Q4 2023 Five9 Inc Earnings Call

February 21, 2024

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Speaker Change: You have joined the meeting as an attendee and will be needed throughout the meeting.

Speaker Change: Thank you for joining us today on the call.

Speaker Change: Our mic, Brooklyn, Chairman and CEO, Dan Burkland, President and Barry <unk> CFO.

Berry'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 IRR from certain customers customer growth anticipated customer benefits company growth enhancements to and development of our solution market size in trends or expectations regarding macroeconomic.

Speaker Change: 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 Eros and certain customers customer growth anticipated customer benefit.

Speaker Change: The growth has been in development of our solution market size and train our expectations regarding macroeconomic condition company market position initiatives and expectation technology and product initiatives, including investment in R&D and other future events are.

<unk> company market position initiatives and expectations technology and product initiatives, including investment in R&D and other future events are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Speaker Change: <unk> looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Speaker Change: Such statements are simply predictions should not be unduly relied upon by investors.

Such statements are simply predictions should not be unduly relied upon by investors actual events or results may differ materially and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect <unk> future results and cause these forward looking.

Speaker Change: Actual events or results may differ materially and the company undertakes no obligation to update the information in such statements.

Speaker Change: These statements are subject to substantial risks and uncertainties that could adversely affect <unk> future results and cause. These forward looking statements to be inaccurate, including the impact of adverse economic condition, including macroeconomic deterioration of uncertainty, including increased inflation increase interest rate supply chain disruption decrease economic.

Statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration in uncertainty, including increased inflation increased interest rates supply chain disruptions decrease economic I'll put a fluctuations in currency exchange rates lower growth rates within our installed base of customers and the other risks discussed.

Speaker Change: I'll put a fluctuations in currency exchange rate lower growth rates within our installed base of customers 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.

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.

Speaker Change: 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 <unk> website at investors Dot five nine dot com.

Speaker Change: 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 <unk> website at investors got five nine dot com.

Lastly, a reminder, that unless otherwise indicated financial figures discussed are non-GAAP.

Speaker Change: Lastly, a reminder, that unless otherwise indicated financial figures discussed are non-GAAP.

And now I'd like to turn the call over to <unk>, Chairman and CEO, Mike Burkland.

Speaker Change: And now I'd like to turn the call over to <unk>, Chairman and CEO, Mike Burkland.

Thanks, Emily and thanks to everyone for joining our call. This afternoon.

Mike Burkland: Thanks, Emily and thanks, everyone for joining our call. This afternoon.

Sure. The we finished the year with strong results fourth quarter revenue grew 15% year over year and full year revenue grew 17%.

Mike Burkland: Pleased to share the refresh of the year with strong results fourth quarter revenue grew 15% year over year and full year revenue grew 17%.

Mike Burkland: This increase continues to be primarily driven by our enterprise business with LTM subscription revenue growing 25% year over year.

This increase continues to be primarily driven by our enterprise business with LTM subscription revenue growing 25% year over year.

Adjusted EBITDA margin for the fourth quarter was 20% of revenue, helping drive a Q4 record for operating cash flow of $37 million or 15% of revenue.

Mike Burkland: Adjusted EBITDA margin for the fourth quarter was 20% of revenue, helping drive Q4 record for operating cash flow of $37 million or 15% of revenue.

Mike Burkland: As you all know we take a balanced approach to delivering top line growth and bottom line profitability.

As you all know we take a balanced approach to delivering top line growth and bottom line profitability.

Today I'd like to start off by commenting on the market opportunity ahead for Firestone. We believe the market has never been better for large enterprises to move to the cloud we are continuing to see strong momentum up market with new logos as evidenced by our Q4 record in enterprise bookings.

Speaker Change: Today I'd like to start off by commenting on the market opportunity ahead for five nine we believe the market has never been better for large enterprises to move to the cloud.

We are continuing to see strong momentum up market with new logos as evidenced by our Q4 record in enterprise bookings in.

In addition, our pipeline continues to grow hitting another record high.

Speaker Change: In addition, our pipeline continues to grow hitting another record high.

We are seeing acceleration at the top of the funnel with enterprises strategic rfps more than doubling year over year, which is a strong indicator of our market being at an inflection point.

Speaker Change: We are seeing acceleration at the top of funnel with enterprises strategic rfps more than doubling year over year, which is a strong indicator of our market being at an inflection point.

This market opportunity is being driven by three key ongoing trends first migration to cloud contact center platforms is becoming one of the highest priorities for enterprises, especially as many on premise solutions are being end of life.

Speaker Change: <unk> market opportunity is being driven by three key ongoing trends first migration to cloud contact center platforms is becoming one of the highest priorities for enterprises, especially as many on premise solutions are being end of life.

With cloud penetration at approximately 20%. We believe there is a significant runway ahead.

Speaker Change: With cloud penetration at approximately 20%. We believe there is a significant runway ahead.

Enterprises are laser focused on improving customer experience and cloud contact centers are at the heart of enabling these businesses to re imagine their CX.

Speaker Change: Enterprises are laser focused on improving customer experience and cloud contact centers are at the heart of enabling these businesses to re imagine their CX.

And third enterprises are increasingly leveraging AI to empower their businesses and cloud contact centers are becoming an imperative to deliver on their AI and automation initiatives.

Speaker Change: And third enterprises are increasingly leveraging AI to empower their businesses and cloud contact centers are becoming an imperative to deliver on their AI and automation initiatives.

This market remains massive in Underpenetrated and we believe this is a durable multiyear opportunity.

Speaker Change: This market remains massive in Underpenetrated and we believe this is a durable multiyear opportunity.

Now I'd like to remind you of the three main growth drivers of our business our platform our March upmarket and our international expansion.

Speaker Change: Now I'd like to remind you of the three main growth drivers of our business our platform our March upmarket and our international expansion.

I'll start with the platform.

Speaker Change: I'll start with the platform, we continue to strengthen our AI leadership and CX by infusing AI throughout our platform, we have been leveraging the power of generative AI to further expand AI powered solutions, such as fireside chat box and IBM.

We continue to strengthen our AI leadership and CX by infusing AI throughout our platform, we have been leveraging the power of generative AI to further expand AI powered solutions, such as <unk> and chat box and IBM.

Speaker Change: In addition, generative AI is enhancing many other offerings and our AI and automation portfolio, including AI insights NII summaries, which are gaining meaningful traction.

In addition, generative AI is enhancing many other offerings and our AI and automation portfolio, including AI insights NII summaries, which are gaining meaningful traction.

Speaker Change: For example year over year bookings growth for agent assist which includes AI summaries accelerated in each of the last three quarters, culminating in a six <unk> increase in Q4.

Speaker Change: For example year over year bookings growth for agent assist which includes AI summaries accelerated in each of the last three quarters, culminating in a <unk> increase in Q4.

Speaker Change: We believe much of this rapid growth can be attributed to the value we deliver to customers with our leading generative AI capabilities and our successful try before you buy program.

We believe much of this rapid growth can be attributed to the value we deliver to customers with our leading generative AI capabilities and our successful try before you buy program.

Our leadership in AI is also being widely recognized by the industry.

Speaker Change: Our leadership in AI is also being widely recognized by the industry.

Speaker Change: We are excited to report that <unk> was named a global leader in the just released 2024 Aragon research globe for conversational AI the.

Speaker Change: We are excited to report that <unk> was named a global leader in the just released 2024 Aragon research globe for conversational AI.

Speaker Change: The report provides an in depth analysis of leading contact center vendor strategy and product strengths and conversational and generative AI.

Speaker Change: Additionally in the most recent bird Channel survey from late December we were named as the contact center provider with the best AI solutions.

Speaker Change: Overall, we continue to see significant momentum in this area with AI and automation, making up 17% of our total ACB new logo bookings for enterprise in Q4.

Speaker Change: Additionally, AI and automation products now make up 7% of our enterprise subscription revenue.

Speaker Change: Next I'd like to talk about our data strategy data has become more important than ever and unlocking value in CX.

Speaker Change: Next I'd like to talk about our data strategy data has become more important that effort in unlocking value in CX.

How much data is collected the number of data sources, the explosion of data types and the secure and responsible use of that data are all becoming critical buying considerations for contact center decision makers the benefits of having a strong data strategy are clear.

Speaker Change: How much data is collected the number of data sources, the explosion of data types and the secure and responsible use of that data are all becoming critical buying considerations for contact center decision makers the benefits of having a strong data strategy are clear.

Speaker Change: More personalization to create an amazing a differentiated customer experience is just the tip of the iceberg richer insights for key stakeholders in the contact center, including agents managers and operators make for better decisions.

Personalization to create an amazing a differentiated customer experience is just the tip of the iceberg.

Speaker Change: Richard insights for key stakeholders in the contact center, including agents managers and operators make for better decisions.

Speaker Change: Leveraging data with AI drives critical improvements for self service and up leveling every agent to deliver the optimal customer experience.

Speaker Change: Slide nine is the platform where customer experience data is created utilized an accident. We recognized this opportunity early on with the addition of 509 data Lake to.

Speaker Change: <unk> is the platform our customer experience data is created utilized an accident. We recognized this opportunity early on with the addition of 509 data Lake.

Speaker Change: To build upon this we recently acquired Acs, a leading solution to accumulate normalized and present rich and diverse data sources. We also integrate our data with other leading data sources in order to deliver exceptional customer experiences.

Mike Burkland: To build upon this we recently acquired Acs, a leading solution to accumulate normalized and present rich and diverse data sources. We also integrate our data with other leading data sources in order to deliver exceptional customer experiences. We see data is the key to delivering a more personalized customer experience and this continue.

Speaker Change: Data is the key to delivering a more personalized customer experience and this continues to be an important pillar of our platform strategy.

Mike Burkland: To be an important pillar of our platform strategy.

Mike Burkland: As you can see we significantly strengthened our platform throughout 2023.

Speaker Change: As you can see we significantly strengthened our platform throughout 2023 and.

Mike Burkland: And we are continuing to make key investments to enhance our leadership position in the market.

Speaker Change: And we are continuing to make key investments to enhance our leadership position in the market.

Mike Burkland: A good example is fed ramp.

Speaker Change: A good example is fed ramp.

Which will be a multi year investment. However, we believe it will ultimately open up a huge market opportunity not just at the federal level, but also with the state and local governments that we believe will help us generate a meaningful new revenue stream long term.

Speaker Change: Which will be a multi year investment. However, we believe it will ultimately open up a huge market opportunity not just at the federal level, but also at the state and local governments that we believe will help us generate a meaningful new revenue stream long term.

Speaker Change: And now I'd like to focus on our March up market and international expansion.

Speaker Change: We continue to see strong momentum, which Dan will touch on in a moment as I mentioned earlier enterprise and strategic Rfps are continuing to increase at a significant rate.

Speaker Change: Which gives us confidence in our ability to continue marching up market in 2024 and beyond.

Which give us confidence in our ability to continue marching up market in 2024 and beyond.

Speaker Change: Also I want to point to one of the key reasons, we've been so successful in winning in deploying some of the largest enterprise accounts.

Also I want to point to one of the key reasons, we've been so successful in winning in deploying some of the largest enterprise accounts, we continue to get feedback from our customers that they chose us not only for our market leading platform, but also because of our people.

Speaker Change: We continue to get feedback from our customers that they chose us not only for our market leading platform.

Speaker Change: But also because of our people are.

Speaker Change: Our customer success model is a key differentiator.

Speaker Change: The vendor they choose must have the experts to ensure a smooth transition to the cloud and improved customer experience and better business outcomes and we have hundreds of CX experts globally that focus on transformation migration implementation and ongoing optimization.

Speaker Change: We also collaborate with some of the best CX partners in the World, who also deliver a similar best in class experience.

Speaker Change: Our international expansion continues to be a growth driver in 2023 International revenue grew 29% year over year.

Speaker Change: Our international expansion continues to be a growth driver in 2023 International revenue grew 29% year over year. This strong growth was driven by the ongoing investments, we are making particularly in Europe.

Speaker Change: This strong growth was driven by the ongoing investments, we are making particularly in Europe.

Speaker Change: For instance, we expanded our footprint in the dock region by turning up local data centers and scaling our strong go to market team in that region.

Speaker Change: Also we continued to strengthen our Porto engineering hub, increasing our head count there by nearly 50% last year.

Speaker Change: Our success in marching upmarket and expanding internationally are increasingly being driven by our ever growing network of global partners and their dedication to leading with five nine.

Speaker Change: Our success in marching up market and expanding internationally are increasingly being driven by our ever growing network of global partners and their dedication to leading with five nine.

Speaker Change: For example, we recently announced the listing of our intelligence CX platform on Google cloud marketplace, which simplifies the procurement of $5 nine and helps Google customers retire their GCB spend commitments.

Speaker Change: For example, we recently announced the listing of our intelligent CX platform on Google cloud marketplace, which simplifies the procurement of five nine and helps Google customers retire their GCB spend commitments.

Speaker Change: Also we recently launched our new and enhanced five nine University for partners, which provides comprehensive product training and certification programs to enable these partners and sales implementation and services.

As a result in 2023 of the number of global partner sales certifications tripled year over year and partner implementations doubled during that same period.

Speaker Change: As a result in 2023, the number of global partner sales certifications tripled year over year and partner implementations doubled during that same period.

Speaker Change: In addition, we had 51 partnership booked more than $1 million in HCV in 2023.

Speaker Change: Before I turn it over to Dan I'd like to say that we remain extremely optimistic about the opportunities in this massive and underpenetrated market we.

Speaker Change: Before I turn it over to Dan I'd like to say that we remain extremely optimistic about the opportunities in this massive and underpenetrated market, we have the right platform and the right team to capitalize on this long term and durable growth opportunity and with that I'll turn it over to our president and CFO, Dan Burkland, Dan. Please go ahead.

Speaker Change: Have the right platform and the right team to capitalize on this long term and durable growth opportunity and with that I'll turn it over to our president and CRO, Dan Burkland, Dan. Please go ahead.

Daniel P. Burkland: Thanks, Mike and good afternoon, everyone I'm pleased to report that we had a record for enterprise bookings for any Q4, adding to our strong momentum up market as we continue to expand our go to market and technology partnerships.

Speaker Change: We exited the year with 183 customers that generate over $1 million in <unk> to $5 nine representing more than 50% of our recurring revenue.

Daniel P. Burkland: We exited the year with 183 customers that generate over $1 million in <unk> to five 9% representing more than 50% of our recurring revenue.

Speaker Change: In terms of large global partnerships BT Telus International IBM and Deloitte just to name a few continue to invest and build global practices around customer experience and have chosen to lead with 509.

Daniel P. Burkland: In terms of large global partnerships BT Telus International IBM and Deloitte just to name a few continue to invest and build global practices around customer experience and have chosen to lead with five nine.

Speaker Change: And now I'd like to share some examples of key wins for the quarter.

Daniel P. Burkland: And now I'd like to share some examples of key wins for the quarter.

Speaker Change: The first example is a nonprofit health care organization based here in the U S. They had been using Avaya, which was reaching end of life and lack the innovation to deliver great customer and patient experience.

Daniel P. Burkland: The first example is a nonprofit health care organization based here in the U S. They had been using Avaya, which was reaching end of life and lastly, innovation to deliver great customer and patient experience.

Speaker Change: We competed with the leading see cash providers and were chosen as the most comprehensive end to end solution with the best services offerings to accomplish their goals with.

Daniel P. Burkland: We competed with the leading see cash providers and were chosen as the most comprehensive end to end solution with the best services offerings to accomplish their goals with.

Speaker Change: With five die they will access a complete omnichannel solution deeply integrated to both epic and service now CRM.

Daniel P. Burkland: With five die they will access a complete omnichannel solution deeply integrated to both epic and service now CRM.

Speaker Change: They will also be using our advanced Iga for both intelligent routing and self service.

They will also be using our advanced Iga for both intelligent routing and self service.

Speaker Change: Our agent assist for transcription and summaries and our workflow automation to insert a whole set of conversational data into their CRM.

Daniel P. Burkland: Our agent assist for transcription and summaries and our workflow automation to insert a whole set of conversational data into their CRM.

Speaker Change: We're also providing a complete <unk> suite powered by parent, including WSI, <unk>, QM and speech analytics and performance management.

Daniel P. Burkland: We're also providing a complete WAM suite powered by Sharon, including WSI, QM and speech analytics and performance management.

Speaker Change: We anticipate this initial order to result in over $3 6 million an.

Daniel P. Burkland: We anticipate this initial order to result in over $3 6 million an.

Speaker Change: <unk> to five nine.

Daniel P. Burkland: <unk> to $5 million.

Speaker Change: The next example is a prominent university, where we are providing contact center solutions for their education research and health care facilities. They had been using Cisco, which did not meet their digital transformation initiative.

The next example is a prominent university, where we are providing contact center solutions for their education research and health care facilities. They had been using Cisco, which did not meet their digital transformation.

Mike Burkland: for our superior end-to-end technology solutions, as well as our deep vertical expertise and strong references in education and healthcare. They will be using our proven IVA and chatbots for both education and healthcare groups. They'll be leveraging our agent assist to generate transcripts and summaries with deep integration to Salesforce, Epic, and ServiceNow CRMs. They'll also be using our WEM suite, powered by Verint, for AQM, interaction analytics, and WFM for automated scheduling and forecasting. We anticipate this initial order to result in approximately $2 million in ARR to Five9. The third example is a healthcare services network of acute care hospitals, rehabilitation, physician groups, and retail pharmacies. They've been using a variety of solutions, including Cisco and Avaya, and we're looking for a single, consolidated, and innovative platform in the cloud.

Mike Burkland: For our superior end-to-end technology solutions, as well as our deep vertical expertise and strong references in education and healthcare. They will be using our proven IVA and chatbots for both education and healthcare groups. They'll be leveraging our agent assist to generate transcripts and summaries with deep integration to Salesforce, Epic, and ServiceNow CRMs. They'll also be using our WEM suite, powered by Verint, for AQM, interaction analytics, and WFM for automated scheduling and forecasting. We anticipate this initial order to result in approximately $2 million in ARR to Five9. The 3rd example is a healthcare services network of acute care hospitals, rehabilitation, physician groups, and retail pharmacies. They've been using a variety of solutions, including Cisco and Avaya, and we're looking for a single, consolidated, and innovative platform in the cloud.

<unk> solutions as well as our deep vertical expertise and strong references in education and health care.

They will be using our proven IV iron chatbot for both education and health care groups there'll be leveraging our agent assist to generate transcripts and summaries with deep integration to Salesforce epic and service now CRM.

They will also be using our Wm suite powered by variant for EQM interaction analytics and Wfl for automated scheduling and forecasting we anticipate this initial order to result in approximately $2 million.

<unk> to five nine.

The third example is a health care services network of acute care hospitals rehabilitation physician groups and retail pharmacies, they've been using a variety of solutions, including Cisco and Avaya and we're looking for a single consolidated and innovative platform in the cloud.

Mike Burkland: With Five9, they will access a full omni-channel, inbound and outbound solution, including proactive outreach via digital channels for appointment reminders, prescription refills, and test result notifications. Likewise, patients will be able to use our IVA for scheduling appointments, refilling prescriptions, and locating a nearby specialty provider. Five9 will be deeply integrated into their Epic CRM, and we also included the Five9 WEM solution, including QM, WFM, and interaction analytics. Once they are migrated over to Five9, they plan to add Agent Assist for agent coaching, transcriptions, and call summaries. We anticipate this initial order to result in approximately $1.6 million in ARR to Five9. And now, as I normally do, I'll share an example of a customer who has expanded their use of Five9. This customer started with Five9 several years ago as a relatively small regional bank with about 50 seats.

With five nine they will access a full omnichannel inbound and outbound solution, including proactive outreach via digital channels for appointment reminders prescription refills and test result notifications.

Likewise patients will be able to use our ida for scheduling appointments refilling prescriptions and locating in nearby specialty provider.

Five nine will be deeply integrated to their epic CRM and we also included the 590 <unk> solution, including QM WFAN in interaction analytics.

Once they are migrated over to 509, they plan to add agent assist for agent coaching transcriptions in call summaries we.

We anticipate this initial order to result in approximately $1 6 million, an IRR to five nine.

And now as I normally do I will.

Share. An example of a customer who has expanded their use of 509.

This customer started with 590 <unk> several years ago as a relatively small regional bank with about 50 seats. They grew organically to about 200 seats and then merged with another bank in 2022.

Mike Burkland: They grew organically to about 200 seats and then merged with another bank in 2022, where we expanded and replaced the Cisco system at the other bank. This brought their annual spend to over $1 million in ARR. Then, after the full rollout in Q4 of 2023, we added the final business unit, which also added our WEM suite, powered by Verint, and our chatbot and IVA solutions. This customer will now generate over $1.9 million in ARR to Five9. So as we enter 2024, we feel very strongly that our go-to-market engine is hitting on all cylinders to take advantage of the massive CX transformation underway, the accelerating migration to the cloud, and the increasing adoption of AI and automation. And with that, over to Barry for the financials. Barry?

We expanded and replaced Cisco system at the other bank.

This brought their annual spend to over $1 million in IRR.

Then after the full rollout in Q4 of 2023, we added the final business unit, which also added our WAM suite powered by parents and our chatbot in IV solutions.

We will now generate over $1 $9 million and they are finite.

So as we enter 2024, we feel very strongly that our go to market engine is hitting on all cylinders to take advantage of the massive CX transformation underway, the accelerating migration to the cloud and increasing adoption of AI and automation.

And with that over to Barry for the financials Barry.

Barry Zwarenstein: Thank you, Dan. We are pleased to report Q4 revenue growth of 15% year-over-year. This is despite the ongoing macro headwinds on our install base, which slowed growth in our normally seasonally strong consumer vertical. By way of illustration, a number of clients in the consumer discretionary subcategory experienced, for the first time since coming onto the Five9 platform, a Q4 sequential recurring revenue decline. In addition, we had a tough compare internationally with exceptionally strong new logo seat turnups in the Q4 of 2022. Our LTM enterprise subscription revenue, which now accounts for over 65% of total revenue, grew 25% year-over-year. Our enterprise business made up 87% of LTM revenue, and our commercial business, which represents the remaining 13%, grew again in the single digits on an LTM basis.

Thank you Dan.

We are pleased to report fourth quarter revenue growth of 15% year over year.

This is despite the ongoing macro headwinds on the installed base, which slowed growth normally seasonally strong consumer vertical.

By way of illustration, a number of clients in the consumer discretionary subcategory experience for the first time since coming onto the <unk> platform, a fourth quarter sequential recurring revenue decline.

In addition, we added telecom internationally with exceptionally strong new logo seats are nuts.

In the fourth quarter of 2022.

I Hope you have enterprise subscription revenue, which now accounts for 65% of total revenue grew 25% year over year.

I enterprise visits made up 87% of LTM revenue and our commercial business, which represents the remaining 13% grew again in the single digits on an LTM basis.

Barry Zwarenstein: Also, recurring revenue accounted for 92% of our total revenue in the fourth quarter, and the other 8% was comprised of professional services. Our LTM dollar-based retention rate remained the same as last quarter at 110%. We expect Q1 LTM dollar-based retention rate to be either flat or very slightly down, and we expect a positive inflection in the latter part of the year, assuming no major changes in the economy. Longer term, we continue to expect our retention rate to trend towards the high 120s by 2027, due to our higher mix of enterprise customers, especially larger ones, which have higher retention rates. Fourth quarter adjusted gross margins were 61.3%, a decrease of approximately 100 basis points year-over-year, but a quarter-over-quarter improvement of approximately 70 basis points.

Barry Zwarenstein: Also, recurring revenue accounted for 92% of our total revenue in the Q4, and the other 8% was comprised of professional services. Our LTM dollar-based retention rate remained the same as last quarter at 110%. We expect Q1 LTM dollar-based retention rate to be either flat or very slightly down, and we expect a positive inflection in the latter part of the year, assuming no major changes in the economy. Longer term, we continue to expect our retention rate to trend towards the high 120s by 2027, due to our higher mix of enterprise customers, especially larger ones, which have higher retention rates. Q4 adjusted gross margins were 61.3%, a decrease of approximately 100 basis points year-over-year, but a quarter-over-quarter improvement of approximately 70 basis points.

Also recurring revenue accounted for 92% of our total revenue in the fourth quarter.

And the other 8% was comprised of professional services.

I LTM dollar based retention rate remain the same as last quarter at 110%.

We expect Q1, LTM dollar based retention rate to be either flat or very slightly down.

And we expect a positive inflection in the latter part of the year, assuming no major changes in the economy.

Longer term, we continue to expect our retention rate to trend towards the high 100, Twenty's by 2027 due to a higher mix of enterprise customers, especially the larger ones, which have higher retention rates.

Speaker Change: Fourth quarter adjusted gross margins were 61, 3% a decrease of approximately 100 basis points year over year.

But a quarter over quarter improvement of approximately 70 basis points.

Barry Zwarenstein: Fourth quarter adjusted EBITDA was $48.3 million, representing a 20.2% margin, a decrease of approximately 200 basis points year-over-year, but a quarter-over-quarter increase of approximately 230 basis points. Fourth quarter non-GAAP EPS was $0.61 per diluted share, a year-over-year increase of $0.07 per diluted share. Now, I would like to share our average concurrent seat count for the fourth quarter, which grew 19% year-over-year to 349,635 seats. This is equivalent to approximately 525,000 seats on a named seat basis, a unit of measure that some others in the industry cite. As a reminder, we will continue to provide these metrics only on an annual basis. Finally, before turning to guidance, some balance sheet and cash flow highlights.

Barry Zwarenstein: Q4 adjusted EBITDA was $48.3 million, representing a 20.2% margin, a decrease of approximately 200 basis points year-over-year, but a quarter-over-quarter increase of approximately 230 basis points. Q4 non-GAAP EPS was $0.61 per diluted share, a year-over-year increase of $0.07 per diluted share. Now, I would like to share our average concurrent seat count for the Q4, which grew 19% year-over-year to 349,635 seats. This is equivalent to approximately 525,000 seats on a named seat basis, a unit of measure that some others in the industry cite. As a reminder, we will continue to provide these metrics only on an annual basis. Finally, before turning to guidance, some balance sheet and cash flow highlights.

Speaker Change: Fourth quarter, adjusted EBITDA was $48 $3 million, representing a 22% margin a decrease of approximately 200 basis points year over year, but quarter over quarter increase of approximately 230 basis points.

Speaker Change: Fourth quarter non-GAAP EPS was <unk> 61 cents per diluted share a year over year increase of seven cents per diluted share.

Speaker Change: Now I would like to share average concurrent seat count for the fourth quarter, which grew 19% year over year to 349600, and Sydney Fox seats there.

Speaker Change: This is equivalent to approximately 525000 seats on a named seat basis, a unit of measure that some others in the industry side. As a reminder, we will continue to provide these metrics only on an annual basis.

Speaker Change: Finally, before turning to guidance, some balance sheet and cash flow highlights.

Barry Zwarenstein: I'm pleased to report that we achieved a Q4 record for operating cash flows of $36.5 million, driven in part by continued strength in our DSO performance, which came in at 32 days. We have now delivered 30 consecutive quarters of positive LTM operating cash flow, and we remain optimistic about our potential for continuing cash flow generation, given our long-term model, our substantial NOLs, and our low DSO. I'd like to finish today's prepared remarks with a discussion of our full year 2024 and the Q1 guidance. As a reminder, for the last 7 out of 9 years, we've started with prudent revenue guidance of 16% year-over-year growth.

Speaker Change: I am pleased to report that we achieved a Q4 record for operating cash flows of $36 $5 million driven impart by continued strength in our DSO performance, which came in at 32 days.

Speaker Change: We have not delivered 30 consecutive quarters of positive LTM operating cash flow and we remain optimistic about our potential for continuing cash flow generation given our long term model.

Speaker Change: A substantial.

Speaker Change: And I know you guys, though.

Speaker Change: And I can finish today's prepared remarks with a discussion of our full year 2024, and the first quarter guidance as a reminder, for the last seven out of nine years, we started with prudent revenue guidance of 16% year over year growth.

Barry Zwarenstein: For 2024, we are doing the same by guiding to a growth of 16% year-over-year at the midpoint, or $1.055 billion in revenue, which is in line with the high level outlook we provided last quarter. This 16% year-over-year growth is, of course, a starting point, and we will update our outlook as the year progresses. With regards to the bottom line, we are guiding 2024 non-GAAP EPS to a midpoint of $2.16 per diluted share, same as the outlook we provided for 2024 during the last earnings call. As a reminder, we plan to continue making strategic investments in innovation and go-to-market initiatives to enhance our leading position in the market. As for Q1, we are guiding revenue to a midpoint of $239.5 million.

Speaker Change: For 'twenty 'twenty four we're doing the same are guiding to a growth of 16% year over year at the midpoint.

Speaker Change: $1.055 billion in revenue, which is in line with the high level I Hope we provided last quarter.

Speaker Change: This 16% year over year growth is of course, a starting point and we will update our outlook as the year progresses.

Speaker Change: With regards to the bottom line, we are guiding towards 24, non-GAAP EPS to a midpoint.

Speaker Change: $2.16 per diluted share same as the outlook, we provided for train three and four were doing the last earnings call. As a reminder, we plan to continue making strategic investments in innovation and go to market initiatives to enhance our leading position in the market.

Mike Burkland: As one of the first quarter, we are guiding revenue to a midpoint of $239 $5 million. This represents a relatively flat sequential change.

Barry Zwarenstein: This represents a relatively flat sequential change, similar to last quarter's Q1 guide, but better than the prior historical range of 1 to 4% decline. Despite the ongoing macro headwinds, we are guiding to a better quarter-over-quarter change due to the muted seasonal uptick in the fourth quarter, which we expect to result in a less seasonal downtick in the first quarter. As for the remainder of the year, we expect a very small sequential growth in the second quarter and larger sequential increases in the second half. As a result, we anticipate slightly more than 30% of our annual revenue being generated in the second half of 2024. We expect first quarter non-GAAP EPS to come in at $0.38 per diluted share at the midpoint, a decline of $0.23 per diluted share sequentially.

Barry Zwarenstein: This represents a relatively flat sequential change, similar to last quarter's Q1 guide, but better than the prior historical range of 1 to 4% decline. Despite the ongoing macro headwinds, we are guiding to a better quarter-over-quarter change due to the muted seasonal uptick in the Q4, which we expect to result in a less seasonal downtick in the Q1. As for the remainder of the year, we expect a very small sequential growth in the Q2 and larger sequential increases in the second half. As a result, we anticipate slightly more than 30% of our annual revenue being generated in the second half of 2024. We expect Q1 non-GAAP EPS to come in at $0.38 per diluted share at the midpoint, a decline of $0.23 per diluted share sequentially.

Mike Burkland: Some of these the last quarter's Q1 guide.

Mike Burkland: <unk> in the prior historical range of one 4% decline.

Mike Burkland: Despite the ongoing macro headwinds, we are guiding to a better quarter over quarter change due to the muted seasonal uptick in the fourth quarter, which we expect to result in a less seasonal downtick in the first quarter.

Mike Burkland: That's why the remainder of the year, we expect a very small sequential growth in the second quarter.

Speaker Change: And the largest sequential increases in the second half.

Speaker Change: As a result, we anticipate slightly more than 50% of annual revenue being generated in the second half of 2024.

Speaker Change: We expect first quarter non-GAAP EPS to come in at.

Speaker Change: 38 cents per diluted share at the midpoint the decline of 23 cents per diluted share sequentially.

Barry Zwarenstein: I would like to point out that the Q1 non-GAAP EPS is always the weakest of the year, and the $0.23 per diluted share quarter-over-quarter decrease is within our historical range of prior Q1 guidance. For the remainder year, we expect non-GAAP EPS to increase to approximately $0.43 per diluted share in the Q2 and further improve in the second half. Please refer to the presentation posted on our investor relations website for additional estimates, including share count, taxes, and capital expenditures. In summary, we are pleased with our Q4 performance. We will continue to invest strategically throughout the year to enhance our leading position by further innovating on our platform, mining our market, and expanding internationally. Operator, please go ahead.

Speaker Change: I would like to point out that the first quarter non-GAAP EPS is always the weakest of the year.

Speaker Change: And the 23 cents per diluted share quarter over quarter decrease is within our cyber range prior first quarter guidance.

Speaker Change: For the remainder of the year, we expect non-GAAP EPS to increase to approximately 43 cents per diluted share in the second quarter and further improve in the second half.

Speaker Change: Please refer to the presentation posted on how best relations website for additional estimate you could share count taxes and capital expenditures in.

Speaker Change: In summary, we are pleased with our fourth quarter performance, we will continue to invest strategically throughout the year to enhance our leading position by far.

Speaker Change: They're innovating on our platform marching up market and expanding internationally.

Speaker Change: Operator, Please go ahead.

Operator: Thank you so much, Barry. We will now move into the Q&A session. When I call your name, please ensure your video is on and that you unmute. As a reminder, in an effort to hear from everyone, please limit yourself to one question. Our first question will come from Scott Berg with Needham.

Speaker Change: Thank you so much Barry we will now move into the Q&A session. When I call. Your name. Please ensure your video is on and that you on mute as a reminder, in an effort to hear from every.

Speaker Change: One please limit yourself to one question. Our first question will come from Scott Berg with Needham.

Scott Berg: Hi, everyone. Thanks for taking my question here. Lots of them. Why don't I start with the fourth quarter results? Barry, your, your quarterly revenue tends to have variances around seat usage and implementation time frames, and that tends to drive your outperformance, at least from a historical basis, in any one quarter on the revenue side. Q4 this year was your weakest revenue beat that I can remember in all the years covering the company. I guess, can you help us understand what was maybe different in the operation side of the business this quarter versus other quarters that have had stronger revenue outperformance? Thank you.

Scott Berg: Hi, everyone. Thanks for taking my question here. Lots of them. Why don't I start with the Q4 results? Barry, your, your quarterly revenue tends to have variances around seat usage and implementation time frames, and that tends to drive your outperformance, at least from a historical basis, in any one quarter on the revenue side. Q4 this year was your weakest revenue beat that I can remember in all the years covering the company. I guess, can you help us understand what was maybe different in the operation side of the business this quarter versus other quarters that have had stronger revenue outperformance? Thank you.

Scott Berg: Hi, everyone. Thanks for taking my question here lots of well why don't I start with the fourth quarter results.

Speaker Change: Barry your quarterly revenue tends to have variances around seat usage and implementation time frames and that tends to drive your outperformance I believe from a historical basis at any one quarter on the revenue side.

Speaker Change: Q4. This year was your weakest revenue beat that I can remember and the all the years covering the company I guess can you help us understand what was may be different in the operations side of the business this quarter versus other quarters that have had stronger revenue outperformance. Thank you.

Barry Zwarenstein: Yes. So it comes down to that part of our business, approximately half, that is from our install base. If there are less interactions coming into the contact center, there's gonna be less demand for agents and less demand for our services. The numbers are very clear. We externally provided the JPMorgan Chase debit and credit card spending data, which showed low single-digit nominal growth, which means negative transaction growth. And that was a headwind that we were facing. In addition, I'd like to point out, in terms of the magnitude of the beat, Scott, we beat by 1%, which was admittedly lower than normal. We beat by 2% a year ago. The fourth quarter is very difficult to predict.

Speaker Change: Yes.

Speaker Change: So it comes down to that part of our business approximately half of that is from our install base.

Speaker Change: If theyre less interactions coming into the contact center is going to be less demand for agents and less demand for our services.

Daniel P. Burkland: The numbers are very clear.

Daniel P. Burkland: Externally we provided.

Daniel P. Burkland: The the JP Morgan Chase debit credit card spending data, which showed low single digit nominal growth would you mean negative.

Daniel P. Burkland: Transaction loss.

Daniel P. Burkland: And that's was the headwind that that we were facing.

Daniel P. Burkland: In addition.

Daniel P. Burkland: I'd like to point out in terms of the.

The magnitude of beans, Scott.

Speaker Change: We'd be about 1%, which was admittedly lower than normal we'd be about 2% a year ago. The fourth quarter is very difficult to predict.

Barry Zwarenstein: Our customers have to take into account the degree of seasonality and do it in the context of a macro environment that's a little bit soggy. By way of illustration, if you look at the maximum and minimum beats over the last seven years, and you skip over the two COVID years, because those are extraordinary, I'm gonna give you four numbers: 2, 5, 4, 9. 2, 5, 4, 9 is Q1, Q2, Q3, Q4, spread between the min and the maximum beat in those quarters. Clearly, the variability is higher in the fourth quarter because of those factors that I was alluding to. That really is the explanation.

Barry Zwarenstein: Our customers have to take into account the degree of seasonality and do it in the context of a macro environment that's a little bit soggy. By way of illustration, if you look at the maximum and minimum beats over the last seven years, and you skip over the two COVID years, because those are extraordinary, I'm gonna give you four numbers: 2, 5, 4, 9. 2, 5, 4, 9 is Q1, Q2, Q3, Q4, spread between the min and the maximum beat in those quarters. Clearly, the variability is higher in the Q4 because of those factors that I was alluding to. That really is the explanation.

Speaker Change: Our customers have to take into account the degree of seasonality and do it in a context of a macro environment, that's a little bit soggy.

Speaker Change: And.

Speaker Change: By way of illustration, if you look at the man and the maximum and minimum beats over the last seven years.

Speaker Change: And you skip over the two Covid you is because those are extraordinary.

Speaker Change: I'm going to give you for numbers 2549.

Speaker Change: 2549 is Q1, Q2, Q3 Q4 spread between the men and the maximum beat in those quarters and clearly the variability is higher in the fourth quarter because of those factors that I was alluding to.

Speaker Change: So.

Speaker Change: Is that really is the explanation.

Scott Berg: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you.

Operator: Okay, our next question comes from Ryan MacWilliams with Barclays.

Speaker Change: Okay. Our next question comes from Ryan Macwilliams with Barclays.

Ryan MacWilliams: Yeah, it's good to see you. How should we think about the cadence of revenue growth throughout the year, given the Q1 guide and the Q4... The full year guide? It seems like there's solid growth embedded in the second half of 2024. Anything to call out there besides seasonality? Thanks.

Ryan Macwilliams: Yeah, that's good to hear.

Ryan Macwilliams: How should we think about the cadence of revenue growth throughout the year given the <unk> guidance for the full year guide. It seems like there is solid growth embedded in the second half of 'twenty 'twenty, four and anything to call out there besides seasonality. Thanks.

Barry Zwarenstein: ... Yeah, the basic reason over there is the fact that we've got good visibility on the new logo side. We've got this considerable backlog, and we still have three or four months or so of new enterprise orders that Dan and the team will bring in what we call go gets that will count towards revenue in 2024. So we feel, you know, pretty comfortable that we're taking the right stance in balancing the prudence on the new logo, on the installed base side, with the visibility that we have on the net new.

Speaker Change: Yeah, the basic reason over there.

Speaker Change: The fact that we've got good visibility.

Speaker Change: On the new logos.

Speaker Change: Regarding consumer.

Speaker Change: Considerable backlog and we still have three or 400, or so of new enterprise orders and Dan and the team will bring in what we call go getters.

Speaker Change: That will count towards revenue in 2024, so we feel pretty comfortable that retaining the REIT status and balancing the prudent on the new logo on the installed base side with the visibility that we have on the on the net new.

Mike Burkland: And Ryan, I'll pile on just a little bit here. You know, our confidence in the rest of the year is really driven by what's in the backlog. You know, we had a record Q4 bookings for enterprise. And we've had very good quarters from a booking standpoint the last several quarters, and it's, you know, that's what gives us a lot of confidence to back at.

Speaker Change: And Ryan I'll pile on just a little bit here.

Speaker Change: Our confidence in the rest of the year, it's really driven by what's in the backlog.

Speaker Change: We had a record Q4 bookings for enterprise.

Speaker Change: We had very good quarters from a bookings standpoint for the last several quarters and its.

Barry Zwarenstein: Since Mike is piling on, I'm gonna pile in as well. That is that if you look at the guidance we gave, and we gave pretty explicit guidance as well, explicit obviously for Q1, but also for Q2 in the revenue. It doesn't take a rocket scientist to figure out that there's an acceleration coming in the second half of the year, that is embedded into our guidance with our initial 16% starting point. There is one other thing that I neglected to mention early on, so this is not gonna count against your one question, Ryan, but it's really for Scott. We also had a tough compare in terms of international. It doesn't...

Speaker Change: That's what gives us a lot of confidence in the back half.

Speaker Change: And since Mike is finding one I'm going to pile on as well and that is that if you look at the guidance, we gave and we gave pretty explicit guidance, but obviously, if you want but also for Q2 and our revenue.

Speaker Change: And it doesn't take a rocket scientist to figure out that there's an acceleration coming in the second half of the year.

That is embedded into our guidance without initial 16% starting point.

There is one other thing that I neglected to mention earlier on.

Speaker Change: So this is not going to count against your one question, Brian, but it's really for Scott.

Speaker Change: We've also had a tough compare in terms of international.

Barry Zwarenstein: You know, we knew that going in, but in terms of the actual performance in the quarter, we had very good seat turnouts in Q4 2023, but even better ones from the first strategic account that we ever had, which was the British insurance company, plus FedEx, excuse me, the parcel delivery company delivering, going up in Europe, starting in 2022, very strong by the fourth quarter of 2022.

Speaker Change: I it doesn't we knew that going in.

Speaker Change: But in terms of the actual performance in the quarter.

Speaker Change: We had very good sito announcing Q4, 2023 but even better ones from the first strategic account than we ever had which was the British insurance company plus Fedex excuse me the parcel delivery company delivering.

Speaker Change: Going up in Europe.

Speaker Change: In 2022, very strong by the fourth quarter of 2022.

Ryan MacWilliams: Appreciate the color. Unfortunately, I don't think I'll ever be confused for a rocket scientist, but-

Speaker Change: I appreciate the color. Unfortunately, I don't think I'll ever be confused for a rocket scientist, but [laughter]. Thanks Ron.

Mike Burkland: Thanks, Ryan.

Operator: Okay, our next question comes from DJ Hynes with Canaccord Genuity.

Speaker Change: Okay. Our next question comes from DJ Hynes with Canaccord.

DJ Hynes: Hey, guys. Good to see everyone. I don't know if I'm thinking about this correctly, but maybe you can help me. So seat count grew 19% last year. It grew 19% this year, but enterprise subscription growth has continued to decline, right? Which, which tells me price per seat maybe is declining, which, which seems at odds with everything that's happening with AI and attach rates. Just help me unpack the discrepancy between kind of seat count growth that's been stable and, and the declines in enterprise subscription growth.

Gosh, good to see everyone.

Barry I don't know if I'm thinking about this correctly, but maybe you can help me so.

Speaker Change: <unk> count grew 19% last year it grew 19% this year.

Speaker Change: But enterprise subscription growth has continued to decline right, which tells me price per seat, maybe it's declining which seems at odds with.

Daniel P. Burkland: Everything that's happening with AI and attach rates just help me unpack the.

Daniel P. Burkland: The discrepancy between kind of seat count growth, that's been stable and the declines in enterprise subscription growth great question D J and thank you.

Barry Zwarenstein: Great question, DJ, and thank you. If you do the arithmetic, you'll see that in fact, you're right. If you look at the recurring revenue per seat, Q4 2022 to Q4 2023, is down by approximately 3%. The whole reason for that, or the almost exclusive reason for that, is usage. We have more and more of these big clients that come onto the platform with committed contracts, all brought to us by the likes of BT and AT&T, where the – and a good example is a healthcare company, now our second biggest comp customer. They don't use our usage, and may in the future, but currently they don't. And that's what causes... The goodness that comes in from AI and automation is still there, but it's not offsetting something as big as 13% of our current revenue.

Daniel P. Burkland: You do the arithmetic, you'll see that in fact Youre right. If you look at the recurring revenue per seats Q4, 2022 through Q4, 2023 is down by approximately 3%.

Daniel P. Burkland: The whole reason for that or the almost exclusive reason for that is usage.

Daniel P. Burkland: Then we have more and more of these big pipes that come onto the platform.

Daniel P. Burkland: With committed contracts all brought to us by the likes of BT and AT&T with it.

Daniel P. Burkland: And a good example is a health care company now our second biggest gum.

Daniel P. Burkland: Customer they don't use our usage and may in the future by country. They know and that's what causes the goodness that comes in from AI and automation is still there, but it's not offsetting something as biggest cookie.

DJ Hynes: So CX usage, pricing per seat continues to trend up. Is that the correct way to put it?

Daniel P. Burkland: Cooking set of our current revenue.

Daniel P. Burkland: So ex usage pricing per seat continues to trend up is that right.

Barry Zwarenstein: It does. There are some other dynamics, like Latin America is growing a little bit faster, and the prices there are a little bit lower. But if you're looking at the US, it is pretty much in line with how it's been growing in the past.

Daniel P. Burkland: Yes.

Daniel P. Burkland: There are some other dynamics like Latin America is growing even faster than the price of the a little bit lower but if you're looking at the U S.

DJ Hynes: Okay. Thank you, guys.

Daniel P. Burkland: Is pretty much in line with how it's been growing in the past okay. Thank you guys.

Daniel P. Burkland: Yeah.

Operator: Okay, our next question comes from Meta Marshall with Morgan Stanley.

Daniel P. Burkland: Okay.

Meta A. Marshall: Okay. Our next question comes from meta Marshall with Morgan Stanley.

Meta Marshall: Great. Thanks, guys. A question for me, I guess just what do you guys see as your biggest bottleneck today? Is it getting budget authorization? Is it getting organizations to realize what approach they want to take to AI? Is it professional services? Is it just kind of overall macro environment? Like, what do you think is kind of the biggest bottleneck you guys face with customers in getting them ramped?

Meta A. Marshall: Thanks, guys.

Meta A. Marshall: A question for me I guess, just what do you guys see as your biggest bottleneck today is it.

Daniel P. Burkland: Hum getting budget authorization is it getting organizations to realize what approach. They wanted to take to AI is that professional services is it just kind of overall macro environment like why do you think is.

Daniel P. Burkland: Kind of the biggest bottleneck you guys faced with customers and getting.

Mike Burkland: Gosh, I don't think there's any single bottleneck. I think what is important to understand is the strategic nature and the mission-critical nature of what we do. To come in and really help companies transform how they're delivering customer experience, to take what they're used to, probably having 10 very independent, I'm using an example, in some cases, 10 different contact centers with 10 different, you know, operations managers running those. To saying, "Hey, we're gonna consolidate this into one virtual, and we're gonna be able to distribute work throughout all of those locations, and do so in a much different fashion, with a lot more technology, automation, and AI that wasn't previously available." So it's a lot of planning.

Daniel P. Burkland: Sam ramped.

Speaker Change: Gosh I don't think there's any single bottleneck I think what is.

Speaker Change: Important to understand is the strategic nature.

Speaker Change: The mission critical nature of what we do.

Speaker Change: To come in and really help companies transform how they're delivering customer experience to take what they were used to probably having 10 very independent music. An example in some cases 10 different contact centers with 10 different.

Speaker Change: Operations managers running those just saying hey, we're going to consolidate this into one virtual and we're gonna be able to distribute.

Speaker Change: Throughout all of those locations and do so in a much different fashion with a lot more technology and automation and AI that wasn't previously available. So it's a lot of planning.

Mike Burkland: The larger you go up the stack of larger and larger companies, and large enterprises, the more difficult it is for them to organize and come to agreement on how to roll things out. So always, when you go up market, you're gonna have longer lead times and longer rollouts. We'll move as quickly as they're capable of moving, and we have business consulting experts that actually work with them to help kind of try to speed that up. We also talked about the Aceyus acquisition to help speed that migration up. But it is a big undertaking, and so we're very realistic on how long it takes to bring these customers up. But I don't think they're not getting any longer.

Speaker Change: The larger you go up the stack of larger and larger companies and large enterprises the more difficult. It is for them to organize and come to agreement on how to roll things out so.

Speaker Change: Always when you go up market youre going to have longer lead times and longer rollouts.

Speaker Change: Move as quickly as they are capable of moving and we have business consulting.

Speaker Change: Experts that actually work with them to help kind of try to speed that up we also talked about the ECS acquisition to help speed that migration up but it is a big undertaking.

Speaker Change: So we're very realistic on how long it takes to bring these customers up but I don't think they're not getting any longer.

Mike Burkland: It's just that as we move up market, we have to recognize that it's a lot more effort and work, not only on our side, but really on the customer side, to get to the point to where they can launch and then continue to ramp.

Speaker Change: Just as we move up market, we have to recognize visits.

It's a lot more effort and work.

Speaker Change: Not only on our side, but really on the customer side to get to the point, where they could not.

Barry Zwarenstein: Great. Thanks so much.

Meta Marshall: Great. Thanks so much.

Speaker Change: Two are they can launch and then continuing to ramp.

Mike Burkland: Yep.

Speaker Change: Alright, thanks, so much.

Operator: Okay, our next question comes from Jim Fish with Piper Sandler.

Speaker Change: Yes.

Speaker Change: Okay. Our next question comes from Jim Fish with Piper Sandler.

Jim Fish: Hey, guys, thanks for the question here. And Barry, appreciate the disclosure around AI revenue finally. I think a lot of longs were looking for that one. So, speaking of that, any sense to what—how we should think about that growth rate for the year and what that 7% revenue could be to kind of get to that 2027 goal? And Dan, for you on this topic, what's differentiating your Agent Assist product versus what competitors have out there, or their kind of version of it? Thanks, guys.

Jim Fish: Hey, guys. Thanks for the question here Barry I appreciate the disclosure around AI revenue finally, I think a lot of longs were looking for about one so speaking about any sense to what how we should think about that growth rate.

For the year and what that 7% our revenue could be to kind of get to that 2027 going and Dan for you on this topic, what's differentiating your AI assist product.

Jim Fish: Versus what competitors have out there for their kind of person with it thanks guys.

Barry Zwarenstein: Want me to do this?

Mike Burkland: Sure. I'll talk about AI, our Agent Assist product. Three components to it. There's the real-time coaching and delivering answers, so that they from the data sources within that company, so the agent can be more proficient and effective at answering a customer question. There's the AI transcription and the AI summary of the call that gets inserted into the CRM, all part of our Agent Assist solution. If you look, and you'll see, others are all talking about those same capabilities. The key there is, if you're on our platform, you need to use our Agent Assist product. The reason is, you have to have the platform listening into the conversation to perform the transcription and to perform the summary of that transcription in real time.

Jim Fish: Yeah.

Speaker Change: Sure I'll talk about it.

Our agent assist product three components to it there's the real time coaching and delivering answers so that they can get from the data sources within that that company. So they can the agent can be more proficient effective in answering a customer question never see AI transcription and the AI summary of the call the kitchen.

Speaker Change: Inserted into the CRM all part of our agent assist solution. If you look and you'll see others are all talking about those same capabilities.

Speaker Change: The key there is if you're on our platform you need to use our agent assist products.

Speaker Change: Reason is you have to have a platform listening into the conversation to perform the transcription and to perform the the <unk>.

Mike Burkland: And if you're doing agent coaching, you have to take that in near real time and feed it back to the agent. So when you say, "What's the difference?" There's probably not a ton of difference in what ultimately gets delivered. We all go about it slightly different in the underlying technologies, but we're all delivering that same capability. But you can't take a Five9 customer or Five9 contact center and use somebody else's Agent Assist. That won't work.

Speaker Change: Number of that transcription in real time, if youre doing agent coaching you have to take that in near real time and feedback to the agents. So when you say, what's the difference there is probably not a ton of difference to us.

What ultimately gets delivered.

Speaker Change: We all go about it slightly different than the underlying technologies, but we're all deliveries that same same capability, but you can't take a five nine customer contact center and use somebody else's agent assess that will work.

Barry Zwarenstein: So, Jim, in terms of what will happen to that 7%, it would be easy just to say it's growing faster, therefore it's going to consistently increase. It's tempting, but I'm going to resist the temptation. And the reason I'm going to resist the temptation is the following: We've got a massive install base, 350,000 concurrent seats, and we are spring-loaded to take advantage of when this economy finally and inevitably turns around. Our retention rates have been in the mid-90s, and when those transactions increase, it'll spread across that entire install base, and we are not going to be embarrassed if that overwhelms, just by the sheer magnitude of the install base, the growth that we enjoy clearly demonstratively from AI and automation.

Speaker Change: Jim in terms of the boiler happens at 7%.

Speaker Change: It would be easy just to say is growing faster than we've done it consistently increase it's tempting, but I'm going to resist the temptation and the reason I'm going to resist the temptation is the following.

Speaker Change: We've got a massive installed base.

Speaker Change: 350000 concurrency.

Speaker Change: And we are spring with all of us to take advantage of when this economy finally, and inevitably does around our retention rates have been in the mid nineties and win.

Speaker Change: There are no transactions increase it will spread across that entire installed base and we are not going to be embarrassed.

Speaker Change: If that overwhelmed by the sheer magnitude of the installed base.

Speaker Change: The growth that we enjoyed clearly demonstrated lee from AI and automation.

Jim Fish: Couldn't help but try, but thanks, guys. Appreciate it.

Speaker Change: For now, but try but thanks guys I appreciate it.

Barry Zwarenstein: Thanks, Jim.

Operator: Our next question comes from Taylor McGinnis with UBS.

Speaker Change: Thanks Krish.

Yeah.

Speaker Change: Our next question comes from Taylor Mcginnis with UBS.

Taylor McGinnis: Yeah. Hi, team, can you hear me?

Barry Zwarenstein: Yeah, we can, Taylor.

Taylor McGinnis: Yeah, Hi, Tim can you hear me, yes, we had in Thailand.

Taylor McGinnis: Okay, perfect. Hello, everyone. Thanks so much for taking the question. Maybe, Barry, can you talk a little bit about the assumptions embedded in the Q1 guide, or at least the visibility you have to that outlook? So it implies some flattish sequential growth, but I think historically in Q1, you guys have done closer to mid-single digits. So have we gotten to the point where some of the softer usage activity that you've spoken about is no longer serving as an incremental headwind? I think you mentioned the 25% subscription growth, so as these large deals ramp, could we start to see an improvement in sequential growth as we move throughout the year?

Taylor McGinnis: Okay, perfect and Hello, everyone. Thank you for taking the question maybe on <unk>.

Taylor McGinnis: Can you talk a little bit about the assumptions embedded in the <unk> guide or at least the visibility you have you have to that outlook. So it implies flattish sequential growth I think historically in <unk> you guys have done closer to mid single digits.

Taylor McGinnis: Have we gotten to the point, where some of the softer usage activity that that you've spoken about it no longer servicing as an incremental headwind.

Taylor McGinnis: I think you mentioned the 25% subscription crowd. So couldn't so as these large deals ramp could we start to see an improvement in sequential growth as we move.

Barry Zwarenstein: I'll take the last part first. Yes, the guidance would lead you to be pretty clear in assuming that we're going to see growth in the second half of the year. With respect to the dynamics around Q1, where you started your question with, Taylor, here we normally would have, in the past, a 1 to 4% decline. The number's always there. We give a guide, go down 1 to 4%, and then to beat it each time. Now, in Q4, we had a smaller uptick, so we're going to have a smaller downtick, and we've kept it flat. And I really would not want to comment on in terms of the... Beyond that, in terms of Q1, beyond the guide that we've given, except to say that we feel comfortable with what we've given.

Taylor McGinnis: Throughout the year.

Taylor McGinnis: Okay.

Speaker Change: I'll take the last part first yes.

Speaker Change: The the guidance would lead you to be pretty clear in assuming that you're going to see.

Speaker Change: In the second half of the.

Speaker Change: With the with respect to the dynamics around Q1, where you started your question with that.

Speaker Change: Yeah, we normally would have in the past, our 1% to 4% decline.

Speaker Change: They're the ones that we give a guy go down 1% to 4%.

Speaker Change: To beat it.

Each time.

Speaker Change: Now in Q4, we had a small uptick so we got out of this morning, daunting and we've kept it flat.

Speaker Change: And I really would not want to comment on in terms of the.

Speaker Change: Beyond that in terms of Q1 beyond the guy that could give us excepting to say that we feel comfortable with what we give them.

Barry Zwarenstein: We're doing it in an environment that, you know, that is, is pretty uncertain. I'll make two comments on that. The external data, which is a window into our own clear data that we see from our customers on a daily basis, the JP Morgan data for Q1 is actually negative, debit and credit card spending. So for sure, the transactions are meaningfully negative. So we're taking that into account, and we've just come off an experience where when you look at our biggest consumer, well, amongst our biggest consumer discretionary customers in the fourth quarter, for the first time ever since they came onto the platform, there was a sequential decrease from Q3 to Q4. Never happened before. And so yes, we take this into account when we're doing our guidance.

Barry Zwarenstein: We're doing it in an environment that, you know, that is, is pretty uncertain. I'll make two comments on that. The external data, which is a window into our own clear data that we see from our customers on a daily basis, the JP Morgan data for Q1 is actually negative, debit and credit card spending. So for sure, the transactions are meaningfully negative. So we're taking that into account, and we've just come off an experience where when you look at our biggest consumer, well, amongst our biggest consumer discretionary customers in the Q4, for the first time ever since they came onto the platform, there was a sequential decrease from Q3 to Q4. Never happened before. And so yes, we take this into account when we're doing our guidance.

Speaker Change: And we're doing it in an environment that.

Speaker Change: That is pretty uncertain.

Speaker Change: I'll make two comments on that.

Speaker Change: The.

Speaker Change: She is external data, which is a window into our own.

Speaker Change: Clear data that we see from our customers.

Speaker Change: Daily basis.

Speaker Change: A J good morning data for Q1 is.

Speaker Change: He is actually negative.

Speaker Change: Kevin Craig about spending so but should this transaction go meaningfully negative so we're taking that into account.

Speaker Change: And we've just come off of the experience where when you look at.

Speaker Change: Biggest consumer well amongst the biggest consumer discretionary customers in the fourth quarter.

Speaker Change:

Speaker Change: For the first time ever since I came on to the platform there was a sequential.

Speaker Change: Decrease from Q3 to Q4, none of that happened before.

Speaker Change: And so.

Speaker Change: Yeah, we.

Speaker Change: Taking this into account when we're doing.

Michael Turrin: Perfect. Thanks so much.

Taylor McGinnis: Perfect. Thanks so much.

Speaker Change: Our guidance.

Barry Zwarenstein: Thank you.

Speaker Change: Okay.

Speaker Change: Perfect. Thanks, so much thank you.

Operator: Our next question comes from Peter Levine with Evercore ISI.

Speaker Change: You.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Peter Levine with Evercore ISI.

Peter Levine: Thanks, guys, for taking my question. Maybe, Barry, for you on the margin front gross margins. I know you made investments over the past year to kind of modernize your infrastructure, offloading services to partners. Maybe just give us an update on kind of how that's trending, and then how should we think about gross margins going forward? I know in the year it looks like it ticked down, but, you know, what's the, you know, expectation for gross margins?

Peter Levine: But thanks guys for taking my question it would be a barrier for you on the margin front gross margins I know you made investments over the past year to kind of modernize your infrastructure Offloading services to partners, maybe just give us an update on kind of how that's trending and then how should we think about gross margins going forward I know in the year it looks like it ticked down but what's the.

Barry Zwarenstein: Perfect. And just by the way, I'm gonna ask the operator to have the next question be for somebody, for Mike or Dan. So in terms of the gross margin, the, there's a number of factors. Moving from international, GCP instances to our own, where the margins are higher. There's, there's the moderation in some of the investments we've been making, including in professional services, with playground that is coming as a headwind. But over all of that, of all of that is a revenue growth rate against 6% and 76 basis points. And you see that in the Q4, because typically the Q4... Always the Q4, one exception, is higher because that's a, it's a strong quarter.

Peter Levine: Our expectation for gross margins.

Speaker Change: And just by the way I'm going to ask the operator to have the next question Steve for somebody for micro data.

Speaker Change: So in terms of the gross margin.

Speaker Change: There's a number of factors moving from international.

Speaker Change: GDP estimates as to where the margins are higher is the moderation in some of the investments we've been making including in professional services.

With Paypal that AR is coming is it a headwind.

Steve: So all of that of all of that is the revenue growth rate against fixed and semi fixed cost and you see that in the fourth quarter is typically the fourth but always a fourth quarter with one exception is high because as opposed to the strong quarter. So we actually.

Barry Zwarenstein: So we actually, and we don't want to sound, I should put it, cocky or anything, we're actually, not that disappointed with our gross margins, given the overall weakness in the revenue that we have been experiencing. So to answer your question now directly, in terms of where we would expect the gross margins, we have got a number of programs internally that are gonna take a while to demonstrate, despite to come to fruition, but they will. It's a major focus area. We understand the importance, we've got levers we can pull, and if we get a tailwind from the revenue, then you'll see it very sharply in the gross margin improve.

Steve: And we don't want to sound.

Steve: I'll start with coffee or anything we actually.

Steve: Not that disappointed with our gross margins given the overall weakness in the revenue that we had been experiencing.

Steve: So to answer your question on DAU ranking in terms of the way we would expect the gross margin. We have got a number of programs internally that are in it takes a while to demonstrate despite two contemplation, but theyre well.

Steve: It's a major focus area we.

Steve: We understand the importance.

Steve: We've got levers we can pull.

Steve: If we get a tailwind from the revenue then you'll see a very sharply in the gross margin improvement.

Peter Levine: An update on partners and offloading some of those pro services?

Steve: And then I'll take on partners and Offloading some of those pro services.

Barry Zwarenstein: Dan, Mike?

Mike Burkland: Yeah, we've begun enabling more and more partners to take on, you know, obviously on the sales side, they have the competency now to represent us. So we have thousands of people throughout the world representing Five9. We've also done what's called Project Pull Through, and we've referred to it before, where we've identified a select few partners that are willing to invest in getting certification for implementation and ongoing services of the platform. Very important that we have that qualification requirement, because we want to make sure that those partners are upholding the very high standard that we have for ourselves and delivering record level NPS scores. We've referred to them as +85. It's unheard of in our industry. Most folks are well below +50, and we maintain a +85 rating, and we want to maintain that.

Steve: Dan.

Daniel P. Burkland: Yes, we've begun.

Daniel P. Burkland: Enabling more and more partners to take on obviously on the sales side.

Daniel P. Burkland: You have the competency now to represent us and we have thousands of people throughout the world representing five months. We've also done in what's called project pull through and we've referred to it before where we've identified a select few partners that are willing to invest in getting certification for implementation and ongoing services on the platform. It's very important that we have that qualification.

Daniel P. Burkland: Requirement, because we want to make sure that those partners are upholding the very high standards that we have for ourselves and delivering record level NPS scores, we've referred to as costs 85, it's unheard of in our industry. Most folks are well below plus 50 <unk>.

Mike Burkland: We hold our, our partners accountable to that as well, and, Mike alluded to that in the, in his, comments earlier. But, it's something that is allowing us to increase the percentage that goes through partners. Internationally, we're up, we're over 50%, and domestically, we're tracking very nicely and in the high 20s, as far as the number of projects that are now being led by our partners.

Daniel P. Burkland: Maintain a plus 85 rating and we want to maintain that we hold are our partners accountable to that as well Michael.

Mike Burkland: Mike alluded to that.

Mike Burkland: His comments earlier.

Mike Burkland: Something that is allowing us to increase the percentage that goes through partners internationally, where we're over 50% and domestically, we're tracking very nicely and in the us and the high Twenty's as far as the number of projects that are now being led by our partners.

Peter Levine: Thank you, guys.

Mike Burkland: Yep. Thank you.

Speaker Change: Thank you guys, yes. Thank you.

Barry Zwarenstein: Thanks.

Operator: Okay, our next question comes from Michael Turrin with Wells Fargo.

Speaker Change: Okay.

Speaker Change: Okay. Our next question comes from Michael <unk> with Wells Fargo.

Michael Turrin: Hey, great. Nice to see everyone. Appreciate you taking the question. Just a quick multiparter. So I'm curious in Q4, if you saw any elongation tied to some of the M&A headlines, a lot of us on the investor side were focused on. And Barry, sorry, still a question for you. I know you're fatigued, but maybe expand on the precision you have behind that second half reacceleration, because you also mentioned in the prepared remarks that Q4 can be tougher to forecast. It seems important for the forecast we have, coming into 2024, so maybe you can just add what gives you the confidence there as well. Thank you.

Michael: Okay, Great nice to see everyone. Appreciate you taking the question.

Michael: Just a quick multi partner so I'm curious in Q4, if you saw any elongation tied to some of the M&A headlines.

A lot of suddenly investor side, we're focused on and and Barry sorry still a question for you I know I know you are fatigue, but maybe expand on the precision you have behind that.

Michael: And that second half re acceleration because you also mentioned in the prepared remarks that <unk> can be tougher to forecast.

It seems important for the forecast we have coming into 'twenty. Four so maybe you can just add what gives you the confidence there as well. Thank you Mike I'll start with the first question I'll, let Mary handle the second one is now feel free to chime in but there was no.

Mike Burkland: Michael, I'll start with the first question. I'll let Barry handle the second one, Dan, feel free to chime in. But there was no impact from some of those rumors that occurred relative to M&A. We set the record straight with a press release very quickly, and we did that for a reason. We, you know, we definitely did not want customers, prospects, and partners reacting to false news. So we were very clear with the press release. If you want to quantify it, it was a two-day delay in terms of, you know, potential sales cycle increase, but it wasn't, it wasn't a big impact. That's why we issued the press release. Barry?

Mary: No impact.

Mary: From some of those rumors that occurred.

Mary: Relative to M&A, we set the record straight with a press release very quickly when we do that for a reason.

Mary: Definitely do not want customers prospects and partners.

Mary: <unk> the false news. So we were very clear with the press release, if you want to quantify it and was it two days delay in terms of.

Mary: Potential sales cycle, and Chris, but it wasn't it wasn't a big impact that's why we issued a press release.

Barry Zwarenstein: So in terms of the preceding, there it is. Again, think about new logo versus installed base. In terms of the installed base, we've made the assumption that the economy is going to, to use the same phrase that I used before, remain somewhat soggy for the rest of the year. Nothing big down, nothing big up. And based upon that, we've looked pretty closely at the, you get an LTM dollar-based retention rate. We, of course, get the spot. We looked at it pretty closely, and we gave the guidance that we would have a positive inflection on the dollar-based retention rate during the course of 2024. Just like we said, by the way, for Q4 of 2023. So we had $900 million, $910 million of revenue in 2023.

Mary: So in terms of the season or it is.

Mary: Again thinking about new logo versus installed base in terms of the installed base.

Mary: We've made the assumption that the economy is going to.

Mary: He used the same phrase that I used before remains somewhat suddenly for the rest of the nothing big nothing being up.

Mary: And based upon that we've looked pretty closely.

Mary: You'll get an LTM dollar based retention rate we of course get this part we looked at it pretty closely.

Mary: And we gave the guidance.

That we wouldn't have any positive inflection on the dollar based retention rate.

Mary: During the course of 'twenty 'twenty four just like we.

Mary: And by the way for Q4 of 2023.

Mary: So we had 900.

Mary: <unk> million dollars and $910 million of revenue in 2020.

Barry Zwarenstein: If you use just the 10-- the same Dollar-Based Retention Rate, no increase, you've got, for the year, you've got $90 million, round numbers, $91 million, from the installed base. That's the one part. The other part, the balance of, say, $55, $54 million, is what's sitting in the backlog and what we have supreme confidence that Dan and his high-stepping sales team will be able to bring in before the end of May or end of June. And bring-- and Andy and his high-stepping implementation team will implement by year-end.

Mary: 2023.

Mary: Just the same.

Mary: Same dollar base retention rate no increase.

Speaker Change: You got it for the year, you've got $90 million round numbers $91 million.

Speaker Change: From an installed base that's the one part the other part the balances a 50 $554 million.

Speaker Change: Is what's sitting in the backlog and what we have supreme confidence that Dan and he's a high stepping sales team will be able to bring in before the end of may or end of June and bring that Andy and human high-stepping implementation team will implement by Europe.

Operator: That's very helpful. Thank you.

Michael Turrin: That's very helpful. Thank you.

Barry Zwarenstein: Thanks, Michael.

Speaker Change: That's very helpful. Thank you. Thanks.

Operator: Our next question comes from Siti Panigrahi with Mizuho.

Speaker Change: Thanks, Michael.

Speaker Change: Our next question comes from CPE, Panna groggy with Mizuho.

Siti Panigrahi: Thanks for taking my question. I think maybe a follow-up to that, your last answer. You know, you talked about, your sales cycle and implementation cycle, but, as you look at your, implementation pipeline or go live, how do you compare that to to, this year versus last year, 2023? And also, can you get an update on, you know, on some of the ramp, ramp of your large enterprise deals you guys talked about on large healthcare conglomerate or even Fortune 50 insurance companies?

Panna: Hi, Thanks for taking my question I think maybe a follow up to that your last answer.

Panna: You know you talked about your sales cycle and implementation cycle, but as you look at your implementation pipeline. Our go lives how do you compare that to this year versus last year 2023.

Panna: And also can we get an update on.

Panna: Some of the wrap around of your large enterprise deals you guys talked about in large health care conglomerates are even fortune 50 insurance companies.

Mike Burkland: Yeah, great question. To answer your pipeline question, the pipeline's at an all-time record, and that's really across most all the sectors, particularly upmarket in our enterprise and strategic accounts area. As we've mentioned before, more and more of these large enterprises are now embarking on large projects, digital transformation, RFPs, to replace and get out from under the legacy platforms that they've been living on for many, many years. They really have no choice. It's not only that they're being pushed off of those platforms by the legacy providers because they're being either end of life or ending development, but they're also being pulled away from those and into the cloud by the advent of AI and the automation solutions that they can take advantage of. So that's one, pipeline's never been stronger.

Speaker Change: Yeah, Great Great question to answer your pipeline question. The pipeline is at an all time record and that's really across most all of the sectors, particularly up market and our enterprise and strategic accounts area.

Panna: As we've.

Panna: As we've mentioned before more and more of these large enterprises are now embarking on large projects digital transformation rfps to replace and get out from under the legacy platforms that they've been living on for many many years. They really have no choice its not only that they're being pushed off of those platforms by the legacy providers because they are.

Panna: Being either end of life ending development, but they're also being pulled away from those and into the cloud by the advent of AI and the automation solutions and that can take advantage of so thats one pipeline has never been stronger.

Mike Burkland: As far as the cycles to onboard new customers, yeah, I mentioned that earlier. It's one of those where we've got to work through that with each customer, independently. We've got the best services organization in the world, with those experts that Mike had mentioned in his prepared remarks. Which is so key because we can go in and really consult with them and help them understand how they can most easily and most effectively make that transition to the Five9 cloud, and do so with the right business outcomes that they're trying to achieve. That's what we pride ourselves on, and we think we do it better than anyone. You know, it does give us the positive of having visibility into a backlog, where we can see in the future revenue for several quarters.

Panna: As far as the cycles to onboard new customers, Yes, I mentioned that earlier, it's one of those where we.

Panna: We've got to work through that with each customer independently. We've got the best services organization in the world with those experts that Mike had mentioned in his prepared remarks.

Panna: So key because we can go in and really consult with them and help them understand how they can most easily at most effectively make that transition to the $5 nine cloud and do so with the right business outcomes, they're trying to achieve and that's what we pride ourselves on and we think we do it better than anyone.

Panna: It does give us the positive of having visibility into our backlog.

Mike Burkland: So, that's the comfort side of it, if you will. But, yeah, we're working always on tooling and, making things more and more efficient and helping our customers get onboarded more and more quickly. But there are certain things, you know, you've got integrations into lots of different platforms to be able to really extract the value from our AI and automation solutions. One of the biggest keys there is integrating to those data sources so that we can have more data feeding the engine, that can then make the intelligent decisions, that it needs to make. And that's the key, is building in all those integrations before you flip the switch and go live. And once we do that, then it's a matter of ramping them up and, and bringing them on board.

Panna: We can see in the future revenue for several quarters so that.

Panna: What's the comfort side of it if you will.

Panna: Yeah, we're working always on tooling and.

Panna: Making things more and more efficient and helping our customers get on boarded more and more quickly, but there are certain things you got integrations into lots of different platforms to be able to really extract the value from our AI and automation solutions are the biggest keys. There is integrating to those data sources. So that we can have more data feeding the engine that can then.

Make intelligent decisions than it needs to make.

Panna: And that's the key is building in all those integrations before you flip the switch and go lives and once we do that then it's a matter of ramping up.

Siti Panigrahi: Thank you.

Mike Burkland: Yep.

Panna: And bringing them on board.

Operator: Our next question comes from Matthew Niknam with Deutsche Bank.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Matthew nickname with Deloitte Bank.

Barry Zwarenstein: Hey, it's Matt Niknam from Deutsche Bank.

Matt Niknam: Hey, it's Matt Niknam from Deutsche Bank.

Operator: Sorry about that. The question-

Matthew: Hey, it's Matt <unk> from Deutsche Bank, [laughter], Alright, I got a question.

Barry Zwarenstein: No worries. So we talked a lot about retail and consumer discretionary. I'm just curious how... any color you can give on healthcare and financials and how they did in the fourth quarter relative to typical seasonality? And have you baked in any abnormal softness in Q1 for those two verticals? Thanks.

Matt Niknam: No worries. So we talked a lot about retail and consumer discretionary. I'm just curious how... any color you can give on healthcare and financials and how they did in the Q4 relative to typical seasonality? And have you baked in any abnormal softness in Q1 for those two verticals? Thanks.

Matthew: No worries, so we talked a lot about our retail and consumer discretionary I'm just curious how any color you can give on health care and financials and how they did in the fourth quarter relative to typical seasonality and have you baked in any abnormal softness in <unk> for those two vertical thanks.

Mike Burkland: So as the healthcare and the financials are the biggest and second biggest vertical, consumer being the third. If you look at all the others aside from consumer, so the vast majority being financial and healthcare, they were pretty much in line in the fourth quarter in terms of sequential growth as they were the prior year. We've not baked in any major headwind in those two verticals in Q1. Okay, Matthew?

Mike Burkland: So as the healthcare and the financials are the biggest and second biggest vertical, consumer being the third. If you look at all the others aside from consumer, so the vast majority being financial and healthcare, they were pretty much in line in the Q4 in terms of sequential growth as they were the prior year. We've not baked in any major headwind in those two verticals in Q1. Okay, Matthew?

Speaker Change: So after.

Speaker Change: The health care and the financials.

Speaker Change: The biggest and secondly, as vehicle consumer being as it is.

Speaker Change: If you look at all of the others aside from consumer so the vast majority of being financial and health care. They were pretty much in line in the fourth quarter in terms of sequential growth that they were the prior year.

Speaker Change: And we've not baked in any major headwinds in those two vehicles in Q1.

Barry Zwarenstein: Thank you.

Matt Niknam: Thank you.

Mike Burkland: Thank you.

Operator: Thanks. Okay, our next question comes from Mike Latimore with Northland.

Speaker Change: Okay Matthew.

Matthew: Thank you.

Matthew: <unk>.

Matthew: Yeah.

Matthew: Okay. Our next question comes from Mike Latimore with Northland.

Mike Latimore: Great. Hi, folks. So, on the DB and E number you talked about, Barry, are you, did you say you expect it to be 110% for the year, or do you expect it to improve by the second half of the year?

Matthew: Okay.

Matthew: Great.

Mike Latimore: So on the DB any number you talked about various are you did you say you expect it to be 110% for the year or do you expect it to improve by the second half there.

Barry Zwarenstein: The latter. So it's currently 110. We're not giving Q1, Q2. I think all we said very explicitly is that the, we expect an inflection in the second half of the year. We have a breakout between enterprise and commercial. We have the spot rates. We have within enterprise, the breakout between the bigger customers, which have demonstratively and consistently higher elevated retention rates, versus those that, the smaller enterprise customers. And there is some art to it, there's no question. Our customers don't know exactly what they're going to be doing this quarter, let alone in the second half, but based upon the best, analysis we can do, we feel comfortable in saying what we said.

Mike Latimore: So it's currently one can we not.

Mike Latimore: What do you mean Q1 Q2, I think I've always said very explicitly that we expect an inflection in the second half of the year.

Mike Latimore: We have a good breakout between enterprise and commercial we have the spot rate we have within enterprise the breakout between the bigger customers, which have demonstrated being consistently high dollar based retention rate versus those that.

Mike Latimore: This one enterprise customers and.

Mike Latimore: There is some art to it there's no question that a person has done exactly what they are going to be doing this quarter. There's a lot of in the second half, but based upon the best.

Mike Latimore: Got it. Okay, thanks.

Mike Latimore: Analysis, we can do we feel comfortable in saying like we said.

Barry Zwarenstein: Sure.

Speaker Change: Got it okay. Thanks Charles.

Operator: Our next question comes from Catharine Trebnick with Rosenblatt.

Mike Latimore: Okay.

Mike Latimore: Our next question comes from Katherine <unk> with Rosenblatt.

Catharine Trebnick: Thank you for taking my question. So, Dan, this is for you.

Barry Zwarenstein: Hi.

Catharine Trebnick: Are you seeing, Barry, I'm giving you a break. So what are you seeing in the RFPs from your large enterprise customers that you would say is different today than it was a year ago? And I know it's AI and automation, but are there other factors in these digital transformation that are looked, that are asking you to pull these feeds in for you?

Katherine: Thank you for taking my question. So Dan this is for you.

Katherine: Are you seeing.

Katherine: They're giving you break so why do you think you can the rfps from the E. R. M. Large enterprise customers that you would say is different today than it was a year ago and I know with the AI and automation, but there are other factors in these digital transformation that it looks that are asking us to pull these feeds.

Mike Burkland: ... Yeah. So awesome question. Thank you, Catharine. And I'll give two answers instead of three, because you wouldn't let me answer with AI and automation, which obviously is in all of these. But the two biggest changes are, one, you know, Genesys made their announcement that they're end-of-lifing their legacy on-prem and their multi-cloud solutions, which really resulted in a whole new set of customers that came to market with, "Oh, we've got to embark on a process." That's just starting. Some of these big enterprises, it takes them several quarters to assemble a team, write an RFP, establish what they're gonna ask for in that RFP, and launch. So we mentioned that we saw a doubling of the number of RFPs year-over-year, especially outmarket. So that's one, and primarily due to that Genesys space.

Speaker Change: Yeah, Yeah. So awesome question. Thank you Catherine.

Speaker Change: I'll give two answers instead of free because you wouldn't let me answer with AI and automation, which obviously isn't in all of these but the two the two biggest changes are one genesis made their announcement that they were end of life ing their legacy crown that their multi cloud solutions, which really resulted in a hole.

Speaker Change: New set of customers that came to market with Oh, we've got embarked on a process. That's just starting some of these big enterprises. It takes them several quarters to assemble a team right in RFP establish what theyre going to ask for is an RFP and blocks.

Speaker Change: We mentioned that we saw a doubling of the number of rfps year over year, especially up market.

Mike Burkland: To go along with what's always been the case, which is the legacy of Avaya and Cisco solutions. As I mentioned in my prepared remarks, you know, I think of the three net new examples, one was Avaya, one was Cisco, and one was a combination of Avaya and Cisco. So that, that's kind of the first. The second to your question is the services. What we're finding is companies are recognizing and realizing it's not just a platform that they're purchasing. They can't just plug this into their enterprise and have it create the value that they're looking for. They've got to work and really partner with somebody who has the expertise and has the resources that have been there, done that. Many of our field professional services resources were formerly customers.

Speaker Change: So that's that's one and primarily due to that that Genesis space to go along with what's always been the case, which is the legacy Avaya and Cisco.

Speaker Change: Solutions as I mentioned in my prepared remarks.

Speaker Change: I think two of the three net new examples one was Avaya one was Cisco and one was a combination of Avaya Cisco.

Speaker Change: So that's kind of the first the second to your question is the services what were finding is companies are recognizing and realizing it's not just the platform that they are purchasing I can't just plug this into their enterprise and habit.

Speaker Change: The value that they're looking for they've got to work and and really partner with somebody who has the expertise and has the resources that had been there done that many of our field professional services resources were formerly customers.

Mike Burkland: They came from the largest enterprises and worked on the largest enterprises to help them with their previous platforms. So it's having those level of experts. We talk about the power of the technology and the power of the people, that's coming out more and more in the RFPs. When we look at the reasons why people choose Five9, they're coming back to us and saying, it... And I explained this in some of the prepared remarks I made about the examples.

Speaker Change: At Board and it came from the large the largest enterprises and worked on the largest enterprises to help them with their.

Speaker Change: What's their previous platforms. So is having those level of experts we talk about the power of the technology of the power of the people.

It's coming out more and more in the RFP. So when we look at the reasons why people choose <unk> they are coming back to us saying it.

Mike Burkland: They're saying, "It's because you came in, and when you demonstrated to us, you tailored the demo to our requirements and our pain points, and came in with the professional services team," in many cases, upfront before the sale was closed, to show them what we could be capable of, and give them a feel for our business consulting, as well as our, you know, solution architects, to be able to show them what's capable. And that oftentimes is underestimated in our industry.

Speaker Change: Explain this in some of the prepared remarks I made about the examples they are saying, it's because you came in and when you demonstrated to US you Hey, Where's the demo to our requirements and our pinpoint and came in with the professional services team in many cases upfront before the sales close to show them, what we could be capable of.

Speaker Change: And give them a feel for our business consulting as well as our.

Speaker Change: Solution architects to be able to show them, what's capable and.

Operator: All right. Thank you very much.

Catharine Trebnick: All right. Thank you very much.

Speaker Change: Oftentimes is underestimated in our industry.

Mike Burkland: Yep.

Speaker Change: Alright, Thank you very much.

Operator: Our next question comes from Samad Samana with Jefferies.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Samad Samana with Jefferies.

Samad Samana: Hi there. Good evening. Thanks for taking my question. So maybe first, Dan, I'll stick with you, so Barry can have a nice, long break here. If I just think about, like, subscription revenue dollars added for each year for the last several years, versus what you're spending in sales and marketing annually, you basically have that ratio increasing, right? Where you're spending, but sales and marketing is remaining elevated, but you're adding kind of less dollars each year. So is it getting more expensive to either acquire customers? Are you investing more? Are you building out sales headcount somewhere, where we're waiting for the payoff? Just maybe help me understand kind of that sales and marketing investment versus what you're seeing in dollars, and what that means for the go-to-market organization.

Samad Samana: Hi, there good evening. Thanks for taking my question. So maybe first Dan I'll stick with US Barry can have a nice long break.

Samad Samana: If I just think about like subscription revenue dollars added for each year for the last several years versus.

Samad Samana: What you're spending in sales and marketing annually.

Samad Samana: We have that ratio, increasing right, where you're spending.

Samad Samana: Marketing is it remaining elevated but you're adding kind of left dollars. Each year. So is it getting more expensive to either acquire customers are you investing more you're building out sales head count somewhere where we're waiting for the pay off just maybe help me understand kind of that you have the marketing investment versus what you're seeing in dollars and what that means for the got it.

Mike Burkland: Yeah. I, I know you directed that question to me to give Barry a break, but he's chomping at the bit to take it, because, because you'll, you'll be surprised by some of the numbers that are a result of that. Barry?

Samad Samana: Market organization.

Speaker Change: I know you directed that question to me to get very a break but he's chomping at the bit to take it because.

Speaker Change: Because you'll be surprised by some of the numbers.

Barry Zwarenstein: Yeah. No, Samad, you better take into account that there's really two businesses under the hood. And where Dan and them are spending their money is to bring in the new logos. When you're looking at those subscription numbers that you correctly cited, that includes the somewhat weaker install base. And it's real. I mean, I've given you... I'm not gonna repeat what I said earlier. And when you've got, you know, Dollar-Based Retention Rate declining from the 120s to the 110s on approximately half of our business. And by the way, this is not logo churn. Enterprise logo—why I say we spring-loaded to take advantage of when the economy inevitably turns around, is that the logo retention rates on an enterprise business has been consistently in the mid-90s.

Speaker Change: They are a result of that.

Speaker Change: You got to keep into account that there's really two businesses under the hood.

And way down and that must be sending the money is to bringing in new logos.

Speaker Change: When you're looking at those subscription numbers that you correctly cited that includes the somewhat weekend install base and and Israel.

Speaker Change: I've, given you mean I'm not going to repeat what I said earlier and when you've got a dollar base retention rate declining from the 120 to 110 on approximately half of our business and by the way. This is not logo churn.

Speaker Change: Ventura enterprise loaded when I say, we spring loaded to take advantage of when the economy inevitably turns around is that they do.

Speaker Change: The retention rates on the enterprise business has been consistently in the mid nineties.

Barry Zwarenstein: So they're there, they've got less transactions, but they're there. And that's the reason. There's a second auxiliary reason, not the dominant reason, and that is that, the healthcare companies of the world and the auto delivery companies of the world are disproportionate. We don't pay dollar for dollar on every single last dollar on these big companies, they get many, otherwise, we'd have people running around in Lamborghinis all the time. And so, we have, those are lumpy, they remain lumpy, but they help bookings and then-

Speaker Change: Is it about this transaction, but they are there and that's the reason is the second auxiliary reason not the dominant reason and that is that.

Speaker Change: The the healthcare companies of the world in the parcel delivery companies of the world are disproportionate.

Speaker Change: They.

We don't pay a dollar for dollar in every single last all that on these big companies again, many otherwise we'd have people running around the level you need all the time and so we.

Speaker Change: We have.

Speaker Change: Those are lumpy and will remain lumpy.

Mike Burkland: And I'm gonna pile on one more time, Samad, on the sales and marketing efficiency, right? We have lots of internal metrics that we don't disclose, and one is that I look at every single quarter. I've looked at it for 16 years; it's the cost of a dollar of ACV bookings by net new. So that's sales and marketing compared to, again, bookings, which, again, we're not disclosing that number. I can tell you it has been very consistent for, well, for a long, long time. It is very, very consistent, and it's- I would say it's best in class.

Speaker Change: But they they.

Speaker Change: Help bookings and then.

Speaker Change: Going to pile on one more time tomorrow on the sales and marketing efficiency right.

Speaker Change: Lots of internal metrics that we don't disclose what is the I worked at every single quarter and worked out for 16 years, it's the cost.

Speaker Change: Of a dollar of ACB bookings by met too so that sales and marketing compared to again bookings, which you down we're not disclosing that number I can tell you. It has been very consistent.

Speaker Change: Well for a long long time.

Speaker Change: Very consistent and it's I would say it's best in class.

Samad Samana: Great. Maybe, Barry, just a housekeeping question. I apologize if I missed it, but I just wanna make sure on the guidance, when I think about you, you're citing, you know, kind of third-party public data and how there's at least some directional correlation there, right? So is it fair to assume if that trend is a good proxy for what will happen? Like, let's say, we get that before you guys report, right? So if that keeps moving in a direction, for better or for worse... Is that fair for us to look at that? And what have you assumed for the rest of this year, looking forward, that it stays at the levels we've seen so far in January and February, or that it gets worse or better?

Speaker Change: Great maybe Barry just a housekeeping question I apologize if I missed it but I just wanted to make sure on the guidance.

Speaker Change: When I think about your siding, you know kind of third party public data and how there's at least some directional correlation there right. So is it fair to assume it.

Speaker Change: That trend is a good proxy for what is what will happen like what did.

Speaker Change: We get that before you guys report right. So if that keeps moving in a direction for better or for worse is.

Speaker Change: That fair for us to look at that and what have you assumed for the rest of this year looking forward.

Speaker Change: As at the levels, we've seen so far in January and February or did it get worse or better.

Barry Zwarenstein: Very fair question. That first part of the question, the answer is yes. You - we, but we point you towards it because it's an external, open, referenceable indication. In fact, in some quarters, it tracks even by month, let alone by quarter. Now, with respect to going forward, I've already said that the number of, again, before, in the, UBS may be different. Well, I'm not going to try and mention all the different banks. Wells, Bank of America, all might be different. Using the one that we co- we use each time, it was negative in January, on a nominal basis, let alone a transaction basis. So, we've taken that into account. We're not assuming that the world's coming to an end. There's enough positive comments around there.

Speaker Change: Just had a question in that the first part of the question the answer is yes.

Speaker Change: We bought we pointed towards it because it's an external open referenced double indication and in fact in some quarters.

Speaker Change: <unk>, even by monthly loved by quarter.

Speaker Change: Now with respect to going forward I've already said that the number you gave me a moment.

It may be different well I'm not going to try and mentioned all the different banks wells bank of America or might be different from using the monthly because we use each time.

Speaker Change: It was negative in January.

Speaker Change: On a nominal basis living on a transaction basis.

Speaker Change: So.

Speaker Change: We've taken that into account, we're not assuming that the world is coming to them is enough positive comments around me up there just some pockets of weakness and are reflected in those larger numbers and that's what we've allowed for no you're going to have to drill we've given our guidance we contend with it.

Barry Zwarenstein: There's just simply pockets of weakness that are reflected in those overarching numbers, and that's what we've allowed for. Now, you're gonna have to draw... We've given our guidance, we're content with it. You, you're going to have to draw your own conclusions that when you see January and February, and we're in our quiet period, that whether or not it's positive, negative, or neutral.

Speaker Change: You're going to outgrow your arms included in that when you see January and February and we're in a quiet period.

Samad Samana: Understood. Appreciate the time, as always. Thank you.

Speaker Change: They're not it's positive negative or neutral.

Barry Zwarenstein: Thank you. Thanks, Monty.

Speaker Change: Understood I appreciate the time as always thank you.

Operator: Our next question comes from Matt VanVliet with BTIG.

Speaker Change: Thanks Mark.

Speaker Change: Our next question comes from Matt and Leap with E. P. I G.

Matt VanVliet: Okay, great. Thanks for taking the question. Good afternoon. I guess when you're looking at the nearly doubling of the RFP activity on the upmarket customers you talked about, curious from what you're seeing in terms of sales cycles, how are those RFPs sort of processing along on a normal timeframe relative to in the past? And then how are you feeling about your ability to execute on those deals, relative to where the macro is today?

Okay, great. Thanks for taking my question and good afternoon.

I guess when you're looking at a nearly doubling of the RFP activity on the upmarket customers you talked about curious on what Youre seeing in terms of sales cycles. How are those rfps sort of processing along on a normal timeframe relative to in the past and then how are you feeling about your ability to execute.

Speaker Change: On on those deals.

Mike Burkland: Yeah, they're taking just the normal course of, from a link standpoint, they always would. Now, we've moved upmarket, so when we were more and more of those larger deals, you know, they do have longer sales cycles because there's more complexity to them. The advent of AI and automation naturally led to slightly longer sales cycles, but that, that was a one-time occurrence as that became part of the RFP scope. But no, it's, it's all, you know, as expected, and we feel very good about our opportunity and our ability to close those at a, you know, unprecedented rate. I'll just say that, we kind of led the market with, you know, securing two of the largest and most complex in the world.

Speaker Change: Relative to where the macro is today.

Speaker Change: Yeah.

Theyre, taking just the normal course of.

Speaker Change: From a linked standpoint that they what they always would now we've moved up market. So when we work more and more of those larger deals.

Speaker Change: And they do have longer sales cycles, because theres more complexity to them.

Speaker Change: I'd been in AI and automation naturally.

Speaker Change: Led to slightly longer sales cycles, but.

Speaker Change: That was a onetime occur access that became part of the RFP scope.

Speaker Change: But no I'd say, it's all <unk>.

Speaker Change: As expected.

Speaker Change: And we feel very good about our opportunity and our ability to close those at AR.

Speaker Change: Unprecedented right I'll, just say that we.

Speaker Change: Kind of led the market with.

Mike Burkland: We've demonstrated our ability to roll those out in a timely and efficient manner, and they're referenceable, and we feel great about our opportunities going forward. So, all positives there. Thank you for the question.

Speaker Change: Securing two of the largest and most complex in the world, we've demonstrated our ability to roll those out.

Speaker Change: In a timely and efficient manner.

Speaker Change: The reference of all.

Speaker Change: We feel great about our opportunities going forward. So all positive Sir Thank you for the question Alright, great. Thank you.

Matt VanVliet: Right. Great. Thank you.

Mike Burkland: Yep. Thank you.

Operator: Okay, our final question comes from Thomas Blakey with KeyBanc Capital Markets.

Speaker Change: No.

Speaker Change: Okay. Our final question comes from Thomas Thomas Blakey with Keybanc.

Thomas Blakey: Thanks for squeezing me in, guys. I just wanted maybe I'll do a two-parter as the last person. Just maybe just double-clicking on that consumer thing, Barry. I know this has been a headwind. It should be getting smaller. I just wanted to know your expectations for consumer into the second half. I think there was a couple of questions around that in terms of visibility there. But just wanted to know just explicitly what the expectations are that installed consumer vertical into the second half. And then maybe an update for Dan. You talked about the record pipeline. Maybe just give us an update. Everybody wants to hear about the mega deal kind of pipeline update would be helpful. Thank you.

Thomas Blakey: Thanks for squeezing me in guys I just wanted to.

Thomas Blakey: Maybe I'll do a two part or as the last person just maybe just double clicking on that consumer thing Barry.

Thomas Blakey: This has been a headwind it should be getting smaller I just wanted to know your expectations for consumer and for the second half I think there was a couple of questions around that in terms of visibility there, but just wanted to know just explicitly what the expectations are that installed our consumer vertical in the second half and then maybe an update for Dan you talked about the record pipeline.

Thomas Blakey: Maybe just give us an update everybody wants to hear about the Mega deal cutoff pipeline update would be helpful. Thank you.

Barry Zwarenstein: Mm-hmm. Tom, I'm afraid I'm gonna have to disappoint you on your second last question, because we are not gonna be sharing the explicit vertical, by vertical, expectations for each quarter of 2020. I'm exaggerating for effect.

Thomas Blakey: Great.

Speaker Change: I'm afraid I'm going to have to disappoint you.

Speaker Change: Second last question because we.

Speaker Change: We I'm not going to be sharing the explicit.

Speaker Change: Biomedical expectations for each quarter of 2020, I'm exaggerating for effect.

Thomas Blakey: Right.

Barry Zwarenstein: We have an overarching view as we've shared, and I wanted to limit it to that.

Speaker Change: We we have a.

Mike Burkland: And the second part of your question about the mega deal pipeline, feel extremely strong there. As I mentioned earlier, it's at a record high. We've expanded that team to work those strategic accounts, those mega deals, as you say. And the bookings of those are, it's very lumpy. They come in at different times and, you know, create lumpiness to our numbers because they are so large. But feeling very positive about the future and the opportunity that lies ahead.

Speaker Change: Over arching view that we've shared and I wanted to limit it to that.

Speaker Change: And the second part of your question about the Megadeal pipeline.

Speaker Change: Extremely strong there.

Speaker Change: As I mentioned earlier, it's at a record high.

We expanded that team to work those.

Speaker Change: Strategic accounts are those mega deals as you say.

Speaker Change: The bookings of those are very lumpy they come in at different times and not create lumpiness to our numbers because they are so large but feeling very positive about the future and the opportunity that lies ahead.

Barry Zwarenstein: Tom, just as a, to try and give some response, obviously, the most variable one by far is the consumer one. So when we look at the year-over-year comparisons for the entire company, not just consumer, we going into an increasingly easier situation as each quarter goes by 20, 18, 16, 15. So the second half is clearly somewhat easier, including the consumer.

Speaker Change: And Tom just said the two time give some response.

Speaker Change: Obviously, the most variable one by far is the consumer one and so when we look at the year over year comparisons for the entire company not just consume are we going to an increasingly easier situation as each quarter goes by 2018 16 15.

Speaker Change: So the second half is clearly somewhat easier including consumer.

Thomas Blakey: That was a leading question, but yeah. Thank you, Barry.

Barry Zwarenstein: Thank you.

Mike Burkland: Thanks. And if I, if I could, in closing, I just want to say a quick thank you to all the Five9ers, as we call them, the Five9 employees, as well as our partners, for all their great work, their hard work, their dedication. They are the reason for our record results in 2023. And I'm so excited about 2024 as we surpass $1 billion in revenue and continue to go after this massive market opportunity ahead. So very exciting times. Thank you for joining us, everybody, and look forward to keeping you updated as we progress through the year. Have a good one.

Speaker Change: That was that was a leading question.

Speaker Change: Thank you, Matt and good thanks, and if I if I could in closing I just want to say it quite thank you to all of the five nine years as we call them. The five nine employees as well as our partners.

Speaker Change: For all of their great work, the hard work and dedication.

Speaker Change: They are the reason for our record results in 2023.

Speaker Change: And I am so excited about 2024, as we surpassed $1 billion in revenue and continue to go after this massive <unk>.

Market opportunity ahead, so very exciting times. Thank you for joining us everybody at look forward to keeping you updated as we are.

Speaker Change: Address through the year and have a good one.

Speaker Change: Yeah.

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