Q3 2023 Five9 Inc Earnings Call
CEO, Dan Burkland, President and Barry's warranty and CFO.
Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company expected air from certain customers customer growth anticipated costs, but that's company growth the anticipated benefits from our recent acquisition of Acs.
Hansman, two and development of our solution market size in 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 nines future results and cause. These forward looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration in uncertain feet, including increased inflation increase interest rates supply chain disruption decrease.
Economic output and fluctuations in currency exchange rates lower growth rates within our install base of customers achieve the intended benefits from the acquisition of ECS and the other risks discussed under the caption risk factors and elsewhere in five ninth annual and quarterly reports filed with the Securities and Exchange Commission.
In addition management will make reference to non-GAAP financial measures. During this call a discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the Investor Relations section on 590 website.
And investors up five nine Dot Com Lastly, a reminder, that unless otherwise indicated financial figures discussed are non-GAAP.
And now I'd like to turn the call over to five nines, Chairman and CEO, Mike Burkland.
Thanks, Emily and thank you everyone for joining our call. This afternoon are pushed to report strong third quarter results with revenue growth of 16% year over year, primarily drug, but our LTM enterprise subscription revenue growing 28%.
Adjusted EBITDA margin for the third quarter was 18% of revenue, helping drive an all time record for operating cash flow of $37 million or 16% of revenue.
Let me start off by reminding you of the three continuing trends that drive our confidence in this market.
First enterprises are developing playoffs with a greater sense of urgency to replace their on premise contact center solutions as legacy vendors have retrenched and slowed or even stopped development. In some cases also a reminder that in terms of cloud, replacing our approach. We believe that the penetration is still less than 20%.
Yes.
Second companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience cut costs and increase revenue in this context remember that contact centers are mission critical systems.
Which are a source of brand loyalty and differentiation.
And third <unk>.
Becoming an even more important for enterprises suggest sort of the cloud AI and automation is clearly an area of focus for enterprises as demonstrated by our greater than 80% attach rate on $1 billion plus they are our deals in the quarter.
Now I'd like to discuss the three main growth drivers for our business, namely our platform our March upmarket and our international expansion.
Let me start with our platform as you recall in August we closed the ECS acquisition.
We have experienced significant momentum with initiatives solution as the number of ECS opportunities in the pipeline has increased over 30% in this very short period of time.
As a reminder, issues is a fit for our $1 million plus they are our customers, giving us continued strength of our March up market. For example, they are opening doors for several fortune 100 deals, although it's still early days.
A good portion of our innovation continues to be centered around our AI and automation portfolio and we are seeing significant traction as a result of this innovation Forum.
For example, our professional services team worked on more than 250 AI deployments during the quarter.
Additionally, bookings for our agent assist product increased 150% year over year, driven by our AI summaries customer trials.
It's clear that our practical approach to AI continues to deliver real tangible value to our customers.
This is directly tied to our core AI tenants, including our beliefs that AI attribute available across our platform.
They ought to be democratized and available to all customers.
<unk> should remain in generic Boston and that should be applied in a responsible and ethical manner.
And now I'd like to focus on our March up market and international expansion.
I'm pleased to report that we continue to see strong momentum up market and booking 1 million dollar plus a R. R deals as a reminder, 1 million dollar plus a our customers make up more than 50% of our recurring revenue.
I'm also pleased to report that our pipeline for strategic deals doubled year over year in Q3.
In addition, we had a record number of enterprise and strategic Rfps in the third quarter.
Each increased 66% year over year and 21% sequentially.
This march up market and our continued international expansion are increasingly being driven by our ever growing network of global partners and their dedication to leading with $5.
I'm very pleased to share that IBM has expanded their relationship with us as a global Si partner reselling five nine along with their CRM and Ips M offers and also as a technology partner integrating watch it X with our AI solutions.
This is a common model amongst large S office as we are complementary and tightly integrated with solutions, such as Salesforce service now, Microsoft Google and others.
We have now established ourselves as a global brand with the help of key strategic partners like IBM, BT, Telus International Deloitte and et cetera to name a few.
Our partnership strategy is built not only recruiting new partners, but also on enabling and empowering partners within our methodology of sell with deliver with and build with.
This approach was one of the key drivers that led to our EMEA bookings growing 57% in Q3.
In addition, the U S managed service provider, who has been our partner for the past three years celebrated their largest quarter with several new customer logo wins and over 4 million of incremental ACD added in the quarter.
Their success is built in part on their ability to implement five nights solutions integrated with their enterprise management platform and other services.
Our leadership in the channel is further validated by the three leading technology solution distributors in our industry Soliris.
And in Telesis scam source, each recognizing five nine as their number one she could have supplier.
Furthermore, our recent channel survey by Bear ranked five nine number one for top CCAR solutions sold by the channel and number one and easiest to do business with these.
These partners along with many others are helping place us in a prominent position within the global channel community.
In closing I'm very excited about our continued momentum upmarket wildly and with the success, we're having with our AI automation offerings.
The opportunity ahead for five nine has never been better and I want to thank all of our employees, who bring passion and purpose. So therefore worked every day to make this a reality and with that I'll turn it over to our president and CRO Denver, Dan go ahead.
Thanks, Mike and good afternoon, everyone I'm pleased to report that we have a strong bookings quarter. Our pipeline reached another all time high with our strategic accounts pipeline doubling year over year, and our sales of AI and automation solutions are seeing unprecedented momentum.
As you know the very high end of our market is lumpy with regards to the timing of bookings. However, I'd like to remind you that the large enterprise category of $1 billion to $5 million of IRR is the bread and butter of our business and in aggregate, it's a larger contributor to our revenue growth than the Mega deals.
Now as I, usually do I would like to share. Some examples of new logo wins during the quarter.
The first example is a health care insurance company that was moving away from an Avaya on premise version that was being end of life.
They chose slide nine along with one of our leading UC partners with deep integration in order to gain visibility and provides seamless transfers between contact center workers of back office employees all from a single UI.
We will also include our chat email SMS QM and interaction analytics and we anticipate this initial order to result in approximately $2 $3 million in <unk> to five nine.
The second example is a hospital billing and collections company. They were using Cisco that was being managed by a third party, making moves adds and changes cumbersome and also long lead times.
They evaluated the major see cash providers and chose slide nine.
We're including the full omnichannel solution with email chat SMS as well as both voice and digital IV H.
We are also providing them with QM interaction analytics Ws M and H N a shift where they expect to reduce call handle times by up to 50%.
We anticipate this initial order to result in approximately $2 $3 million and a two 5 million.
The third example is a utility company serving many markets in North America. They were using hosted Cisco solution that was nearing its end of life. They chose five nine from all the major see cash providers and we'll be implementing our core offerings, along with the advanced solutions, including chat email agent stretched.
Our complete Ws, so suite powered by variant performance management and gamification.
This customer will also be deploying our voice and digital IV as for self service to pay invoices check account balances and canceling or moving service. We anticipate this initial order to result in over $2 $2 million in Anr to Firefly.
And now as I normally do I'd like to share two examples of existing customers, who expanded their use of five nine.
First example is a global touch control company, who had been using our system for several years and was recently acquired by European Company, who is using a nonprofit on legacy solutions.
North America operations team was able to do a side by side comparison with real production traffic to compare performance over several months they chose us for our superior reliability as well as our AI and automation portfolio.
We anticipate their spend to increase from approximately $2 1 million in <unk> to approximately $4 2 million and they are.
This last example is a leading global ticket sales and distribution company, where we began providing our solution throughout Europe more than five years ago.
In early 2022 we used the strong success, we established with them in Europe to parlay this into their U S operations, where they saw increased call volumes.
We now continue to expand as we replace their legacy on premise solution.
Its recent order increases their spend with us from approximately $1.2 million and they are to over $2 $2 million or they are.
So as you can see we are executing extremely well in landing some of the largest brand in the world as well as helping our existing customers expand and re imagine how they deliver CX for their customers.
And with that I'll hand, it over to Barry to cover the financials Barry.
Thank you Dan.
Total revenue exceeded our expectations growing 16% year over year.
Very driven by the 28% growth in Iot and enterprise subscription revenue.
As a reminder, we believe we are well positioned to resume they started there was a growth in the thirties.
Goodbye subscription lines of macroeconomic headwinds on our installed base some site.
Either drive visits made up 87% of LTM revenue.
In our commercial business, which represented the remaining 13% grew again in the single digits on an LTM basis.
Now I would like to provide color on a recurring basis total revenue.
Third quarter recurring revenue.
Which made up 92% of total revenue grew 18% year over year.
The same year over year rate as in the second quarter.
Third quarter recurring revenue grew 4% quarter over quarter, the phase sequential rate as in Q3 of last year.
New logo deployments or say slower installed base growth.
Speaking of new logo deployment note that the international rollout of the parcel delivery companies.
And the deployment of the health care conglomerate remain largely on track.
Turning the inevitable ebbs and flows of implementations across multiple divisions.
Revenue grew.
<unk> grew sequentially at a slower rate of 3% in the third quarter, which is 5% in the third quarter of 2022.
Primarily driven by the Lumpiness of our potential services revenue, which declined 3% sequentially coming off of a record high P. S revenue in the second quarter of 2023.
This type of fluctuation is typical for our professional services revenue, which has experienced negative sequential growth in it.
One quarter in nine of the last 10 years.
LTM dollar based retention rate was 110% a decline of two percentage points sequentially, mainly due to the ongoing macroeconomic quoting kept beauty growth in our installed base.
We expect fourth quarter LTM dollar based retention rate to be either flat or slightly down and we expect positive infection in 'twenty 'twenty four assuming no major changes in the economy.
The longer term.
We continue to expect our retention rate to trend towards the high one correctly like 27 due to a higher mix of enterprise customers, especially the larger ones.
You'd have higher retention rates and higher output from an AI and automation and other offerings.
Third quarter adjusted gross margins was 66% a decrease of approximately 80 basis points year over year.
As we mentioned last quarter we.
We are making upfront incremental investments to support our new logo momentum, which is hindering our ability to report year over year growth.
Adjusted gross margin in the near term.
Third quarter, adjusted EBITDA was $41 $3 million.
Representing a 17.9% margin a decrease.
There are approximately 60 basis points year over year.
Third quarter non-GAAP EPS was <unk> 52 cents per diluted share a year over year increase of 13 cents per diluted share.
Turning now to cash flow, we generated operating cash flow of $37 million.
A record driven impart by continued strength in DSO performance, which came in at 32 days.
We have not delivered 29 configured quoted the positive LTM operating cash flow.
Third quarter free cash flow of $31 $5 million was also an all time high.
We remain optimistic about application of our continuing cash flow generation, given our long term model our substantial Nols now low DSO.
And now I'd like to discuss our guidance for the remainder of 2023 as well as provide high level commentary regarding 'twenty when you fall.
We closely track numerous any indicators with a focus on consumer discretionary spending.
Given that it directly impacts our seasonally strongest vertical in the second half, namely consumer.
Based on J P Morgan Chase data.
The dominant although year over year growth in discretionary credit and debit card spending deteriorated progressively throughout the third quarter from 5% in July down two 1% in September which was the lowest growth of the year.
Importantly oil didn't notice.
That would manage defined 90 is not normal it spending growth, but rather transaction volume growth.
Which drive contact center inquiry volume in this regard the 1% nominal growth in spending in September of this year represented negative transaction volume growth.
Given this trend we are adopting a prudent approach to the fourth quarter and are assuming weaker seasonality in our consumer vehicle. Therefore, we are guiding fourth quarter revenue to a midpoint of $237.6 million.
Which imply a quarter over quarter growth rate of feed the channel.
The 3% sequential increase is in line without typical guidance batten heading into the fourth quarter. Despite the weaker seasonality expected in our consumer vehicle due to the upstream from the ongoing strength of our new logo good miners.
Accordingly, we are maintaining the midpoint of our annual revenue guidance of $909 million or 17% year over year growth.
And as for the bottom line, we are guiding fourth quarter non-GAAP EPS to a midpoint of 48 cents per diluted share and we are raising the midpoint of the full year $2 92 per diluted share, which represents a year over year increase of 28%.
I would now like to provide some preliminary high level commentary on our current thinking for 2024.
For those of you that have been falling five nine for some time, you know that for the stickiness between 'twenty and again its rates may three we started each new year with prudent revenue guidance of 16% year over year growth at the midpoint.
24.
Also began its about 16% year over year growth or approximately adopted 1.15 billion in revenue base.
Based upon the ongoing strength in our new logo business and less challenging compares in our installed base on the assumption that the economy does not deteriorate further next year.
This urge you to do it as starting point.
And we will update our outlook as the year progresses, we expect revenue to continue following a typical pattern with finding boating activity defended the annual revenue being generated in the seasonally stronger second half of 'twenty 'twenty four.
In terms of non-GAAP EPS, we are comfortable with current street consensus of $2.15 per diluted share for the full year in 2024. In addition.
We'd like to provide an unknown on the quarterly profile of our bottom line. If you look at our historical financials and non-GAAP EPS. It typically amongst the lowest of the AR in the first quarter and we expect this to be the case again in 2024.
Therefore, we anticipate non-GAAP EPS.
In Q1 to eight to April to be in the high Twenty's per diluted share with we expect bottom line to improve slightly in the second quarter and more meaningfully in the second half, especially in the fourth quarter.
Please refer to the.
<unk> posted on our Investor Relations website for additional estimates, including share count taxes and capital expenditures.
In summary, we are pleased with our third quarter results.
And while we remain prudent without auto we continue to execute consistently against this massive market and we believe we are well positioned to accelerate our business once macro economic conditions improve operator.
Go ahead. Thank you so much Barry and everyone before we begin our Q&A session. Today, we please ask that analysts to limit yourself to one question to allow for as many questions as time permits. We thank you for your cooperation in advance.
Our first question will come from Ryan Macwilliams with Barclays. Please go ahead Ryan.
Hey, guys just double click on the fourth quarter commentary. So are your customers ramping agents as you expected for seasonal use cases, and you're simply taking a prudent approach around like coal volume during that period or so.
Anything different there thank you.
Yet they are radically better than slow pace and.
We are taking a prudent approach and that this is an environment to do that.
I really want to emphasize that as JP Morgan debit and credit card discretionary spending matrix.
And because the internal numbers actually track it.
Very well.
It never was 531 for July August September and internally month by month, that's what is happening.
In our business as well on the consumer vertical.
And so we.
We looked at that we looked at the fact that.
Credit card delinquencies auto loan delinquencies are the 20 year high.
Looked at the fact that the most recent JP Morgan.
Survey on consumer discretionary spending at 44% of them, saying they were going to reduce it is suites on CNBC. This morning, a new here the CEO of <unk>.
Of the target setting has had seven quarters of both nominal and real transacted reductions and we frankly, just don't have the fortitude to say, we got it thought through that so we're taking a prudent approach.
And that's what we've always done and it's worked out for us.
I appreciate the color thanks, guys. Thanks, Brian.
And we will move on to Terry Tillman with trust.
Hey, good afternoon, Thanks, Mike Dan and Barry My question and it is one question, but it might almost delve into like a two parter.
Maybe Dan for you in terms of you did emphasize the idea of the one to 5 million dollar deals. There's a lot of bread and butter. There. In fact, you did say that it's a bigger proportion of your growth, which I think is an interesting data point, but what about the 5 million dollar plus deals. So those seven and eight figure transactions. How do you feel today about the volume and velocity of those over the next 12 months versus 90 days.
As ago, so not pinning it to a quarter, but how do you feel about those and the activity and then secondly on.
Unprecedented adoption of AI and automation unprecedented is a pretty important word how much are you expecting those decreasing play in those larger deals. Thank you yeah, great Terry great questions.
I'll start with if you look at the upmarket that one of the 1 million dollar plus deals and kind of that $1 million to $5 million range. Absolutely is the biggest growth driver for us from a revenue perspective, there's a lot of them.
You think about it that's typically at a contact center with 500 seats or above.
Those big large megadeals, there's very few of them and that's why there are so lumpy and that's a market. That's just starting to look at free cash for the first time there are quite a few but there's only a few that come up for grabs each year and we've been fortunate enough to capture the early adopters of those that we've talked about before.
So we've always said don't expect those each and every quarter.
We saw great momentum from the 1 million to $5 million range and remember those implement quicker they turned to revenue quicker and they're much more predictable cycle about how quickly that will happen as far as looking at the high end pipeline like you said for the next year couldn't be more optimistic about it.
If you look at what's happening from a demand perspective, Mike mentioned it in his comments about the number of Rfps.
66% increase in the number of Rfps, 21% sequentially from Q2 to Q3 alone and that comes from a couple of things. One is the end of life ing of a lot of the premise based systems or the end of development on those systems, which implies to customers that they've got to make this move to the cloud so we see that.
<unk> market the million dollar plus all the way up through the megadeals.
Got to make this transition to the cloud and they're starting on that process now.
Thing that makes me feel like Theres no better time to be in this space is that all of those companies will make that transition and you look at the millions of seats that are out there to do so and it gives us great optimism, but remember there's a sales cycle and then there's an implementation cycle and show you don't see it hit our books right away and so couldn't feel strong.
Longer about it and I feel that there's a lot of business coming in the top of the funnel, which gives us great optimism about the future.
Second part of your question.
Okay.
Mr AI and automation.
Unprecedented momentum there we had an attach rate of our 1 billion dollar deals of right around 80%.
Some one one or more of the applications in our in our eight AI and automation applications and in that attach rate has been very very strong.
The rfps that are coming out are requesting it proactively now and that's really the majority of the conversations that we're having and the positioning of our solutions are all about how can we help improve reinvent.
Deliver a better customer experience and it's all centered around how do we automate how do we bring in these new technologies, how do we help not only automate to let the user self serve how do we automate to help our agents be more effective and be more.
Efficient with their time, a big one is call summaries being able to just summarize the call for the agent instead of them having to put in their notes.
After a post call wrap up if you will all things that help those customers do more and serve their customers better with less resources. So it's a it couldn't be a better time.
Thanks for the questions.
And we'll now move on to the DJ Hynes with Canaccord.
Hey, guys good to see everyone, Mike Dan maybe I could ask you to double click on some of the Acs commentary integration.
Progress.
You gave us some color on kind of how that's contributing to deal flow I'm curious so I mean Acs in the past has been a business that's worked with other large contact center.
Anders in this space.
How have you been treating that how are you thinking about it now that you own the asset any color there would be interesting.
Yeah sure Vijay <unk>.
Momentum is off to a very quick start with ABC as again, we closed that deal in August as you know not very long ago as.
As I mentioned the pipeline for atheists solutions. The combined pipeline. If you will that they had plus ours now is up 30% in just a couple of months.
They've also open open some doors for us to sell C cavs into their base and some major fortune 100 accounts and.
It's a it's right on right on track so to speak I would say ahead of schedule in terms of the impact it's having on our business the influence of snapping on our deals and the influence that it's having on.
Prospects in our customer base as well as their customer base I'll also add that their employees.
Really leaned in and ours have as well on the integration of our teams is just going perfectly well.
Great. Thank you.
Got it.
UBS is Seth Gilbert has the next question.
Hey, this is Seth on for Taylor I was wondering if you could elaborate a little bit on the timing of the large deal ramps maybe more specifically is the parcel delivery service still scheduled to be fully deployed by the end of this year health care conglomerate by early 2004, and then maybe a little bit of an update.
On where that Fortune 50, global health care insurance company as from their ramping wipes that would be great. Thank you.
Yes.
Yes.
They're on track there.
Proceeding as planned.
The parcel delivery service rolled out the Americas right away, they've recently rolled out in Europe and are in process of Rolling out Asia Pac.
So that is right on track to as you said conclude right around the end of the year or beginning of next year and then if you look at the.
Conglomerate.
Health care conglomerate, they're in process and proceeding as planned they've got like 12 different businesses or companies underneath that so each of those are.
Operating in parallel rolling out in parallel at different stages, we expect that to go throughout the rest of 2024 before they're at full strength and then the the one that you mentioned.
Health care insurance company, that's going to be a longer ramp they haven't even started yet and so that will not hit until start hitting revenue until second half of 2024.
Thank you Yep 10, moving on to Jim fish with Piper Sandler Hey.
Hey, guys. Thanks for the question.
I guess Barry for you.
It's probably something in the first one I asked us what has to go right or wrong at this point to hit that 16% 24 Guide I know.
The 16% it's tended to be conservative in the past, but you know what your Q4 guide youre exiting at about 17% for this year. So just walk.
Walk us through the confidence for 16% to be kind of that sustained rate.
Prudent sustained rate, especially as you are lapping some of the larger deals.
In terms of what they have expressed here thanks guys.
As a fish so.
The 16%, which I'd like to emphasize is a starting point for us.
Think of it in two components.
New logos.
And secondly, the install base in terms of the new logos, we have a huge backlog.
That is sitting there that's going to be deployed not just.
The Mega is that's a bread and butter million two 5 million dollar deals.
Dan.
I think mentioned it might've been Mike.
That's a meaningful part of that revenue in fact.
The while both the parcel delivery service and the health care company.
So between that backlog and what we call that go get the gentleman sitting there am I right.
Dan Burkland, he and his team are not just sitting on the deaths they've got all these rfps.
Arguably the best go to market.
Machine in the industry and that can also bring into both businesses as well aside from the backlog. So that's on the new side I mean, it's still based side, we've taken a lot of comfort from the fact that we are beginning to lap the weak macro conditions that we experienced in the recent quarters.
And we wouldn't be saying in our prepared remarks that.
The fourth quarter may be either flat or down slightly.
This we felt pretty sanguine about 'twenty 'twenty four and different if they are making or anything you can do for yourself in terms of whether that alone contributes to the extra $145 million in revenue year over year.
Got it thanks guys.
Thank you.
We will now hear from Scott Berg with Needham.
Hi, Mike Dan and Barry Thanks for taking my questions here.
Barry I wanted to follow up on the question on the 24 guidance a little bit kind of a two part question. There is one would think about linearity of the revenue you have a couple of large deals coming online is that it's been fully discussed here, but just to know if the kind of cadence for the year.
On the revenue side is pretty linear and then what are your assumptions around C growth in your install base Europe, you've obviously had some.
Challenges in Q3, and you'll be more prudent here in Q4, how should we think about your.
Kind of calculus around seats on the installed base next year. Thank you yeah. Thanks, Scott So in terms of.
The linearity we.
Every year, they've got a very consistent pattern about that a little over half is in the second half of the quarter.
Call. It 50, 152, one year resumed fifty-three and.
The balance of course in the first half so I'm going to be any different this coming year. Despite the puts and takes in terms of some of the deals that are ramping.
In terms of the year over year comparison, it was astutely pointed out in our recent research from somebody that.
Compares are tougher in the in the first half. So you would expect that in a bigger increases in the second half year over year.
In terms of the seats.
C growth in installed base.
I don't think we're in a position I know, we're not in a position to comment further at this stage beyond looking at the dollar base retention rate.
That's the best indicator of what is going to be happening in the installed base of course, it will grow but at what rate will depend upon a number of factors, but mostly the macroeconomic condition I do want to mention as an aside.
This is all about the logos.
Each individual logo digging a little bit slower on average then.
Logo churn.
Our logo churn is excellent.
We are in the mid Ninety's on the enterprise side.
And when we talk about it internally is that when inevitably the American economy turns around.
We will benefit from that directly because we're spring loaded.
We could turn it up to cease overnight and so when they transactions pick up agents, who pick up and we'll see that by the way and by the way just as an aside also the highly profitable places.
Excellent thanks for taking my questions guys.
And we will now hear from IGN Bhatia with William Blair.
Perfect. Thanks.
Thanks, guys for taking the question.
Fully appreciate the conservatism in Q4, right I think we're all kind of literature the choppiness in the macro.
But Barry I think you mentioned that you had started.
Or there were data points that suggest that in September things have gotten weaker have you seen any change in your transaction volumes in September and.
Just as you think about your vertical exposure is there opportunity for other verticals to offset perhaps some weakness in the consumer vertical as you look at Q4 FY 'twenty four.
Is the health care vertical which is also a seasonally important vertical.
The open enrollment and the like.
Oh.
Indications on that is similar to what we expected when we set that guidance that no.
Meaningful upside thus far.
It's just gotten started about two.
Two weeks ago.
In terms of the.
Consumer.
It's in the month of.
Of October it pretty much in line nothing dramatic do what we do is different from what we are assuming at the time.
Perfect. Thank you.
Yeah.
Moving on to meta Marshall with Morgan Stanley.
Great. Thanks, and maybe Dan a question for you with so many of these deals kind of having an AI a catch up.
I'm sort of AI angle to ban just what are you seeing in terms of bottlenecks.
And do they take longer to get signed.
Is that data privacy is just what is the scope of what they wanted to do just trying to get a sense of where people are I'm figuring out what they want to actually what type of virtual solutions to market.
Yeah the.
Attach rates wonderful do they take a little longer.
Yeah, I think on average if you look back a few years.
Yeah, but the whole if the if the whole lot of it takes slightly longer.
Which also comes with moving up market as we've done.
That's why it's a gradual process, it's not a significant metric that really impacts anything from our perspective.
And yes, the customers tend to.
They sign up for an AI application. We go in we implement and oftentimes our professional services team and consulting teams will work with them to find new use cases additional use cases, and really do a cross sell up sell kind of in progress while theyre implementing the solution.
Which tends to happen with any innovation, that's new to the buyer and they have it's not a replacement knapsacks show there they're experimenting they're finding new use cases.
We see great momentum as I mentioned.
With our AI and automation portfolio across the board and made out I would just add to that AI and automation revenue is growing faster than any other product area for us that's a revenue.
And I already talked about it in my prepared remarks about 250 projects AI and automation projects being worked on by our professional services team in the quarter. So we're starting to see kind of the.
The end result, if you will right the lagging indicators of some of the things we've been talking about over the last few quarters in terms of momentum in bookings on attach rates starting to show up in revenue or revenue growth as well as you know a lot of active projects not to mention a continuation on the bookings I mentioned agent assist in terms of 150%.
Great perfect. Thank you.
Yes.
Tomorrow Tomorrow with Jefferies has our next question.
Hey, guys. This is actually Billy Fitzsimmons on for some marks about.
Barry for you and I hate to ask a similar question to what other people have already asked but I do want to triple check.
Triple click on the 'twenty 'twenty four outlook and then just so we're all clear.
And maybe to ask what Jim and Scott asked in a slightly different way, but obviously, that's 16% numbers.
Turning point in our remains early but can you just walk us through maybe some of the other factors that were incorporated into that number.
How do you think there are things, which continue shrunk deal activity continued international expansion channel mix.
AI enabled product adoption into that outlook and does that 60% number and incorporate kind of continued weakness in some of the more challenging verticals or or a potential improvement.
And if I could sneak in one more for Dan you've talked the last couple of quarters about that.
Strong channel momentum.
What inning are you guys have been in that journey, and where can that kind of go go from here. Thank you.
Yeah. So.
So I'm going to try and be creative Anthony in terms of coming up with a different answer.
You gave me some having them as though which are going to go down.
Internationally, there's clearly.
A bank deposits, becoming increasingly important that goes up one percentage point as it took the Senate total revenue each year.
The growth has slowed actually in Europe as well this last quarter down to I think there's plenty, 8% because they too are facing macro headwinds, but we are operating at very fair to us and that superior growth rate will almost certainly extremely likely continue.
Hugh in 'twenty 'twenty four.
The channel.
I'm going to pocket and ask either Mike or Dan to add to that because they get really passionate when it comes to that and channel is more important on the international side.
And then but just generally.
The deal rather.
Other than that we've been beating is the two houses of the growth of our installed base and.
And the new logos on.
On the new logos, you're looking at three very serene diesel.
In terms of the.
The rfps are that we can execute against the value that they would not worry about the demand is getting the continued high win rate.
The.
Installed base.
We've left it there's no particular verticals.
We should be worried about at all.
But having said that you know if you had asked this question.
10 months ago, we wouldn't have guessed anything about Silicon Valley Bank. So you need to we need to be prudent it side of the year.
Yeah.
Just to layer on a couple of things if the optimism around 24 quite frankly. This is built mainly on our backlog if all the bookings momentum that we've had over the last few quarters that you have to turn to revenue as well as again that that flow of demand that we're seeing inflect. The missed this this RFP number that I talked to.
About 66% growth year over year and 21% sequentially.
You can see that accelerating and we can see an accelerating we can feel it and again those are enterprise and strategic Rfps a lot of these enterprise deals will be.
The shorter sales cycles and potential revenue impact from 'twenty four but the good news is as Barry said with DVR. Our assumptions that are very reasonable you can kind of do the math in terms of what 16% revenue looks like from a dollar perspective, what that contributes next year a DVR are relatively.
Relatively stable, which we believe it will be.
You can see it it doesn't take a whole lot of turn ups from our backlog to drive 16% revenue growth. So we're very comfortable with that and then if I could start on the channel down and you can chime in in terms of what inning. We're in I would say we're in about the second or third inning in terms of our channel maturity.
And.
This is very similar to what you saw I would say two three years ago in terms of just larger enterprises adopting cloud the channel has been kind of holding on us.
Our legacy on premise stuff until a few years ago, when they started to lean in with us and again being named number one by the top three technology distributor.
But that's that's a huge huge accomplishment by our channel team. We've got the best in the business Jake Butterbaugh. His came about absolutely crushed it so we're kind of punching.
Above our weight in some respects, but I do believe we're still in the second and third.
And just to add to that on the channel front.
If you look at the large.
Announcements that we've made with big partners the idea this quarter.
Telus International B T.
Just getting started with them and they own and really help manage digital transformation projects for the largest companies in the world and they have now made that pivot to Mike's point over to Oh, We've got to go in and lead with C casually with cloud solutions.
And lead with AI and automation and so we're in the process of educating training and certifying those folks to come up to speed and they will be a force multiplier for us in a tremendous way and if I give you one statistic.
Just a short time ago. If you look at 2019, we had.
19 partners that brought brought to us you'd asked about the pipeline and how much of that top of funnel comes from the partners. We have 19 partners that brought us over a million dollars of Hep's annual contract value deals in fact that in year 2019. This year, we had 63 such partners bring us over 1 million.
In HDD and that number is only continuing to grow and so as Mike said, we're the second or third inning.
I would argue that from a revenue influence and lead opportunity we could be even in the first inning, especially at the high end of the market because that really hasn't been available to us until just recently.
We like the position we're in if you read the bird survey that they did.
And look at where we sit when we do sign up a partner how they feel about us compared to our competitors in this market.
We were granted rated number one.
Many almost every category of who's going to win this market was to invest in AI who's the easiest to work with we really pride ourselves adjacent and his team are doing an amazing job of enabling our partners educating them and making sure that we operate with integrity in this space because they want to turn to somebody they know they can.
Just to deliver what they are promising to their clients.
So really in summary, that's how we feel about the 16%.
Well. Thank you very much appreciate it.
Thank you.
Moving on to Peter Levine with Evercore.
Great. Thanks, guys for taking my question here, maybe to add to that last question. I know you opened up the channel I think to do more pro services to start our floating that I think earlier. This year. So maybe just walk us through kind of where that evolution is today.
And then second one is the barriers I know theres a.
Talked about scaling up to 70% gross margins can you maybe help us frame the trajectory of when we get there is it more of the partners as it is the ARPA would just help us understand so.
So a doctor because that 70% gross margin target.
Peter Great questions I'll go first on the what we call project pull through as you mentioned and that is enabling.
Our third party partners to do.
Implementations for us and that was a strategic initiative that I kicked off about a year ago.
And it's going amazingly well internationally.
Jordi of our deals are being implemented by third parties.
And.
And even domestically we've seen a dramatic increase in the percentage, where we havent disclosed that yet, but we will in the future, but it's a it's a growing percentage.
Right on track in terms of what our kpis objectives or when I rolled this out so I'm thrilled to see the progress of against third parties being.
Trained enabled and actually you know actually doing deployments and we've solved for one of the critical success factors is NPS scores as you know we deliver with our own professional services King NPS scores in the mid to high Eighty's consistently year in year out we're holding our partners to that same N P. S.
Score and Theyre delivering on it but again, we've been very strategic and Barry <unk>.
Step wise in terms of who we sign up how we train them up and helping them be successful.
And theater in order to explain how the gross margins. We believe are going to get to this into the 70 plus.
You have to understand the revenue breakdown because they each have different drivers and different amounts. So the revenue breakdown is 75%.
Subscription by the way two thirds of that is enterprise, but the rest of that is.
Ah is a commercial 17% is usage and 8% is the professional services.
With a less important ones and then move to the most important one is.
Less important one because it's a relatively small part of the total.
The equation is the professional services, which is now in the low double digits negative we don't mind that too much. It makes us happier customers. It brings up the software it quicker and the potential like many other companies, so better efficiencies and not having to scale for every single Mega deal that that brings into the door.
Because that's what we've been doing over there so that can get to.
Into the single digits high single digits, but that's not a driver it's helpful.
The second area is usage and then we and the 15 southern in the fifties. That's nothing internationally, we have some opportunities we'd look at adding centers there, but that's not going to suddenly dramatically improve what is happening is that that shift in the mix from usage to subscription every year.
One to three percentage points and.
Just to illustrate that completely when it went public in April of 2014, using it was about 35% of the total is now half of that and that's going to continue they've got a mixed shift that now we've come through the subscription and then it comes down to a very straightforward.
Basically juice out of there, which is certainly worth the squeeze is the fact that we've got fixed costs kind of fixed cost and we just we havent revenue growing faster. So that's why if you look individually at each fourth quarter. The subscription gross margin is always the highest because that's when the revenue is the highest class. We've got some additional initiatives I've mentioned.
One quickly.
When we were getting international drug led to.
To some extent by a big account, we win in a fast and furious with DCP.
The indication of the operating strongly that if we do it in our own data centers, we can actually do it.
For certain class cheaper.
And that move that remark duration.
Is it something that's also on the cost, but these things take time in the meantime, we investing further in international India Africa and other places.
And also in professional services, but these mega deals.
And we always put even death.
Thanks, guys. Thanks Peter.
Panic Rocky with me Matthew how please go ahead with your question.
Hey, guys thinking.
Taking my question.
It's good to hear about the large deals and a strong pipeline, but I just want to ask about when that or what was it that you're seeing in this kind of environment are you seeing.
More stripping out are you seeing more of a customer I'm looking at.
More than that I started the day before signing the deal any color would be helpful.
Yeah as far as deals getting extended Theres, a natural when you bring something new to the market and you bring something that they haven't seen before it's not a replacement it takes a little longer but as I mentioned earlier its insignificant its not something that.
It keeps us up at night or even as a concern during the sales process. It's just make sure you have that extra meeting and in some cases you have to go to the data security folks and legal to make sure that we have the right documentation there to protect their data because in some cases, we're taking data.
From a transcription of a conversation and yet.
Moving it to a third party to have that summary, as an example, when we use GPT to summarize our transcriptions, where having a third party do that.
Obviously, there's just extra steps in the process, but we make sure we've aligned to those and have our sales teams.
Directed to those so much.
It's Greg.
The interest is there and everyone's gotten through it I think we're past that the times of having to create those documents and so now it's just a matter of having the templates and moving forward.
These schemes are you think customer evaluate things that AI strategy so that.
Part of that they're delaying anything or you think that's aseptic sauces altogether.
Thank you for asking that question. They absolutely are using our AI strategy as a key criteria in evaluating and extensively and it's oftentimes the thing that wins business for five nine.
We believe we're actually pioneering in leading in the market when it comes to AI that bird study.
No doubt our customers explaining that to US is while we've made a couple of strategic acquisitions.
How'd us to kind of hit the ground running and not have to develop from.
From scratch ourselves. So we believe we're leading the market in this in this area and we're excited that even the even the deals that happened that may not have a big revenue component tied to the AI.
Vision criteria was precisely because of our AI strategy, and our AI portfolio and roadmap and the way the way that we're going about addiction, we want to do business with you your future proofing us youre, giving us what we want and the direction we want it.
Thanks.
Yep.
Matt Vanvliet with <unk> has the next question.
Hey, good afternoon, guys. Thanks for taking the question I guess staying on the theme of AI and some of the automation features.
80% of new deals had that but.
Yes.
The next level question that we're wondering is one how much attitude to the deal value do you think that's bringing on new deals and then second part maybe more importantly of the installed base what is the penetration rate on that and how much are you, adding there knowing that earlier in the year. There's a lot of concern would be cannibalizing your norm.
More seats, but how much of an uplift on sort of a net dollar retention or are you seeing as customers add that today. Yeah. Thank you for that question. So we messaged, a few quarters ago in and around 10% of the net new bookings, where the AI and automation suite and it remains that.
A slight uptick to that is what we're seeing but keep in mind. That's just the initial order that's the customer that sounds great I am going to migrate off my whole premise legacy system into your cloud and yeah, let's start with an IV a or an agent assist out once we get in there and I alluded to it earlier the P. S group gets in there and start talking to the people.
The floor not the buyer the people on the floor that are running the contact center and the types of calls that they're getting and how we can help their agents be more effective we start putting in things and that's where we're seeing increased momentum. We've got 250 projects that we're working on.
For a couple of reasons, one we talked about pivoting and selling more software when the cheap ads, we're slowing the growth was slowing and we've done that very effectively secondly, once we get in and we find there is many more use cases than we first started out.
Sales person isn't going to delay their sale to keep adding more and more use cases, they're gonna go closer to deal with the customer is ready.
And so we get a lot of that add on and then and then thirdly. If you look at the actual applications themselves they've matured, we talked about agent assist we talked about agent assist two or three years ago well today that includes something called summaries I can take the transcription I can summarize it in about three seconds I can deliver that summary back I can pump it straight into the CRM.
The agent Tomorrow can look at that summary of what happened in today's call in May.
Better judgment and get right to the point very much quicker.
And it cuts back on that wrap up time for the agent. So we're incorporating this AI and AR.
Get an unprecedented level of momentum and interest in the whole suite and it's both for net new where.
Where we're getting a great attach rate, but it's really the installed base, that's starting to really see a certain appetite for for doing more than just dipping their toe in the water as we've talked about before.
Great. Thank you Yep excellence.
Moving on to Michael <unk> with Wells Fargo.
Great I appreciate you taking the question nice to see everyone.
Barry you had some commentary on the retention rate I know, we've talked about it in the past that the 110%.
It sounded like you have some confidence that can maybe bounce back at some point in 'twenty four so just want to understand the trajectory a bit better there are certain milestones you're looking for how much of a lingering.
Lingering impact from prior periods. When you stopped so gauge confidence in the potential for that metric to get back up into the 100, twenty's overtime and the drivers there.
So Mike I don't want to take issue with the phraseology, but you've kept bounce back. This is a they're not bouncing a this is an LTM number move slowly slowly gradually okay. Thank you trend higher.
Thank you.
So.
And really.
In the near term comes down to two things it comes down to a the macro just staying middling now they are getting much better or much worse, a little bit better little ways, it's always asking for.
Because then we get the easier compare and the other thing.
That's important is that some of the longer term.
The health care Company for example is a good example, they start ramping.
And that gives us a very nice tailwind.
Because that day and.
From a tiny base that has a disproportionate impact with me Yep. Okay, then on long term.
Confidence around reaching the high one 'twenty is a fact that the million dollar plus customers.
Which are growing every quarter that would then give you the numbers in UAE every year, which is already more than to say that our recurring revenue as Mike mentioned in his remarks.
Those have an appreciably higher dollar base retention rate, which makes sense doesn't it I mean, these are big companies and Pacific organic even if it wasn't make acquisitions and buy new stuff et cetera.
And that mix impact on that fast growing million dollar plus.
Which is much faster than the rest of the business in dollars and $10.
Is is what gives us that confidence.
Thank you okay. Thanks.
Thanks, Mike.
We have time for one additional question, which will come from will power with Baird.
Great. Good afternoon. Thanks, Thanks, and thanks for the comments on our survey of a spinoff.
I'm happy to help.
My commentary just did look at Youre right.
Let me ask about the strategic deal pipeline comments, you know doubling year over year I mean, it sounds like you continue to see very good momentum there I know you've kind of touched on that but you know perhaps dig in to kind of the key drivers of that and how do we think about kind of confidence level when converting that you know how do we think about conversion rates.
Going forward versus what you've seen if anything that kind of keep in mind on that front.
Yeah.
Market if I go back two to three years in time, there were some large enterprises that would take meetings.
They were just checking what was out there they had really no interest and no immediate need to move to the cloud to think two factors are happening two main drivers one is the.
The legacy platforms that they're using today and many of these large companies have all of them bright days. They have all three of the major platforms.
Avaya Cisco Genesys.
And all of them are either end of life ing or being told theyre not going to further develop on those so the scientists there that they've got to get off those platforms. That's what Chuck I'll I'll give two three factors second we had to demonstrate in the <unk> World and particularly five nine has demonstrated that we can scale and deliver the reliability.
<unk> that they absolutely requires table stakes, but put it all even consider moving and we've done that and proven it because of those two.
I'll say too early adopters they were like two that made decisions far before anyone else and I mentioned this in the last week and the others are now taken notice Ah ha. If it's good enough for them it must be good enough for us and we're being we're being pushed by our legacy provider, saying their end of life ing or being pulled by this AI and automation.
Innovation, that's coming about and they realize the only way to take advantage of that has to move to the cloud and so that's why the RFP volume is up that's why even the ones that are having issued rfps yet are taking meetings to say help how do we how do we start this process. They are turning to the upsized, they're turning to us because they recognize oh no.
Process may take us a year or two to get through and.
There's they're almost feeling like theres pressure there to do it quickly.
Quickly because they want to take advantage of AI and automation and it may take them a year or two just to get through a decision process would start to import. So so that's why we're seeing such great momentum and well I know Dan won't brags, though I would brag for him. We've got the best go to market came in this industry by far and so when you think about pipeline doubling and our ability to.
Go convert that and win business I have so much confidence in this team and it's a it's a team that has actually grown so significantly over the years from our competitors. There are so many people that want to be on the 519 quite frankly, so we're able to attract the best and brightest on this team and they are.
Just superstar, so I have no doubt, but theyre going to convert.
Way more than our fair share of that of that pipeline into wins for five nine and you can see it in our win rates. So I'll leave it at that.
Great. Thank you thanks a lot.
And again this does conclude today's Q&A session, Mike I'll turn it back to you for closing comments, yes. Thank you very much for joining us today I'll just say this I can.
So excited about the future for five years time, we have seen this dramatic inflection quite frankly, we've been talking about in terms of large enterprises adopting cloud.
Shifting off of its legacy on premise solutions and I think the most exciting metric that I talked about today is the leading indicators are leading leading indicator and that is the RFP flow so 66% growth in rfps for strategic and enterprise, 21% growth sequentially. So.
That is a very good leading indicator for the inflection in our business opportunity.
Thanks for joining us.