Q2 2023 Five9 Inc Earnings Call
Thank you for joining us today on the call are Mike, Brooklyn, Chairman and CEO , Dan Burkland, President and Barry is wearing <unk> CFO .
Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company customer growth anticipated customer benefits company grows the anticipated benefits from and timing of the closing of our proposed acquisition of Acs ink growth.
Our portfolio of products and features industry size and trends or expectations regarding macroeconomic conditions company market position initiatives and expectations technology and product initiatives and other future events are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such statements are simply predictions should not be unduly relied upon by investors actual events or results may differ materially and the company undertakes no obligation to update the information in such statements.
These statements are subject to substantial risks and uncertainties that could adversely affect five nine future results and cause. These forward looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration and uncertainty uncertainty, including increased inflation increased interest rates supply chain.
Disruptions decreased economic output and fluctuations in currency exchange rates lower growth rates within our installed base of customers and our ability to close the easiest acquisition and achieve the intended benefits from this acquisition and the other risks discussed under the caption risk factors and elsewhere in five ninth annual and quarterly report.
<unk> filed with the Securities and Exchange Commission.
In addition management will make reference to non-GAAP financial measures during this call.
Discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the in the Investor Relations section on <unk> website at investors at five nine Dot com.
Actually I'll remind you that unless otherwise indicated financial figures discussed are non-GAAP .
And now I'd like to turn the call over to five nines, Chairman and CEO , Mike Burkland.
Thanks, Emily and thanks, everyone for joining our call. This afternoon.
News to report strong second quarter results with revenue growth of 18% year over year, primarily driven by our LTM enterprise subscription revenue growing 28% year over year.
Also we enjoyed a particularly strong quarter for new logo bookings demonstrating the value of our intelligence platform.
Our strong go to market execution.
Adjusted EBITDA margin for the second quarter was 19% of revenue, helping drive a record Q2 for operating cash flow of $22 million or 10% of road.
Turning now to the three key trends that continue to drive our Congress and our market opportunity first legacy vendors are retrenching, forcing enterprises to develop concrete plans with an even greater sense of urgency to replace their on premise contact center solutions remember that in terms of cloud replacing old approach.
We believe the penetration is still less than 20%.
Second companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience.
Cost and increase revenue.
Third AI is becoming a significant catalyst for enterprises to shifts in the club.
Regarding the third trend given all the recent focus on generative AI I would like to recap our perspective on it to impact our industry and in particular flood zone.
We believe generative AI as the next wave of opportunity for $5 with the potential to broaden our town slide nine have been riding the wave of AI and automation for the past several years and we feel we're well positioned to continue to push this industry forward.
Not only is the AI revolution, a tailwind to our technology and innovation, but it's also a tailwind to our business, we provide software for enterprise clients to manage their customer interactions.
<unk> drives efficiency and productivity gains in the form of a mix shift towards more automation of interactions that leads directly to an increase in revenue per customer Tam expansion for $5.
AI and automation is clearly an area of focus for enterprises as demonstrated by our nearly 80% attach rate on $1 million plus a new logo wins in the quarter.
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.
In our continuing international expansion.
Let's begin with our platform today.
Today I am pleased to announce an important extension of our intelligence CX platform as we have entered into a definitive agreement to acquire Acs a market leader in advanced data integration and analytics, we believe Acs will uniquely accelerate our ability to capitalize on two large opportunities.
Streamlining the migration of large enterprise customers from on Prem to cloud and second leveraging contextual data to deliver personalized experiences throughout the customer journey, including using this contextual data in our AI and automation solutions.
Let me elaborate on these one at a time.
Start with streamlining cloud migrations, using our robust catalog of prebuilt integrations Acos software adjusts data from Crs Wam's multiple acd's and many other systems.
Acs ability to normalize the entire dataset allows the business to transition from legacy systems to five died while maintaining consistent reports data visualization and dashboards.
<unk> enables customers to run their business smoothly and take advantage of the <unk> platform during the migration and beyond <unk>.
In short the continuity of data and insight provided by Acs across complex environments allows for smoother large scale cloud migrations with a faster time to value.
Now, let's talk about the second opportunity, which is the leverage contextual data to deliver personalized experiences throughout the customer journey.
This contextual data often lives in dozens of disparate and Siloed systems.
As a market leader in advanced data integration and analytics for large enterprises Acs will further differentiate the five nine platform as we integrate their robust prebuilt data integrations to expand our platform stayed awake.
Acs will enable <unk> to access this contextual data to optimize predict and deliver a personalized journeys customers expect.
The suppliers, especially to our AI and automation solutions, where the use of this contextual data is critical to the accuracy and efficacy required to deliver joyful customer experiences.
ACS customer base includes many fortune 100 companies and joint accounts with <unk>, including some of our largest prospects and customers two of which Dan will talk about in a moment.
And now I'd like to focus on our March up market and international expansion, we continue to see accelerating momentum upmarket with large enterprises adopting <unk> at an unprecedented rate I'm pleased to report that we booked a Q2 record number of $1 million plus IRR deals and Dan will discuss for such new logos, which alone represent.
Approximately $42 million and anticipated IRR to five nine.
As a reminder, $1 million plus IRR customers make up more than 50% of our recurring revenue.
This march up market and our continued international expansion are accentuated by the strong performance from our ever growing network of global partners and their commitment to leading with slide nine.
This was reflected by an all time record for channel bookings.
<unk> partners that achieved over $1 million in ACB bookings in the quarter.
A record high channel pipeline and over 60% of international implementations now being done by partners.
This global partner strategy is also paying dividends and helping us expand our international footprint. For example in addition to the recently announced <unk> partnership in Q2, we also signed Telus International as a strategic partner to five nine which Dan will also elaborate on in a moment.
Lastly in May we held our EMEA SPX summit in Porto, Portugal, the location of our new International development hub.
Personally blown away by the energy and enthusiasm at this event by our partners customers industry analysts and employees.
Before I turn it over to Dan I want to spend a moment to share with you our recently refreshed and Re-energized mission and vision statements for $5 nine.
Our mission is to enable our enterprise clients to re imagine their customer experience by providing our intelligence CX platform combined with passionate experts to deliver joyful customer experience and better business outcomes.
Our vision is to bring joy to CX.
We often refer to this as five nine joy and it shows up in many forms for many stakeholders for consumers it means effortless and fluid customer experiences.
For our enterprise clients it means better business outcomes, such as higher customer satisfaction increased revenue.
Greater efficiency and lower costs for.
For agents using five nine it means being armed with the knowledge data intelligence and automation to deliver great customer experiences.
For supervisors and managers in the contact center it means having the tools and applications to engage and manage their workforce.
For our partners it means providing technology and people that will drive success for our joint customers.
And for our employees it means living by our values every day, resulting in a unique and winning culture filled with passion and purpose and one where we enjoy the journey together.
In summary, our goal is to bring five nine joy to all involved in CX as well as the entire 509 community.
And now I will turn it over to our President and CFO , Dan Burkland, Dan go ahead.
Thank you, Mike and good afternoon, everyone as Mike mentioned, we are seeing a renewed momentum on the net new side of our business, but we're still facing some headwinds on our installed base.
Our new logo bookings were an all time high for any quarter other than the quarter, we booked to health care conglomerate, indicating the strength and persistence.
Three key trends that Mike talked about earlier.
In addition, our pipeline reached another all time high.
Now I'd like to share some examples of key wins for the quarter are normally discuss three key new logos today I'm going to share our fourth given that we already disclosed the $8 $4 million or.
Regional Bank Q2 win in last quarter's earnings call.
First is a fortune 50 global health care insurance company, providing coverage for medical dental disability and life.
Over the years through M&A, they had accumulated several disparate systems.
Leading to tremendous inefficiency, while also lacking the modern applications and automation with.
With five nine they will enjoy a complete omnichannel experience, that's fully integrated to the proprietary CRM.
And we will integrate to their existing <unk> solution using our voice stream API.
They also chose slide nine due to our Acs integration to do precisely what Mike described earlier, helping them make the transition from their legacy existing platforms over to five nine while maintaining consistent reports data visualization and dashboards throughout that migration to five nine.
We anticipate this initial order to result in over $20 million in <unk> to five nine.
The second key win I'd like to highlight is when we touched on last quarter, the regional bank, which booked at the beginning of Q2.
I shall have to slide nine we will be enjoying a full omnichannel experience with deep integration with Salesforce service now and peg a crs and the full suite of five nine WAM powered by guarantee.
We also sold Acs for analytics, and real time dashboard to collect and display information from several different data sources.
In addition, they purchased our voice and digital Ibs as long as agent assist which will provide real time agent coaching an Ottoman automatic retrieval of information to create a personalized customer experience. We anticipate this initial order to result in approximately $8 $4 million of IRR to five nine.
The third key win is a health care company, providing operations staffing tools and technology to primary care facilities throughout North America. They had embarked on implementing a competitive <unk> solution. When they made an acquisition of a company who had recently selected five nine.
The easy decision for them would have been to cancel the acquired company's slide nine contract and continue implementing with our competitor.
Further evaluation they realized $5 nine was the superior solution and we will be using 509 to the entire combined company.
We will be integrating to their salesforce ethic, and Athena CRM as.
As well as using finite WAM powered by Garrett.
They also have purchased our IV a self service solution for authenticating caller Ids scheduling appointments refilling prescriptions and paying invoices. We anticipate this initial order to result in approximately $8 $3 million.
<unk> to five <unk>.
Fourth example, which Mike mentioned earlier is Telus international.
When we entered into a reseller agreement.
The agreement also included a replacement of their internal use legacy systems.
Which serve the PPO portion of their business. We anticipate this initial order to result in approximately $5 $2 million of <unk> five nine.
And now as I normally do I'll share. An example of a customer who has expanded their use of five nine <unk>.
This customer who has been with US since 2017 is a network of independent healthcare providers focused on academic centers acute care facilities and research hospitals.
Separate from their use of 590, they had an ambulatory support center that was using a competing C cab solution, which wasn't meeting their needs.
They replaced it with slide nine and also added five nine WAM powered by parent and our Ibs.
This will more than double their.
Spend with five nine from approximately $1 2 million to approximately $2 $5 million.
So as you can see we're continuing to see strong momentum up market, replacing legacy systems, while enabling enterprises to deliver better experiences to their customers.
And with that I'd now like to hand, it off to Barry to take us through the financials aerie.
Thank you Dan.
We are pleased without performance with both top and bottom line results exceeding our expectations.
Revenue grew 18% year over year.
Driven primarily by our enterprise business, which now makes up 87% of LTM revenue.
<unk> antibody subscription revenue.
Which makes up more than 60% of total revenue grew 28% year over year in line with the high Twenty's outlook, we have been communicating recently.
We view the drop in the enterprise subscription revenue below 30% as transitory.
Good by the subdued growth in our installed base.
We believe we are well positioned to resume historic levels of growth in this part of our business win eventually.
Macroeconomic conditions improve.
Our commercial business, which represents the remaining 30% of LTM revenue.
The year over year in the high single digits.
10 basis.
Recurring revenue made up 91% of total revenue in the second quarter.
The other 9% of total revenue was comprised of professional services.
I will now give more color around revenue.
As Mike mentioned.
The new logo side of our business.
Which typically makes up approximately half of our year over year annual revenue growth.
Continue to grow.
At a strong rate.
The deployment of our two Mega deals remains on track.
We continue to expect the international operations of the parcel delivery company can be substantially deployed by the end of 2023.
And the healthcare married to continue ramping throughout 2023 with full deployment in early 2024 <unk>.
Additionally, our <unk>.
Substantial backlog from other enterprise customers that are not.
Not yet generating revenue provide us with good visibility.
However.
I would like to remind you that the four deals that Dan discussed earlier will not contribute meaningfully to revenue this year.
Now I'd like to turn to our installed base, which continued to be challenged by macro cross guidance in the second quarter with one vertical in particular.
Racing the strongest headwinds, namely consumer.
As a reminder.
Consumers are third largest vertical and it declined sequentially this quarter by mid single digits.
Compared to mid single digit sequential growth in the second quarter of last year.
This is primarily driven customers and used auto sales auto pause gifts.
Health and home improvement.
The remaining 16 vehicles in our installed base in aggregate grew sequentially at a similar rate.
In the second quarter of 2022.
LTM dollar based retention rate was 112%.
The decline of two percentage points sequentially, mainly due to the ongoing macro headwinds, causing some do good in our installed base.
We should you should expect further minor weakness in LTM dollar based retention rate until macro conditions improve.
Longer term, we continue to expect our retention rate to trend towards the high <unk> by 2027.
Due to a higher mix of enterprise customers, especially larger ones, which have demonstrated that a higher retention rate.
Higher <unk> from an AI and automation and other offerings.
Second quarter adjusted gross margins was 61, 8% an increase of approximately 140 basis points sequentially.
And 110 basis points year over year.
This is the first year over year expansion in adjusted gross margins since the fourth quarter of 2020.
However, I would like to point out that given the record number of large new logo wins this last quarter.
We are making upfront incremental investments to further scale professional services, which may hinder our ability to continue to deploy further year over year growth in adjusted gross margins in the near term.
Second quarter, adjusted EBITDA was $41 $5 million, representing an 18, 6% margin an increase of approximately 110 basis points year over year.
Second quarter non-GAAP EPS was <unk> 52 cents per diluted share.
Year over year increase of 18.
Sure.
Turning now to cash flow, we generated operating cash flow of $21 $9 million, a Q2 record driven impart by continued strength of DSO performance, which came in at 53 days.
We have not delivered 28 consecutive quarters of positive LTM operating cash flow.
Third quarter free cash flow of $13 $4 million was also a Q2 record.
We remain optimistic about our potential for continuing cash flow generation, given our long term model.
Tangela Nols and although DSO.
Before turning to guidance.
Some comments on Acos.
The acquisition these were $82 million in cash.
Subject to certain purchase price adjustments.
We expect this transaction to close by the end of about this quarter.
The ongoing acquired revenue and margin contribution will be immaterial to $5 nine but as Mike described ACI is uniquely positions <unk> to streamline the migration of large enterprises and to leverage contextual data.
To deliver personalized experiences throughout the customer journey.
I'd now like to finish today's prepared remarks, with a discussion of our guidance for the third quarter and full year 2023.
For topline, we're guiding Q3 revenue to a midpoint of $224 million.
Which represents a 1% sequential increase in line with a difficult guidance Patton any into Q3.
For the full year, we are increasing the midpoint revenue guidance from $907 $5 million to $909 million.
As I mentioned earlier.
The consumer vertical in our installed base face macro headwinds in the second quarter.
Given that consumer is typically our most seasonal vehicles.
In the second half of the year.
We are being prudent pointed out with the annual guidance factoring in this uncertainty.
As for the bottom line, we are guiding Q3, non-GAAP EPS to come in at a midpoint of 43 cents per diluted share.
For the full year, we are increasing the midpoint of our non-GAAP EPS guidance from $1 75 to <unk> 81 per diluted share both the third quarter and the annual non-GAAP EPS guidance mirror the prudence in our revenue guidance.
Please refer to the presentation posted in the Investor Relations website for additional estimates including share count.
Taxes and capital expenditures.
In summary.
We are pleased with our second quarter performance.
While the current macro environment continues to temporarily challenged I installed base.
We remain highly optimistic about our long term growth prospects due to our significant momentum upmarket.
As demonstrated by the new larger logo wins.
But it would be to continue capitalizing on the AI and automation opportunity.
And international expansion.
Operator, Please go ahead.
Thank you so much Barry and again, everyone that we will now go into taking your questions, but before we begin our Q&A session.
We do want to ask our analysts to please limit yourself to one question to allow for as many questions as time permits and we do thank you in advance and our first question will come from Scott Berg with Needham.
Hey, Mike Dan and Barry Congrats on the nice bookings quarter and thanks for taking my question.
I'll make it a multipart one though to get it all in.
I guess the question is.
During the conference call here, you had a press release on your recent ranking within the new Gartner Magic quadrant.
The catch up to the two components and there is a what changed this time versus the prior rankings.
You are not in the leaders category previously, which you have been ranked in the leaders category now and then second.
I'm going to kind of quote from it said because of specific criteria based on your completeness of vision and ability to execute.
I guess what did they find in there in particular that was that was it. Thank you.
Yeah, Scott Great question, Yes.
We are very pleased to be back in the leaders quadrant as you may recall, we were there in the past and it's nice to be back and recognized by Gartner as a leader in seat counts.
What changed quite frankly, I think as with recognition and validation of all the success, we're having really across our strategic initiatives by March up market right. Those very large enterprises choosing five nine our win rates are significantly.
As high as they've ever been and we're winning some of the biggest deals in the market I think thats one our international expansion is another.
<unk> leadership as the third we've talked about the strategic initiative initiatives for a long time.
And I think Gartner recognizes our progress in those so where.
We're thrilled we're happy we're honored but we're also not surprised.
Yeah.
Excellent and congrats on the great quarter guys. Thanks.
Yes.
Thanks, Scott and we will now hear from Ryan Macwilliams with Barclays.
Hey, guys. Thanks for taking the question great to see the large deal met them in the quarter. So how does your large deal pipeline look like for the second half of the year and are you seeing these gender AI tools put more priority on contact center leaders for moving their contact center systems from on Prem to the cloud at this point.
Thanks.
Yeah, I'll take that one of the pipeline it looks very strong.
As we've talked about earlier.
That portion of the market is just opening up to <unk> for the first time here in the last couple of years.
By kind of being a first mover in capturing some of those largest opportunities and then getting their validation that we're executing very well.
It's got others.
Turning and coming to US we saw a record number of Rfps, we have seen a vast increase in the pipeline. It takes those companies quite some time to get through our sales and selection process and we've got a larger pipeline than ever and we continue to scale, our sales team and commensurate with that.
As far as AI driving more interest it's a combination as Mike touched on it earlier in the prepared remarks, it's a combination of both the legacy systems being longer in the tooth and not getting the investment and secondly, it's the the only the only way you can really implement the AI effectively and do so at scale is to move to the cloud first.
So most of them are recognizing they need to get there and they are not already on a well into a process. There they are accelerating that process.
Here's the color thanks, guys.
And we will now hear from DJ Hynes with Canaccord.
Hey, guys good to see you congrats.
Congrats on the quarter.
Dan maybe one for you I'd love to get any color on how that $42 million and enterprise bookings compares to maybe the past few quarters I mean, I think that's a metric you've shared with us in the past and then the follow up there would just be like.
Mike anything you'd call out with respect to the channel momentum I mean is that being driven by international or is it just the maturing of that go to market motion any any color there would be helpful. Yes, great TJ. It's if you look at the large mega deals as we've referred to them.
Have the parcel delivery service as.
As well as the health care conglomerate, but never have we had a series of wins of this size. So when you look three or four deep or even 10 deep on that list of largest deals for the quarter. We've never seen this many at this type of volume So thats why Mike called out the fact that we're over $40 million Theyre just among those four.
So it's not a it's not super high concentration that may have been the case for a couple of years ago, We're seeing this becoming more of a normal.
So thats great great sign there as far as the channel that's across the board we have a very strong partner.
Group that manages and brings on new partners.
Headed by Jake Butterbaugh mentioned.
Mentioned him before he has been with us for several years for I think for almost five years now and we've really scaled up that part of the organization and it's not just about going out and signing up new partners, but it's making sure that they view us as being their go to market.
<unk> first choice.
We spend a lot of effort and a huge investment to make sure that we're catering to our partner to making sure that they can go to market and represent $5 nine.
In the right way and that we always make sure we're doing the right thing for the customer, but we're also doing the right thing for the partner and making it easy to do business with us and I think through some of the channel checks that are done by many of you get that same feedback we want to continue to be in that.
That pole position if you will.
Yeah makes sense and look forward to seeing you guys in Boston on Thursday, Likewise, Thanks T J.
Marcia with Morgan Stanley has the next question.
Great. Thanks, I just wanted to know if you could.
Quantify or just kind of lay out cost saving.
Acs and kind of streamlining those cloud transition and then just maybe on that does it allow you to not have to kind of invest as much in professional services resources to transition those customers eventually, yes, I'm happy to start on that.
Again, the beauty of Acs is that.
They are so entrenched in the fortune 100, large enterprise contact center market and that's quite frankly, they've got our attention in these joint accounts that were winning.
With them.
Our beloved by their large enterprise clients in fact, we see rfps fairly frequently.
Sure.
There is a requirement in the RFP as to integrate with Acs.
We've even heard just verbally anecdotally from a lot of our largest prospects.
The one thing that we're going to require from our <unk> provider is that they integrate with our Acs because that's how we run our business. So.
That's first and foremost something that I want to make sure everybody understands they are very very strategic to us they've got a.
A fairly sizable installed base in large enterprise on premise.
And.
Their ability to.
These data integrations across so many backend systems is really what allows us to streamline this remember we talked about migrations from on premise to cloud.
Very similar to a heart transplant right. This is a major business transformation and the fact that these large enterprises can continue to run their business during the migration with continuity of data.
That's how they run their contact centers, so as they're migrating off of legacy on premise and on the $5 nine that's really what we mean by streamlining its the ability to kind of have continuity across their business throughout that migration time period and beyond.
And then the second real leg of the stool is that.
Contextual data.
Acs brings to our platform and the ability to.
The leverage that contextual data across all of these data silos in the enterprise to deliver personalized customer experience. So it's really two very very significant value proposition and strategic reasons why we did the acquisition.
Great. Thanks, So much you got it and.
And we are moving on to Peter Levine with Evercore.
Thanks, guys for taking my question, Mike You mentioned something in your.
Prepared remarks, 80% of the million dollar plus deals in the quarter had AI. So I guess, if you look across your installed base today whats the attach rate look like and perhaps what's holding customers back will go well and is it they're just not ready internally with the data is it the macro is it budget just kind of help us understand what what's really stopping customers who've gone.
All in and I could squeeze in a second is just help us on pricing I know theres a lot between how you charge and other contact centers. If it's on a per seat per user basis or is that a consumption model, but just curious if you can share with us. The conversations today that you are having with customers around pricing and AI. Thanks, Yeah sure Peter I'll start with the pricing.
We have eight products in our AI and automation portfolio. They range in terms of pricing is too.
Most our capacity based pricing in other words per port if you will.
Or oftentimes it's.
We offer usage based pricing as well so we're pretty flexible across the spectrum of pricing options in the end of the day, it's all ROI driven right and the efficiency gains and the productivity gains that our customers enjoy from our AI products is very significant and that's really what drives that price that price point and.
In terms of whats.
Your question about the holding back I actually think that almost every enterprise.
We talked to is very interested in AI and automation. There. There is definitely an education process that has to occur.
Most large enterprises are also looking at.
How to implement AI across their enterprise in general not just in our contact center, but how to how to avoid some of the pitfalls. If you will that are out there in the press. So I think it's just an education process more than anything but.
Don't don't I think that 80% attach rate to our large enterprise deals is a very good data point in terms of the.
The interest level in AI and automation across our prospect base.
You guys you got.
And our next question will come from so much.
<unk> <unk> with Jefferies.
Video isn't quite working them and bring them on but I don't think you can Sam so I'll, probably just leave them off Dan Mike and Barry So youre not going to see him, but please go ahead and ask your questions Tonight.
And Mike Thanks for thanks for the lead in Jets.
You had some technology issues here, but I appreciate you taking my questions Barry.
I wanted to ask about the guidance I appreciate the clarity on the consumer vertical and the impact in the second quarter and kind of the sequential uptick in subscription revenue in Q2 as well I guess I just wanted to understand why had it not bidding for that because I think prior guidance implied more like the low twenty's exit rate for subscription.
Revenue as the year progressed.
One I guess I'm trying to understand is that.
The right way to think about it that now youre thinking more like a mid to high teen subscription revenue number exiting the year based on the current guidance and.
It was it because of the consumer vertical or is there anything else factored in did not rolling forward the <unk>.
Yeah. Thanks, so much so let me sort of start at the back end of the day and not putting through the full amount that's right.
We we put through 17% of the total fees in Q2.
This is really a function of this pocket of weakness that we had in consumer.
Consume it and we need to be cautious when they go into the second half in these uncertain times.
We have data.
From our customers, we are highly metric driven.
Always have.
The macro data.
It could sooner.
If you go by the favorable data consumer spending it started with a role in January .
12%.
February was down to eight in March to floor and then in the second quarter. It was.
<unk>.
For the three months if you look at.
Excuse me if you look at the credit card spending on discretionary items that too has been coming down.
Quite dramatically so we.
Just wanted to be careful on that yet.
Our retention rates stay very good.
In that part of that business.
There is a benefit of an eventual pickup into the macro we will participate fully in it.
So.
The second half to finish off the second half is largely due to the fact that we.
We did enter into the second into the second half of the year with slightly lower revenue in our consumers' pocket.
Perfect appreciate the color. Thank you so much.
And we will move on to Taylor Martinez with UBS.
Thank you Matt. Thanks, so much for taking the question maybe just to piggyback off <unk> question. So when you think about the second half of the year and then some of the seasonality that you are talking about in these different verticals any color you can give on the contribution that consumer has to the second half and I know you've talked about some weakness and other verticals in prior quarters.
So I guess any additional color you can give on what you're baking in for those verticals.
And the second part of the question in terms of when we should start to see some of these newer enterprise deals may be offsetting some of this macro weakness I guess, what does the ramp look like from here on those as well thanks.
Okay. So in terms of the contribution to the.
From the consumer lead assuming something similar to what we had last year and had previously assumed.
We just did.
Don't want to go out too far so it would be a little bit cautious over there.
The other 16 vehicles that we track.
In the second quarter, they grew very similar to what what's happened.
In the second.
Yeah.
With the low single digit growth and in both last year and this year and we are putting.
Putting in some of the growth in the second half of the.
In terms of when.
When we would see.
The kick in of these bigger deals.
I think somebody said in Iran. We have gotten out of volume of these deals.
It's going to be a while before they kick in but.
Youll see that.
Fact that we are reporting the numbers that we are in part due to the fact that this weakness that we have in this last quarter on the consumer side has been largely offset by the growth in the new logo, which is very strong.
Got it thanks, so much.
And William Blairs, Matt Stotler has the next question.
Thank you for taking the question, maybe just a follow up on Acs interesting to see that acquisition, obviously I think the strategic rationale that you laid out made sense. We would look to maybe just double click on how youre thinking about the opportunity there whether thats.
Possibly expanding the Tam right and any associated incremental monetization you can do there or is this more sort of just helps to open up maybe the on Prem Tam, especially up market that maybe it was hard to crack or both would love to get some additional thoughts there.
Matt I'll start with that.
I think can think of this is why our I don't want to repeat what I already said, but I think one of the big opportunities here, a big rationales. Besides what I've already said is the pull through value. So we would we always whenever we make an acquisition. There are obvious revenue synergies that we've looked at but I think when.
If you think about Acs the number one.
What kind of revenue opportunity is really the pull through our win rates and large enterprise, we're already very very strong, but this just solidifies our competitive advantage upmarket by.
By having Acs as part of the five nine platform.
This is something that is very unique in the market and it's going to be very difficult for competition of ours to have a similar offering so that's going to allow for pull through continued.
Winds up market and large enterprise for us that's a <unk>.
Big level.
Got it thank you.
Got it.
Jim Fish with Piper Sandler. Please go ahead with your question Hey, good.
Guys. Thanks for the question goes to you.
Going back to Peter's question on the 80% attach rate for Benoit plus deals.
Any sense as to what that was last quarter of last year at this point and what is differentiating five nines AI versus the other <unk> vendors in your view and then Dan just quickly for you I'm a big health care win nice to see is this going to act with that large parcel delivery company and we will see further regional expansion given their 50000 seats navigator.
Are you viewing the potential expansion.
Yes, great questions first I'll hit the 80% attach rate I don't have the measurements from the previous quarters exactly but I can tell you. That's a very common trend and what we're seeing and it's only been increasing I mean, as AI and automation becomes that much more important niche apps for virtually all of the rfps.
Today, as presented whether ASP or not.
And we can find use cases for customers across the board now that we have this full portfolio of eight different applications that we can deliver and combinations, where you combine the two and deliver a pretty unique use case.
So we're seeing that in a lot of brainstorming with new customers they use it to justify.
Their business case to move to <unk> and to the cloud in particular, but they also the installed base, we can see tremendous rois and so we see a better attach rate there has Mike alluded to earlier.
Moving over the second part of your question.
I don't recall, what it was.
<unk>.
So is this going to act like <unk>.
Got you yeah.
The account we mentioned.
It very well could.
Bear in mind. These take these transitions take time.
As they come onto the platform. They will continue to expand their use of various applications that we did not sell them initially.
We have certain things that were preexisting that were integrated too.
In that case as an example, Acs was already they were already a customer of Acs, we're doing that integration.
Directly with that as a strategic element they already have variant.
Out there.
Many many different sites.
We're going to integrate to that via our voice Street API.
Surely they will look to probably upgrade to barren solution to our cloud or in the cloud that we integrate with so we'll be providing many add ons just like most of our large enterprise customers.
The CAGR of the ads and the expansion that they experience with us.
He is tremendous so when you look at our dollar based retention rate and you look further up market you go.
The higher that percentage is just because they tend to buy everything on the truck so to speak.
Thank you.
Yes.
Our next question will come from Michael <unk> with Wells Fargo.
Hey, great. Thanks, I. Appreciate you taking the question I think what a lot of the questions have been on the initial reaction around the beat.
The rays, but if I look at the filings Barry the RPM metric is up 45% year on year I think it's up double digits again sequentially. It. So maybe you can just.
Tell us more around your view of the significance of that RPM metric is that becoming more valuable as you move up market, maybe reflective of some of the momentum that youre highlighting and maybe you can just help level set considerations, we should be making around conversion of bookings to subscription revenue over time as well. Thanks.
Thanks, Michael So indeed, 13% sequential growth 16, 46% year over year growth.
<unk> billion dollars in total.
The situations into those liabilities, then that only captured as part of the picture and a volatile part of the pitch of why because it includes only.
Contracts that have more than a year to run and.
That's not all of our business now we've always said that.
The only thing you can really use the RVO accretive for is to see Directionally, which way is heading and the work that Dan and the team have done in the market that are going into make it really clear that the direction on the new business is up into the right.
Is there anything you can say around just the composition of top types of customers that are showing up in our peer versus whats. The case. So just wanted to get a sense of multiyear today versus what that used to look like historically.
It is so much across the board I mean, the context and the industry as a horizontal industry. There is some concentration in that business in terms of.
Healthcare financial services consumer, but then a whole smorgasbord of other industries below that.
Frankly, I don't have the detailed analysis of that it can shift in part because it is another key management metric for us.
Thanks, If I may add one thing to that Michael bear in mind we.
We don't Incent, our customers or provide additional discounting for.
Longer contract cycles, because we're so confident in the renewal rates are contracts automatically renew each year every year. So oftentimes, we look and say well how long is the term of this customer and we don't know because we are just we put the contract in the drawer and it never gets opened again.
Auto renewal so it's.
It's the beauty and its also one reason why we have a lot of annual one year contracts, but we have a fair amount of three year and five year as well, mostly it's because the customer wants to protect themselves against price increases when they do multiyear.
I appreciate the details thank you.
And moving on to Matt Vanvliet with BTG.
Hey, good afternoon, thanks for taking the question.
So wanted to dig in maybe a little more on the attach attach.
Trading contribution on the AI side. So you mentioned, 80% of larger deals, but can you give us any sense for how much of the <unk> of those deals is actually sort of tied to these AI features.
Presumably it's up year over year, but maybe more importantly, where do you think that goes in the next three to five years can it be 20, or 30% or whats sort of the upper bound of what people are going to pay for it.
I'm glad you brought that up and I'll start it and like you can continue.
If you look at the attach rate, 80% Big number if you look at the revenue contribution small number a very small number and the reason being is we are at the very beginning so it's really implementing AI and automation and the right use cases today. It's do you have a very simplistic straightforward question that gets asked repeatedly.
Within the contact center, while if you automate that you can let the customer self served for it and that's great. So a lot of customers are looking at deflecting.
3% to 5% of their calls over and if you think about the pricing that we've dictated royalty.
You put in.
6% to 10% of the revenue contribution from that customer because they are the fucking up any calls over yes, we make more on those automated calls than we do non automated cost, but it's still a small percentage so three to five years.
I'm optimistic that yeah, the crystal ball says more and more use cases will become prevalent consumers will get more used to and comfortable talking to a machine versus the human.
But for the consultations and the sales calls and all the other.
Things that you need to really speak human to human.
That's where we implement automation to help that human to human conversation and we assist in making it more powerful and more efficient delivering data to that agent more quickly and effectively and more accurately. So theres automation, we can apply to help contact center would be more efficient and effective.
But across the board, where I'm going here is it's it's really hard we have some.
Customers that go all in and put multiple applications and it's a much higher percentage and others, where they're just barely scratching the surface. The beauty here is over time, we know it's going to increase we know it's going to be more prevalent we know something is going to be based as Mike said earlier on a per quarter or capacity basis, we're going to have others.
Or transactional or per minute or on a usage basis and in all those scenarios.
509 software being delivered to help enterprises deliver a great customer experience and so our revenue per customer.
Without a doubt we will continue to increase and do so handsomely.
Alright, great. Thank you.
<unk> <unk> with Mizuho has the next question.
Hey, Thanks for taking my question I want to ask about the margin look you guys have like 100, plus 100 bps plus margin gross margin expense and also operating margin. So do you expect this trend to continue or how should we think about your investment, especially now with this AI opportunity.
And also could you talk about the Azure play how is that going to impact your margin.
So.
Break it into two components gross and operating expenses in terms of gross margin. If you look at over the longer term. It is very clear that tend to go up why do I say that.
It's a simple and a number of factors, but the biggest single one is the leverage between fixed and semi fixed costs and sometimes to understand what's going to happen in the future you need to look at what's happened in the past and if you look at the past 10 years 99 of those 10 years. The gross margins on that decision business expanded 96 and was moving some heavier.
<unk> in the cloud and in international and.
The rough numbers software already accounts for approximately 75% of the total revenue. So it's a growing proportion and we went public it was certainly less than 60%. So we have that tailwind currently.
In the low seventies.
But.
On our way to the ADC.
We've demonstrated we can improve overtime.
The near term, though.
Superior margins and gross margins it is.
That is very revenue dependent as I, just alluded to and we are making some additional investments, particularly.
Uh huh.
Dan is bringing in these mega deal that they require some incremental investment until we really get scaled fully.
In terms of the EBITDA margin with various leading over there.
We've got a long term model that so if you take all three components, we had 47%.
There's nothing about 2027, we currently have 43, so we can actually still go up and still make a 23% EBITDA margin that we anticipated.
Thank you.
Moving on to will power with Baird.
Okay, great. Thanks for taking the question I think.
Probably for Dan Great to see the multitude of new Big wins, maybe just zero in on the Fortune 50 healthcare when it would be great just to understand kind of what that process look like to you to replace.
I'm sure you competed with your competitor so what really kind of helped you stand apart there and this seems to be part of a string of health care. When it's maybe there's a couple more broadly than what's going on with health care for you.
Thats accounts, probably helped and I guess the extension that is how do you replicate that in these other verticals yes.
Not a great great question, well I appreciate it and if you look at the up market expansion and the penetration, we're making across many verticals.
Some that are very prevalent with large client contact centers are certainly health care and financial services large consumer product companies I mean think about who we all as consumers contact everyday health care is one that's.
Not going away.
However.
Especially as our population grows older. So if you look at that.
The insurance company that we sold.
Across the board has several legacy systems.
It wasn't one particular, one but it's the typical three that we've talked about in the past.
And Thats the issue right they've grown to health care companies and insurance companies with bolt on M&A activity over the years and you get these systems that are a decade or two old and they don't do a whole lot and what they do they do it for that given a building right there.
The premise based systems that operate for that one set of.
Resources are users that are in that facility and that creates silos of efficiency small ones and that creates great inefficiency. When you think about what a virtual contact center can do like five nine because just the sheer.
Moving of calls from the cloud straight to the resources as if theyre under one roof.
As a tremendous saver that we've had for years. They now can take advantage of that.
They also can take advantage of all the AI and automation that we deliver from the cloud so it's.
It is a great vertical for us.
It's one that's leaning into to CCAR right now primarily because of those AI and automation solutions and the old legacy platforms, they're on.
But also it's one that they are leaning into because they are going through a rapid change themselves in M&A activity in <unk> do you want to have the flexibility to do so in the future.
Great. Thank you.
And our next question will come from Deutsche Banks, Matthew Nathan.
Hey, guys. Thank you for taking my question. So obviously, new logos you talked about a very strong quarter.
Could you talk a little bit about where you're taking share from how it's evolved the last few quarters and then just any color you can provide on linearity of bookings during Q. Thanks.
Yes, taking share.
It's still primarily moving off of the legacy Avaya Cisco Genesys.
Genesis has a massive they're also a cloud competitor, but they have a massive installed base. Some estimate over 2 million seats out there that they've indicated are being end of life that need to be replaced but theyre going to get a picture of that they've already demonstrated that some of the figures that they've already disclosed, but we're going to get some to get to an opportunity for most to go shop.
<unk> and really put out an RFP and see what's in the market and we love that opportunity if we get a great share of those.
Opportunities. So it's those three and then on occasion, we do find that there are <unk> providers that have either gone through a partner there wasn't really astute and up to speed on being able to really maximize the value for that company to extract the value for that product.
And sometimes it's just the wrong fit for the enterprise and so they do make a change so we do have see cash.
Providers that we replace and one example, I gave was.
In the prepared remarks was a company that had already embarked on the competitor implementation of ours and the company that they acquired had made a recent decision prior to that to go with 590, but hadn't started in implementation. So they basically contacted us to cancel that contract and we asked them to take the.
Closer look and give us a chance to evaluate the two side by side, even though they were several months into another implementation.
They ultimately made the decision that we were the better fit for them and then they went our way.
And just on linearity any any color there over the course of the quarter.
On the course of the quarter linearity in our business I would love to achieve it.
I have a few decades now strikes for that the deals at the lower end of the market, we can get more linearity and more predictability because we see the lead flow and the sales cycle and we know our close rates are very consistent on the high end of the market. It's really tough it's lumpy because we have these big deals.
Make a huge swing, we've had quarters, where <unk> been talking about the top three or four we've had quarters, where does that number is far lower than in other quarters, where we've we've dwarfed it with some big numbers like this one and so it's hard to get linearity until we get the higher volume.
That's something we're certainly striving for.
Thank you.
Thank you so much and we do have time for one additional question, which will come from Kathryn Trebek.
Oh, hi, Thank you very much for taking my question.
And could you piece part of all but you did WWE <unk> BT and Telus is all new partners in the last couple of months, how long does it actually take to put the go to market strategy and generate revenue from these big partners.
Yes wonderful question, Katherine and that's something that I'm glad you mentioned that because it is something we want to make sure folks realize that it's not a sign them up and open the floodgate chips.
Got to train them educate them have them make the investments in.
Their go to market and some of the back office support.
We're going to provide to the customers in many cases. These large service providers like the ones you mentioned, they're doing this not just to bring products to their customers, but to really get services around them. We have something we've referred to as project pull through which is enabling these very types of partners to be able to enable the implementation services professional services.
<unk>, if you will as well as ongoing support for at least tier one and tier two.
That gives us in the long run better margins. It gives them an ability to make money off of the services that are used to delivering on their legacy solutions.
And it gives them an incentive to want to bring us into their opportunities because they recognize that I'm going to get the services business to this it's not just the margin on the markup. So how long does it take it varies but usually it's at least six to nine months before we really start to see a pipeline.
<unk> and probably a year to year and a half before we see some revenue contribution because again, there's a sales cycle there.
Most of these are going after customers that are on the larger end of the scale.
And congratulations on the acquisition.
Thank you. Thank you Catherine Thank you prices.
Well and again, everyone that does conclude today's Q&A, So I'll turn things back to Mike for closing closing comments, Mike over to you yeah. Thank you for joining US everyone as we cross the mid year Mark.
And just I couldnt be more thrilled and what I've seen.
With what I've seen in terms of the momentum in our business.
A little bit about it.
Of upmarket momentum for deals that Dan talked about.
It's an exciting time for five nine so exciting time in our industry and <unk>.
We look forward to continuing the conversation with you all thanks for joining us.