaning as you know I've always enjoyed.
The historic growth dramatically sorry growth from Q3 to Q4.
And if you look at the history between eight and 12% eight and 11% sequentially.
We are not seeing this year and let me just give you one illustration.
Got.
When about biggest verticals.
<unk> actually had a third because we had a vehicle that has a substantial one in terms of the number of people there.
116 enterprise accounts 248 commercial account so it's a big sample.
And if you go back as far as you, possibly can with records that are readily available to each year.
Continent.
Q2, Q3 to Q4 that would be a meaningful material improvement in revenue.
This year, there was a sea change.
It's just basically.
Basically flat and we talked about it goes in the you know.
Total coal with respect to the old five.
Top vehicles that they experience.
So I would say, it's a combination of seasonal because we can clearly identify some of those at the usual people in health care and retail, but then also in the other areas, whether it's construction not supposed to be whatever it would be more on the organic side.
Yeah, and just to add to that those go hand in hand, as you know Scott.
The headwinds are affecting the seasonal pads.
Their organic growth that they normally achieve which means they don't need to hire as much. So you could you could call it seasonal where you could call. It hiring they kind of go hand in hand, we're going to hire additional workers when they need them.
So you don't see the demand for their products, they're not going to add the seats to the contact center and hired the folks that fill those gaps.
Okay.
Great. Thank you for taking my question.
Moving on to our next question. This is Peter Marshall Morgan Stanley.
Great. Thanks, so much for the question.
A question of two parts for me just in terms of when do you kind of find out from customers that either they're not going to like this.
Trying to get is in the conversation, if theyre not expanding or their contracting.
The seat count.
And or is that just something you just kind of see in the numbers that metric factor or are there kind of a conversation happening and where you can say hey, we can give you. These additional products to help ease the transition and if you're having a problem with kind of overall macro.
So one just is that a conversation or something is that correct. And then you gave the vertical breakdown, but just is that something that we're seeing more on the F&B side or the enterprise.
So this is Dan Great question, let me remind the group here I wanted to break down the the install based bookings into two categories. Because you touched on both of them. One is the seat apps.
Mentioned contraction very very rarely are our customers tell us their business is just suffering where they actually with lower seat counts, they're just not growing at the rates, we've seen and we've seen two very solid years. So it's one it's tough compares.
On the AD side so.
The seat adds being the growth slowing, but we are offsetting that with like you said going back to the base and saying we've got more applications, we can upsell and cross sell new new applications.
Both Q2 and Q3 of this year were our two largest quarters for selling into the installed base up sells and cross sells non seat.
And so we're seeing those two factors working together, but there's no question the headwinds that affected the hiring on their part and therefore as I mentioned earlier the seed out on their part.
And if I could just add.
In terms of.
I'll find new guys do we know.
We do get some.
Notification of because we get it.
Notification of 30 days' notice before they can flex down or up.
In this case.
So we do get that and we also put the biggest types. In particular are really outstanding account management teams. This is really very close to the biggest customers in particular and they can begin to sense it but at the end of the day.
You don't have to wait and see.
Into so.
So many customers across.
Almost 3000 customers.
In some cases, they don't know until its pretty close thats truly an excellent point because they do have the right to flex and.
Often they don't know as Dan just said I mean, just look at.
Excess inventory some retailers et cetera.
Thanks Neil.
Let me go on to our next question from Taylor Mcginnis at UBS.
Yeah.
Hi can you how can you hear me.
We can tailor the weekend.
Sorry about that yeah. So you guys talked about a lot you know a lot about sequential quarter over quarter trends with an E com growth.
If you can comment or provide a little bit more color on year over year growth trend.
If we run some math it seems that the guide this year applies somewhere in the low teens telecom growth assuming that our good growth continues in the low to mid single digits that you talked about and then as we look into next year. It looks like the guide apply imply something similar on the seat count level. So maybe you can just.
<unk> more color on the assumptions therein, how do you get comfort that <unk> can continue at the same pace year over year going into next year.
Yeah. So.
Seats come in two flavors and.
And we sometimes confuse you, perhaps a little bit because we just use the term somebody to change a bit.
One category is when we are.
Turning out new seats from new logos.
And we call those tenants typically and then within the existing base, besides having more to each customer.
<unk> seed we also have.
<unk>.
Just been discussing.
In terms of Oh.
Year over year growth.
We haven't shared that in the past and it's just not something we want to do.
On the food category, you did get some indication.
From the 46%.
New logo Turner said, we had.
<unk>.
Dan and the team have been talking quite some time about the success that they're having with these bigger customers in fact.
We had a record in terms of million dollar plus customers in the quarters. So thats.
It gives us a fair degree of confidence on that side of it.
With respect to the.
The expansion in the installed base.
We've assumed.
A weaker continuing weaker economy into next year and into the fourth quarter.
We don't see that turning around.
And we've done.
<unk> done the best that we believe we can in terms of allowing for that.
Awesome. Thank you.
Yeah.
And we'll move on to a question from Piper Sandler and Jim fish.
Hey, guys. Thanks. This is Quentin on project fish.
As large contact centers continued to adopt five nine and we've seen that is typically utilized partners on a W.
W. At both side over the internal offering do you need to further invest behind the virtual observer tech stack to make the product more viable for the enterprise or our enterprise features and functionalities and investments that just makes more sense to look at inorganically. Thank you.
Yeah, Great question and we.
Absolutely have two platforms for a reason.
When we talk about the partner one that's one that's variant, which we OEM and provide the full suite and although we get very healthy margins from that.
Even though it's a third party product and we have customers at the high end of the market that have spent the better part of a decade or two being comfortable and familiar with that platform. So in some cases, they ask for by name.
We've mentioned on these calls before in some cases, we don't even need to demo it.
It's a known quantity and they can get on the latest release and pay for it as a service and transfer all their data over to our platform from their existing so that adoption rate is easy and elegant.
Well again for them to continue on with that platform. So I don't know that we ever really want to come in and try to convince them to switch to a different platform. Having said that we are absolutely investing in RVO solution and what it can bring to the market right now when you look at that as kind of our small to mid size offering and then our current offering at the high end of the market.
The solution will continue to expand and be more robust from a feature functionality to small to midsize businesses still what the more functionality that.
Previously it was only available at the high end of the market. So we'll continue to invest there and that will slowly creep up as you can imagine as it gets more capabilities.
Awesome I appreciate it thank you.
Moving on to Peter Levine with Evercore.
My question is broken back, Mike and Doug Congrats Rosie.
Future buffers.
Maybe the first one for you berries can you bracket some of your initial thoughts on into the 23, 60% guidance does that bake in like the worst macro case scenario or is this just more of a normalized cadence of pre <unk> pre corporate guidance, just kind of help us what's in that guidance.
Yeah. So.
Assuming this.
As a matter of interest rates and inflation and disparity between the job openings and the people are looking forward to continued not to taken another big step down.
Frankly.
We and.
That 16% is that basic economic scenario.
And then within the it has been continuing.
Two legged stool, if you will with one leg a little bit shorter than the other one the one that's solid.
Is that is the new is the new business.
This is a strong industry. That's just now you sense, a bunch about it and our eyes are really stunning and and we can deliver.
It's on the expansion side that we've taken that extra cushion.
And then maybe one for new guidance, Yes, I would think the IPA and a tighter labor market.
So so I'd be curious to know like what what's holding customers back and go all in.
With automation given the high ROI again, the tighter labor market. So I mean are there limitations for what Ivy I really offers our customers are just being hesitant and not ready to kind of go walk yes. That's an awesome question. There's really two primary reasons that I would focus on one is you've got to be very careful on what what.
Applications youre going to try to automate meaning it.
It's got to be a conversation that the customer.
Just going to ask kind of a highly frequent basis and and.
The numbers I mean, you've got at high volumes of numbers because of the professional services and the customization that's required to build those applications is not trivial. So it does require a significant investment. So you've got to look at things that are very very common what are people, calling into and asking for hundreds of times, a day and tighten up here.
<unk> resources that you can truly get some significant ROI by automate. So that's the first step and then the second one as you know.
While we'd love to think you could just put <unk> and <unk> have conversations with humans.
There is also the demographic of.
The type of inquiry, that's happening right when I say the demographics.
There are certain demographics that you may not want to just offer them a full automated solution for regardless of how simple and straightforward you know most of US would think that is.
They just are averse to wanting to communicate with something other than a human at this point will that change over time, absolutely and Thats why we see the adoption.
We'll continue to rise and continue to become more prevalent.
Society becomes more comfortable talking to voice interfaces.
Automated chat interfaces.
As we get.
The intelligence and the machine learning algorithms more and more accurate to where people accept the answers they're getting.
Because the worst thing you wanted to do is create that frustration that we also on the commercials, where people are saying Oh ancient agent representative there.
They're not having a good experience because of the automation. So it's a balance you've got to pick your spots and do it effectively and Thats what were doing but Peter I would just add that.
Our iga minutes nearly doubled over the last year or so.
This is this is exciting stuff for our customers. It is also future proofing their decision around their contact center solution.
They want to know that their cloud contact center provider is on the cutting edge when it comes to AI and automation and base.
They certainly have chosen <unk> nine and so many opportunities to do that.
And just to clarify one thing we talk about 10% of our new bookings being IV. Those are dollars. So when you say go all in when a customer let's say a 500 seat customer says Oh. This is great I'm all in I want to go IPA well, how much what percentage of your calls are you truly going to deflect over.
In some cases, it's like well one or two or.
3%.
Well that to them that's going all in.
But the flex, 3% and were seven 3% of those agents times 500, that's 15 at 15 Ibs.
Add those dollars up.
It doesn't offset the 500.
385 humans seats that we're selling so even though somebody thinks they're all in it mainly resulted in five or 10% of the stack.
Thank you very much guys.
We will move on now to Sterling Auty at Moffett Nathanson.
Thanks, Mike Welcome back I cant believe they drag you out of retirement, you're traveling the world and now you're back into grind with the rest of us.
If you see a sterling.
And Ron Congratulations good luck, we're all waiting with bated breath to figure out where the heck youre going to work we're waiting for January to see that news alright. So my.
My question would be Mike I think the one thing that we look at Rowan tenure in doing was attracting some very high talent in terms of technology innovation et cetera. What are you going to do to retain and continue to attract that caliber of talent to drive that automation.
Dan just spoke about and then one just administrative one when you guys talk about the mid market weakness is that all encapsulated in the 86% that's enterprise or is that a blend of some of the 86 and some of the 2014.
Yes, so sterling I'll take the first one I'll let.
Dan I will take the second one but.
Youre right on Sterling I mean, when we recruited Rowan five years ago, when I got cancer.
It was with the intention of bringing in a.
The person with the product depth and breadth that Rowan has and what he has contributed is unbelievable over the last five years, we have moved the platform so far forward.
We've now become truly ambidextrous I mean, you guys remember us back in the days when people would think of us as a very very sales web company today.
Today, we are truly ambidextrous when it comes to technology and platform and innovation as well as our go to market strengths not to mention our other function, whereas which are critical to the business but.
The good news is I'm not coming in from the outside I've been chairman of the board for the last five years I was involved in recruiting many of our senior leadership.
Has been brought in it brought in over the last five years I have great relationships with the leadership team here, including not only the ones that were here when I was CEO, but also the ones that have been brought in over the last five years, while I'm. The chairman. So I look forward to continuing to work with them. They are engaged.
<unk> about the future and.
It's just a great time to be on the contact center market in spite of the macro backdrop that everybody is facing.
And Barry the mixed the 80 614 versus the.
The weakness in mid market, where does that fall is in both categories.
I'll take it it's primarily the mid market, which is the smallest end of that enterprise number of the 86, a little bit on the higher end of the commercial but we're seeing nice volumes in the commercial business.
Primarily driven by the channel expansion, we're getting more and more channels, bringing business to us if they have a lot of those high quantity of leads and opportunities.
Small and still not really even though there are headwinds facing some of those smaller customers, we're still seeing a.
Pretty sizable growing pipeline there.
Makes sense. Thank you. Thank you.
Moving on now to Terry Tillman at Truest.
Okay.
Yeah.
Great. Thanks, so much for taking the question. This is Robert on for Terry.
The best I believe you all called out 10% to 20% fee reduction options on most contracts within the enterprise install base has there been any meaningful exercise of these reductions in <unk> versus <unk> and if so what's roughly been the magnitude. Thanks.
It's pretty rare I mean, it sits in all its a an ability there.
Gives us a built in floor at $85, 90% of the contract.
They set up for initially.
<unk>.
Most customers, we're talking about a reduction in the growth rate of the seat adds that that organizations have from either their organic growth, whereas it was mentioned earlier by Scott Berg.
Growing into new departments or expanding into other areas, if they do M&A type activity.
It's just about slowing of growth, it's not really Oh, my gosh customers are contract. There are a few tender a few businesses in there they're spotty, it's here and there.
Where somebody has a significant reduction in their business and therefore needs to produce but it's that's not that's not the situation, where we're talking about slow growth.
Off of two very very.
High volume growth tiers.
With very high percentages of the installed base see that so it's a it's part of it is just going up against a couple of tough compares.
Great.
Thank you.
Moving on now to Matt Van Vliet at BTG.
Yeah.
Hey, good evening guys. Thanks for taking the question.
I guess on the international side, so showing a lot of strength there and some good progress.
No.
I guess, what additional investments do you expect to be making there should we plan on those moderating or is there still such a big opportunity that youre going to continue that head count and then kind of a second part of that.
How much are you relying on channel partners and sort of other partnerships to further expand internationally.
Internationally relative to what you look like in the U S.
Yes.
I'll take the first part of that international is an absolute.
Strategic growth factor for us it's still early days in terms of our international expansion, that's both channels and direct sales in terms of our go to market investments we mentioned earlier.
It is.
If you look at our growth.
Bookings over the last year I think it was 78% increase in bookings internationally.
Yes, it's a tremendous growth factor for us and we will continue to invest there.
Similar to way over the coming years, we got a lot of headroom there.
Thank you.
Got it.
Yes.
We will move now to William Blair's, Matt Stotler.
Yeah.
Hey, everybody.
I'll Echo the sentiments Mike good to see you again, it's been a while and Ron best of luck with what's next to come in and look forward to speaking with you again in the future.
Maybe just just one kind of double clicking Barry on the thoughts on margins going forward. We've got the EPS guidance is very helpful.
In terms of how youre thinking about it.
First of all looking to 2023.
Do you have to pull there what are kind of the puts and takes and then how would you expect.
To continue to recognize leverage going forward.
With the obviously you guys have been running it at all.
Relative to a lot of companies out there so far but further leverage there how should we think about that over the next year or so would be helpful. Thank you yeah. Thanks, Matt. So let me first start with Q4.
Our 2020 to what we've said is that we expect to be at 61% or more.
And that's a slight it involves a site increased a very slight increase from Q3 to Q4.
I'd like to if you don't mind.
We are not in a position to give.
Margin guidance for 2023 match specifically.
But let me make the following overarching comments and also talk a bit about the longer term.
Reason that we are now able to improve our margins is twofold.
Given these mega deals that have come in across the world.
Had to have extraordinary ramping of our professional services organization across the world into countries and we hadn't been in before and with no revenue corresponding to that.
Oh it is.
The significant investments in terms of operations.
And particularly in the public cloud building extra capacity to accommodate the growth that we've seen that do go internationally with.
With a fair degree of speed.
And also <unk> initiatives, which.
Potentially yes.
Mike talked about in his bed remarks with losses between the public cloud and our own data centers and maybe get some margin improvement there.
Hmm.
When you think though about our margins long term to get to that from the current approximately <unk> 61 up to 70% plus.
You need to bifurcate the revenue into three bucket because they are very different drivers, 9% is it professional services on the 91%.
That is a recurring you got roughly very roughly 80 20 subscription and usage.
Where we have in the past and there's no guarantees in business, but.
We expect that in the future, we will continue to get the leverage against fixed and semi fixed costs, but maybe get the extra margin from the.
The observation between our data centers and public filings.
We certainly will.
We expect to continue well, we would certainly expect to continue to get the occupancy increases that we have been enjoying that I'd say too.
Have those margins improve.
On the usage, we don't expect any major changes as margins on <unk> and then finally on the professional services, which are US later on breakeven typically we can see that like many other b to b companies going into high single digits, maybe even low double digits over time.
Very helpful. Thank you.
We have a question now from willpower at Baird.
Okay, great. Thanks for.
Thank you me and a question.
Nearly for preparing or whoever wants to take it I know you've talked about some of those pressures on seat expansion of the installed base I Wonder if you could talk about what you're seeing from a usage standpoint has that been a source of pressure.
The risk there some of these harder hit industries on the 60% plus of the business you referenced I guess.
And in tandem with that love getting your perspective, just on linearity of those broader trends through the quarter, our installed base of <unk> usage and into October is there any sign of stabilization I understand it continued to worsen.
Any comments there would be helpful too. Thank you.
So let me deal with the first one it's a very simple straightforward if you exclude.
The pandemic here.
Period, where.
Where there was both both ways. So in one case. It was Q3 of 2021. They usually just excuse me in Q3 of 2020, usually just took off because people will again add to work in Covid and there was enough agents and the big exposure Conversely.
A year later the seats are expanding and they went up enough agents of the usage was up by the but if you exclude pandemic.
The the rates of growth are very much similar with a slightly lower growth rate on the UC side.
There's no additional products are going to be coming out today is even in spite of slight price decline so very normal trend aside from defendants.
In terms of the linearity.
Well I'd love to be able to say to you that.
Yes.
October is just great and things are looking better.
We just are not in a position to do that as we see it right now.
Okay. Thank.
Thank you.
Moving on to Michael <unk> at Wells Fargo.
Hey, there. Thanks I appreciate you taking the question and for sneaking me on as well.
Barry I appreciate some of the supplemental information you provided the metrics the driver the historical reminder.
Around just prior contact to the guidance is there anything you can add you to help us compare and contrast, what you're currently seeing compares to what you might have considered.
Within previous framework that the macro add more uncertainty than you would've historically contemplated the move towards enterprise and larger deal help with visibility relative to what this business looks like years ago. When it was smaller.
I think everyone's kind of wondering what to do with the input.
Our thought process would be incredibly valuable here. Thank you.
Yeah.
Great question Michael.
Okay.
To answer that we got in again and talk about the.
Listing.
New logo business or the new logo business and then install base.
And maybe do a historical sort of perspective in terms of the new logos.
There's no sense of buts about it we just have so many more levers to pull domestically and internationally by size.
And we've got arguably.
And I welcome any argument on one of the best sales and marketing teams in the industry and the market is strong and will continue to see them.
The.
The growth of the day and as I said actually in the prepared remarks on that side of the business we have.
Visibility and confidence in the backlog is a good indication of that.
The other half of the annual and quarterly revenue growth of approximately comes off the installed base and then.
It is.
It's difficult to say.
We were with the benefit of hindsight, we under estimated the macro impact on us.
Certain of our verticals.
At the time, we believed we were being prudent as always.
I need to beat them, but.
Got it.
Just on what we knew at the time that would be sad.
And chastened by that and we certainly have taken that into account and let's see.
Thank you.
Thanks, Michael.
And ladies and gentlemen, Unfortunately, that's all the time, we have for questions. Today. So let me hand things back over to Mike and the team for any additional comments.
Okay.
Now in closing I'll, just say, it's great to be back spread to see many of you that.
I've known for a long time, and I look forward to reconnecting, but also making new connections with many of you that.
Our new to the story here over the last five years, but as I mentioned before I just I believe so.
So strongly in the market opportunity ahead for five nine I couldnt be more optimistic about the future of this business in spite of the macro headwinds that are facing us in the near term.
And I just want to thank you for joining the call today. Thank you.
Once again, thanks, everyone for joining that will conclude today's call have a great day.