Q2 2019 Earnings Call
Please standby.
Good day and welcome to Fivenines second quarter 2019 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Ms. Lisa Laukkanen. Please go ahead now.
Thank you operator, good afternoon, everyone and thank you for joining us on today's conference call to discuss Fivenines second quarter 2019 result.
Today's call is being hosted by Rolling Trollope, CEO , Dan Brooklyn, President and Barry Zorinsky CFO .
During the course of this conference call Fivenines management team will make projections and other forward looking statements regarding the future financial performance of the company industry trends company initiatives and other future events.
You are cautioned that such statements are simply predictions should not be unduly relied upon by investors and actual events.
Our 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 fivenines future results and cause these forward looking statements to be inaccurate.
A more detailed discussion of certain risk factors that could cause. These forward looking statements to be inaccurate and that you should consider in evaluating fivenine and its prospects is included under the caption risk factors and elsewhere and Fivenine filings with the Securities and Exchange Commission.
In addition management will make reference to non-GAAP financial measures during the call management believes that this non-GAAP information is useful because it can enhance an understanding of the company's ongoing performance and Fivenine. Therefore uses non-GAAP financial information internally to evaluate and manage the company's operations.
This non-GAAP financial information should be considered along with and not as a replacement for financial information reported under GAAP and could be different from the non-GAAP financial information provided by other companies in our industry. The full reconciliation of GAAP to non-GAAP financial data can be found in the company's press release issued earlier. This afternoon and is also available on the Investor Relations section of Fivenine website.
And now I'd like to turn the call over to Fivenines CEO Robin Trollope.
Thank you Lisa and thanks to all of you for joining our call. This afternoon.
We delivered strong second quarter results with 77.4 million in revenue up 27% year over year.
Our adjusted EBITDA margin was 18.6% increase of 2.7 percentage points year over year.
Terrific results for the company demonstrating the strength of our business model.
Now our enterprise business is driving the top line with subscriptions growing at 36% LTM.
This enterprise growth is most pronounced with our largest customers paying more than $1 million in annually recurring revenue that now make up over a quarter of our LTM revenue.
And are the fastest growing part of our business with a CAGR in the fifties over the last three years.
I'll now turn the call over to our President Dan Brooklyn to talk about the great bookings quarter, we just completed Dan.
Thank you Ron our Q2 enterprise bookings grew strongly year over year and reached an all time record by far for any quarter.
Our pipeline also reached another all time high.
This quarter, we continued to see larger and larger deals coming in and more than 60% of deals were influenced by our ecosystem of partners and now I'd like to share some key enterprise wins for the quarter.
The first example is a pharmaceutical company that serves patients during clinical trials for life saving treatments.
They were unable to deliver an optimal customer experience due to several limiting factors and reliability concerns other than cloud based solution.
They were having service interruptions had limited integration with their custom CRM and had a very basic workforce management solution with no intra day reporting which meet stuff forecasting very difficult.
They also couldn't support the call peaks, which were over 1500 concurrent calls.
Finally delivered the best solution to each of these pain points with the end to end solution offering, including five nine W.S.. So powered by parent and workforce management quality management and performance management. This initial order is anticipated to result in nearly 1.5 million in annual recurring revenue to Fivenine.
The second example, I'd like to share with you as a financial services company in the automotive sector, which takes calls and inquiries from dealerships and consumers.
They were using a premises based aspects system, which had become unreliable and had limited integration to salesforce. They were experiencing excessive downtime, which was directly impacting their revenue.
Aspect attempted to migrate the customer to their own cloud solution, but discovered that it could not scale beyond a thousand agents.
With five nights uptime reliability scalability and simplicity of administering the system. We are implementing a complete end to end solution to deliver exceptional customer experience.
This initial order is anticipated to result in over 2.5 million in annual recurring revenue to Fivenine.
The third example is a dentistry company, providing orthodontic solutions direct to consumers globally.
Their existing solution did not have an elegant way of doing true blending for inbound and outbound, calling nor an easy way to accomplish omnichannel routing with Salesforce.
They also experienced difficulties with international dialing identifying country of origin for digital channels and a manual process for resetting skills.
Solving these challenges along with finding a partner who would provide them with the consultation and ongoing high touch optimization, let them directly to fivenine.
This initial order is anticipated to result in over $2.7 million in annual recurring revenue to Fivenine.
And now as we usually do I'll share a significant expansion of an installed base enterprise customer.
This is one of the fastest growing insurance brokers offering quotes for medical auto home and life insurance, who had been a sizable customer fivenine since 2016.
Since their initial five night deployment the customer has added three additional business units with the most recent department, bringing their contact center seat total to nearly 2000.
With this add on order of over 1.2 million now brings their anticipated annual recurring revenue to 3.4 million to five nine across multiple U.S. locations.
As you can see we continue to execute up market with larger customers, while also helping expand our footprint at offerings within our growing customer base.
With that I'll turn it back to you Ron.
Thanks, Dan terrific examples.
So now I'd like to turn to some comments on our business and share with you why I believe that Fivenine is set to enjoy many years of thirtys level enterprise growth.
And I'd like to share with you.
The three key pillars that I see driving that growth.
The first pillar is that market, which with the Tam of over $24 billion is massive does start with the fact that the transition to the cloud of this big market is in its early innings at under 15% penetration.
Next we're through that Youve ingenico phase of the cloud, notably demonstrated by Gartners decision recently to discontinue the magic quadrant for on premise is contact center vendors.
And finally, the priority of the contact center is on the rise as company leaders all over the world recognized that transforming their customer service experience is a necessity.
This transformation.
At fundamentally Repositions the contact center from a cost center into a business differentiator that is worthy of investment.
So thats the market. The second pillar is our product. The first five nine our product has consistently been included by Gartner in their magic quadrant as an industry leader and that's a result of over a decade of experience and investments working with increasingly larger customers building out a hard and versatile platform with a very very large surface area of capabilities.
This iterative scaling of the product is not something that can be easily replicated by inspiring new market entrance.
Next to further strengthen our product we have meaningfully expanded our engineering leadership and are increasing our investment in R&D, our new leaders are Jonathan Rosenberg, our CTO and head of AI and Dave Pickering, our head of engineering.
Yeah.
On July 15th we announced a non charters to current formally from Facebook as our SVP of product management.
So beyond leadership, we've been hiring and training more engineers and scaling our team faster than ever before resulting in a substantial increase in throughput and innovation.
So that team.
Has been hard at work and over the last quarter, we've been building out a new software delivery engine, leveraging a blend of our phone robust cloud infrastructure and increasingly public cloud from both Amazon and Google.
This new engine that we're building is built on the latest past technologies that stands for platform as a service.
Some of these only recently available.
Which enables us to continue to press our advantage and stay ahead of other cloud contact center vendors, who rely on architectures built before this latest wave of technology advancements was available.
Next our team has been demonstrating industry technology leadership, most recently, leading a collaboration with Google Cisco Comcast and pre switch on a standards body submission to drive the industry forward with this new patent pending technology, we're aiming to make it dramatically easier for consumers to reach an agent by bringing voice calls right from the web browser all the way to the contact center without the phone in the middle.
Accelerating web RTC adoption and improving customer experience.
Finally on the AI front, we've shared the treasure trove of data, we have access to with 5 billion minutes of customer conversations going through our platform annually.
Our AI roadmap has now been validated by our largest and most advanced customers and we have begun implementation hiring coding and performing AI model devaluation and performance tuning to now while it's early days in this market. We are certainly leading the way and as we mentioned last quarter. We were featured on stage at Google next as part of their partnership with Salesforce, a demo that was only possible due to the new delivery engine that I mentioned earlier.
So thats product the third pillar is our go to market engine and our results here convincingly demonstrate that our team led by Dan Burkland is one of the best in the industry and we are making progress in that team on multiple fronts first the sales team continues to grow and scale. The average tenure of our leadership team continues to increase and is now nearly six years.
And we're rapidly adding capacity to our field salespeople, which we call sales directors.
Next we announced this quarter the strategic decision to meaningfully and rapidly step up our channel development opening up a new Avenue of long term domestic and international growth.
We announced new leadership, and we have new partnerships.
On the leadership front, we hired a vice president and general manager of International sales based in London.
Second our vice President of global channels, and third a new Vice President of professional services.
So each of these new hires formerly held leadership positions at large contact center technology companies and we'll be reporting to Andy Dignan, our SVP of level channels and services, who most recently led go to market globally for the collaboration business at Cisco.
On the partnership front, we continue to gain traction with system integrators, like Deloitte Accenture inline slalom and I've yet.
Adding people dedicated to the ESI channel and these are size are becoming a meaningful portion of our revenue as they're often brought in to help enterprises with their digital transformation strategy.
Now earlier this quarter at Microsoft inspire event.
We announced a brand new partnership with Microsoft teams you see.
And we met with their partners in global sales organization to develop a joint go to market strategy. So we're building a tightly integrated contact center solution with Microsoft which gives their partner is a huge opportunity to make further progress in you see and enter into the cloud contact center market.
On the CRM front, we continue to have an excellent partnership with Microsoft dynamics CRM.
Finally, the anchor of our go to market machine is our customer success and professional services organization.
The contact center is at the heart of the customer service technology landscape and is tied into many many business systems the customers need help managing that complexity and to help them on that journey. We built one of the largest and most highly rated customer success and professional services organizations in the industry that these teams deliver rapid differentiated and onsite enterprise implementation with a high touch experience that customers really need.
These engagements along with our rock solid platform build trust with our customers, which in turn is what drives our DVR, which on a blended basis was again, 107% in Q2.
So this large experienced long tenured team of seasoned customer facing expert is a key ingredient in the secret sauce that makes fivenine so successful.
We believe no one else in the industry had anywhere near this level of customer facing expertise and we believe it will take years to begin to replicate.
In conclusion.
The stars have clearly aligned for Fivenine.
All three pillars for success are in place.
The market is heating up we have the right product at the right time, and a leading go to market machine and most importantly, a fantastic team of employees, who by the way voted Fivenine is one of the top 25 cloud companies to work for.
So.
To expand on our financial performance and guidance I'll now turn the call over to our CFO varies Weinstein, but.
Before I do so I want to take a moment to acknowledge Barry who was recently honored as the 2019 Bay area as CFO of the year for small and medium public companies taken away back.
Thank you Ron.
Before going into specifics I reminded that unless otherwise indicated all financial figures I will discuss non-GAAP reconciliations from GAAP to non-GAAP results are included in the appendix to our investor presentation on our website.
We are very pleased with our performance with both top and bottom line results exceeding our expectations.
Revenue grew 27% year over year and 4% sequentially.
Driven primarily by our enterprise business.
We've now makes up 79% of LTM revenue.
Enterprise subscription revenue continued its multiyear performance of growing in the cities.
Posting growth of 36% on an LTM basis.
And the enterprise business is highly profitable.
Generating is fixed the one LTV to CAC ratio when it concluded five year basis.
Our commercial business.
Which represent the other 21% of LTM revenue grew in the single digits.
We expect continued single digit commercial revenue growth now that we have is that the 2017 compare.
Recurring revenue accounted for 92% of our revenue.
As a percent of revenue was comprised of professional services.
Second quarter adjusted gross margins were 65%.
An increase of approximately 120 basis points year over year.
Second quarter adjusted EBITDA.
$14.4 million.
Representing an 18.6% margin.
An increase of approximately 270 basis points year over year, demonstrating the profitability of our business model.
Second quarter non-GAAP net income was $12.3 million a year over year increase of $5.4 million.
Finally, before turning to guidance, some balance sheet and cash flow highlights.
Dsos for the second quarter was 30 day.
Operating cash flow for the second quarter was $6.8 million.
The year over year improvement of $1.1 million.
We are optimistic about our potential for continuing cash generation given our long term model.
That's essential in oil.
And our low dsos.
I'd like to finish today Pega box with a brief discussion of our expectations for the full year in the third quarter of 2019.
But 2019, we expect revenue to be in the range of $312.5 million to $314.5 million.
GAAP net loss is expected to be in the range of 12 million to $10 million or 20 to 16 cents per basic share.
non-GAAP net income is expected to be in the range of $44.7 million to $46.7 million was 70 to 73 cents per diluted share.
Consistent with our previous discussions this bottom line guidance reflects expected increases in various growth initiatives.
Particularly in R&D and go to market to go after this massive market opportunity that is coming towards us.
For the third quarter 2019, we expect revenue in the range of $78 million to $79 million.
GAAP net loss is expected to be in the range of $6.3 million to $5.3 million or 10 to nine cents per basic share.
non-GAAP net income is expected to be in the range of.
$8.8 million to $9.8 million or 14 to 15 cents per diluted share.
Note that a number of new highs were back end loaded in the second quarter and therefore, we expect meaningful uptick in R&D and in sales and marketing expense in the third quarter of 2019.
No I know that in the fourth quarter, we expect to again be reporting 20% plus adjusted EBITDA margins.
For modeling purposes, we would like to provide the following additional information.
For calculating EPS, we expect our diluted shares to be 64.5 billion has basically has to be $61.5 million for the third quarter 2019.
And 64.2 at 61.1 million, respectively for the full year 2019.
We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $75000 for the third quarter of 2019 and $130000 for the full year 2019.
Our capital expenditures for the third quarter of 2019 are expected to total approximately $6.5 million to $7.5 million.
For the full year 2019, we expect continued capital expenditures to be between 20 and $24 million.
In summary, we are pleased with our second quarter performance driven by the strong revenue growth and excellent unit economics.
The importance of customer engagement continues to be a key driver.
And the Fivenine team continues to execute extremely well against this massive opportunity.
Operator, Please go ahead.
Thank you and ladies and gentlemen to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again press star one.
We'll take our first question from Terry Tillman with Suntrust Robinson Humphrey. Please go ahead.
Hi, Good afternoon can you hear me okay.
Yes, Terry we can thanks.
Well to know thank you Roland I really like that statement or the pronouncement you made about the.
30% plus growth in enterprise over a long term basis and I wanted to focus on that in terms of.
As you can see obviously a lot more than we can see maybe you could just give us some of the confidence kind of foundational elements on that statement, a 30% plus growth on the enterprise side as it relates to maybe the quality of the hires as it relates to the sales reps or how much youve expanded it in terms of that gives you great sales coverage or just some more on what we really can't see on the outside which is just the sales team and the go to market overall, whereas this confidence coming from thank you.
Thanks, Terry it starts with the market really in the sense that the the fact is that this market is huge right customer interactions are absolutely exploding.
If you look at Gartners data that shows that over the five year period that we're in I think by 2022.
The interactions into contact centers are going up.
By 3.5 times and you have that that's sort of underpinning. The fact that the contact center is emerging as a strategic priority for businesses all over the world and that was reflected most recently at Morgan Stanley as an analyst analysis, where they looked at cloud buying patterns and the fact that customer experience was the top priority for our CIO is and other sea levels.
And then you have the fact that weve essentially gotten through the evangelism phase on the cloud so in other words.
Customers need to upgrade its becoming an increasing strategic priority for their business and they are convinced that the cloud is the way to go.
Gartner I think I pointed out in the call that Gartner doesn't even have a magic quadrant for on premises.
So that's the first thing $24 billion market penetration is beginning the second thing is really about execution and scale right. We have proven that we can execute on the sales front.
We've driven we can execute on the product front, we've got the product that is winning in the market today and scale. So the growth you're seeing driven today by our.
In the top line is really coming from that enterprise business were signing larger and larger deals were now highlighting those million dollar deals where you guys.
And so.
Where we're seeing that traction we're seeing the proven execution and frankly in this market right now from a competition perspective, its really a duopoly I mean, Austin and contact or at the head of this market.
And that's of course in the Gartner report, but we see it in our win rate in our win loss and we see them in the market and while there is noise in the market with new entrants and so on none of them have a beachhead and were never really not seeing them in the market. So therefore sort of my conclusion is that.
This.
Thirtys level of growth in the subscription of enterprise business is going to be durable over over a long period of time.
Okay. Thanks for that and I guess my follow up the kind of focusing again on kind of go to market is also as you look at kind of what you've assembled so far kind of year to date.
How do you and Dan feel about like the sales capacity you have to execute against our target for this year and really even going into next year and how much too.
These emerging global outside relationships, playing that ill. Thank you and congrats ill turn I'll turn to Dan, but just the intro is look we are super happy with the hires we've made.
We've had a very stable team.
With very low attrition rates. The leadership team has been on average around for six years and if you look at the new hires that we just announced running channel and international Dan and I and the team met with them. These are extremely high quality candidates were attracting the top talent in the industry and to these leadership roles and frankly getting into channel and international is going to be a big growth opportunity for the company and so attracting people who have done that before and have those relationships is absolutely huge debt.
Yeah, just to add to that well said Rowan.
When you look at us bolstering the leadership team with those additional ads.
We're preparing ourselves to now go from 300 billion to $1 billion.
And in order to do so we're going to rely on global channels.
The prominent partnerships, but also continuing to really go to market with the best talent and so bringing in expertise we've got a great management team that as Ron said has been here.
For six years plus.
But we are adding to that in the areas of international.
Channels working with us size had been able to leverage those relationships that theyve had in their past.
So folks that come in with the experience of having been there and done that from the $300 million.
On up is very important to to continue our scale.
Thanks Terry.
We'll take our next question from meta Marshall with Morgan Stanley . Please go ahead.
Great. Thanks, guys I wanted to see and congratulations on the quarter. Just if you could kind of speak a little bit more about kind of the ESI channel and you had mentioned that being an important kind of relationship to ramp, but just how long do you think it'll take time for those partners to kind of get those businesses running what type of investment is I'll take from your part just to kind of maximize that channel.
And then second just any update on kind of some of the trials that are taking place on the AI front would be helpful. That's it for me. Thanks sure. Thanks made US great question, along the ASI front, let me be clear that has it's not how long will it take to get traction and get that going.
We've had partnerships for several years.
The one large one the global one as Deloitte that Weve had a partnership for about four years now and we saw what occurred there and how much they were able to generate for us.
They get hired along with the other size that we mentioned earlier.
The slaloms.
I'd.
He y and Accenture and others that are being brought into these larger enterprises to help them with their digital transformation strategy and how they should go about moving to the cloud in particular, and so we get access with them as part of that larger project and get brought in by them.
I think we mentioned on the last quarter call that delights been generating that is now generating.
Well into the double digit millions of dollars of revenue for us.
And we're now replicating that same model across those other partners that I, just mentioned and we've applied resources dedicated resources to working with them. So it's just another way for us to expand our footprint expand our reach and get access markets. So thats been working extremely well for us and it's very strategic.
You asked the second part of your question was with regards to say, Hey, I will turn it to Rowan to let him answer that piece yes.
Media, that's going well, we've gotten a lot of great input from our customers, who have helped us really clarify exactly where they want us to focus and that's around agent assessment. So thats the concept of the.
The real time.
AI recommendations and predictions that are sharing with a live agent on an on an actual call or messaging threat and so we've actually now narrowed in on the definition of the product and a roadmap. We've also recently signed up four of our largest customers to become beta customers on this so it's currently in development and.
We included in one of our upcoming releases probably in 2020.
Great. Thank you guys.
We'll take our next question from Raimo Lenschow with Barclays. Please go ahead.
Pete Congrats from me as well that's amazing.
The.
First question is as you think about the 300 emerging country ability and a big part of like a typical company build out there would be international and you touched on that a little bit.
But I just wanted to.
Find out more like.
Got it kind of fundamental differences to this market I know you're building it out but it gets there because we've seen a lot of production in the U.S., but slightly less internationally and so I just try to understand that and then a very congrats on on that win.
On that note can you talk a little bit on the gross margins because Q2, 65% is I think as the bigger the highest number I've seen ever in my model and just a couple of comments on the strength there. Thank you.
Yes, thanks, very much ill talk about the international the the traction we're seeing there is not a function of the market and so much as it is just our investment in the fact that we've talked about in the past that.
It's a huge market.
In the U.S. and we've really been focused there, but as we've started to expand internationally, we see tremendous opportunity. That's why we just hired a new general manager for that business structurally there are some differences in Europe .
The service providers, obviously, it's much more fragmented market the mark the U.S. as much more consolidated the service providers are much more important in the in the.
In Europe .
And so we'll have a different approach there, but fundamentally it's a massive opportunity in Europe for us to get started on the person that we hired has actually built the contact center business for another for the market leader and so we have brought in someone who has that expertise has the relationships and it is a really important dynamic there that you have the relationships and that you are on the ground in the country and so it's it's a big move for US It will require ongoing investment and that's something that we'll be making over time, but we think we can make investment as the business scales.
And.
Raimo with respect to the gross margin yeah.
65 was one of our highest.
Actually in Q4 of 2018, we were 65.1, but actually Prado, a happier with this quarters simply because.
It's very revenue dependent Q4 was a strong revenue quarter Q2 that tough as revenue quarter and yes, we managed to come within spitting distance of the all time record.
The biggest driver for that is.
Subscription business, which should not surprise you.
Yes that is after all.
Okay recurring revenue 90.
2% total of 73% of the total and this is what we've been talking about raimo for quite some time, it's a simple mechanics of the the subscription revenue, but driven by the enterprise with the LTM, 36% growth rate growing faster.
Then our cost as subscription revenue and that was taken those margins from the sixties years ago solidly now into the Seventys and steady way, we that durable growth, if we grow and talked about.
Into the Eightys over time.
Okay perfect welcome congrats.
We'll take our next question from Sterling Auty with JP Morgan. Please go ahead.
Hey, guys. This is Tom Hill on for Sterling Congratulations on the quarter. So a couple of questions.
GAAP or would you say the contribution of new versus existing customers was in the quarter.
And we saw a couple of changes in management ranks. So all the positions filled now or are there any other changes that you might expect to.
Just overall on the management ranks no no other changes.
We have we hired our last executive level reporting to me and that was a non traders curran.
From Facebook, who worked on the messenger platform there and now.
Dan has hired key said a leader is to grow that drive channels in international that.
And to answer your question about new business versus existing.
Yeah, what I mentioned the bookings new bookings for enterprise was an all time high by far we don't disclose bookings as you know, but that was clearly the case.
And we continue to get expansions land and expand opportunities from our base. That's most well reflected in our dollar based retention rates, which again were at 107%.
On an LTM basis, so very healthy business from both new and existing.
And yes, the leadership team on the go to market. It has just gotten.
Larger and more robust and with better experience. So.
I've never been as optimistic about the management team.
That we've assembled here on the go to market side to be able to take us to the next level.
Great. Thank you.
Yes.
Our next question will come from Scott Berg with Needham and company. Please go ahead.
Hi, everyone. Congrats on a good quarter I guess two brief ones for me.
First of all Dan on the contribution from partners. You mentioned it was 60 plus percent in the quarter I think thats better than the historical trend of better than 55%, but what's the right mix of that going forward, what kind of these new partnership initiatives.
Yeah, I mean, we have such a plethora of partners that crossover many different industries and summer.
Directly tied in complimentary integration stars like Salesforce, and Oracle and the other CRM providers.
Some are go to market partners that are more on the.
Bring us into opportunities and expanding our reach so they are so different summer technology summer.
Hi, SV partners that do an add on to the solution some are true resellers.
Of the solution so it kind of runs the gamut.
What we do as we look at those and say where where is there a partner involved and that percentage is I think a very ideal and healthy.
Mark.
Sure, we have our own marketing efforts and our own.
The ability to go reach and find new customers and find prospects, but we also rely on that that partner ecosystem to find them for us.
And that brings our cost of acquisition down.
Especially as we continue to not only build trust within those partners, but also build reference ability within the customers that theyve referred us to and once we get those references speaking highly.
So its partners want more and more to recommend fivenine because they trust, we're going to deliver four.
It's oftentimes the reputation that's on the line gets her words that is on the line and they want to know that two they recommend to somebody that can trust.
Got it helpful. And then my follow up is for Barry the percentage of revenues coming from nonrecurring was 8% in the quarter I think thats, a little bit higher than the historical trend that I believe is closer to five not looking at my model at the moment, but with the even larger movement up market with some of these really large million dollar plus contracts or you just finding that you need some more services were cleared up maybe shift that mix slightly or should that maybe trend back towards the 5%. Thank you bye.
Yes, so Scott the trend has been upwards when we went public five years ago. It was 3%.
Most recently it was 7% now it's eight.
The trend is definitely to continue see Dan sitting next to me we are not on video, but he's nodding his head rigorously and he has been successful in.
In.
Bringing value to those implementations, we talking about something that's mission critical and.
People want to be sure that the six step implementation process that the team has that go inside for every enterprise and.
Implementation is properly.
Appreciate it and remunerated, Daniel on adding sure and if you look at the.
Our ability to directly go in and provide these implementations with a very high touch model Gartner recognizes that as one of our key strengths and differentiators.
Enterprise customers.
Require and expect that you're going to come in and very very acutely.
Do your research to figure out and design.
Discovery to your design Youre testing your training and turning them up and then optimizing the system.
All those services are so key to getting the customer off on the right foot and having them be able to truly take advantage and accomplish the business needs with the solution. There's nothing more important than that services business and we're seeing that more and more as we move further up market and I just want to add one last thing Scott. This is really going back to the earlier question on gross margin I Didnt mention at the time, because it's not as we go but it is a gentle tail grades in that.
Many years ago, we used to have triple digit negative margin and it has also to be improved.
Pricing from that and the percentage of the HCV that goes to the onetime.
As of now steadily improved and now for the first time that it was a negative in the teens and.
I believe we.
Can confidently talk about that eventually getting to breakeven and positive with a resulting overall corporate benefit.
Okay got it Super helpful. Congrats on this quarter thanks, guys.
Thanks Scott.
Our next question will come from Matt them to live with Stifel. Please go ahead.
Yes, thanks for taking my question.
I guess as you look at some of the discussions around the partners and how they can come really sort of broaden your reach within within customers buy.
They are offering.
A better solution and help with the digital transformations.
Curious, how you're thinking about maybe the total wallet share that you currently have with your existing customers and what that long term opportunity might look like over the next three to five years.
Yes, so we've been seeing a fairly steady rise in our average revenue per user over time over the time that we've been public and that's something that we see continuing we've been very successful at selling more as we move up market the the.
The appetite to buy more in this space is higher so we end up in a really good place as we get these larger and larger customers and so specifically you know our partnership with Verizon has been going very well, what we sell five nine w. Epo powered by parents.
We also increasingly see and this is where I think the channel comes in and notably the size, but the desire of our larger enterprise customers to spend more time integrating the contact center deeply in with their.
With our CRM platform is there and so that drives services revenue. It drives technology revenue I mean things like mule soft and so on are certainly part of that story.
Workflow automation and so on so there's just a tremendous amount of touch points and we see that.
Hey, I can't probably directly answer your question our wallet share.
But I can say that the overall the overall wallet and pie is growing and its growing fairly rapidly.
And our access to it and frankly, our buyers influence over it has also grass growing.
Thanks, and I'm very I'm I've, a follow up to the there was mentioned earlier about using more of the public cloud resources out there.
Obviously, it seems like it's probably for some incremental services, but overall just curious on how that might impact gross margins in the long run if that doesn't continue to be a larger mix of the infrastructure used overall.
Yeah, So Matt.
Frankly.
Our motivation on the public cloud.
On the way is not done for margin improvement, we understand that other companies have benefited from it.
We are doing a much more for the nimbleness and the access to the various.
And platform as a service.
Advances that we can.
Bring to bear.
So we havent been assuming anything material, but it's certainly something that could be positive.
Great. Thank you.
Our next question will come from Jeff Van Rhee with Craig Hallum Capital Group. Please go ahead.
Great Hey, guys is rooted on for Jeff So.
Couple of me so a lot of color on partners alike.
With with the partners with respect to the actual deployment implementations what percent of.
Total views what percent the overall implementations are being done by the partners and then secondly.
A lot of people have some concerns with.
Attrition in Salesforce are now I think you answered this earlier, but I might have missed it can you just comment on any any changes you've seen in the case of attrition salesforce as well thanks.
Sure. Thanks Rudy.
This is Dan happy to take that first looking at implementations by partners.
I have been very cautious while we're signing up some large global companies that are willing to make the investments necessary to be able to put in the quality implementation and how that result in success on the customer side is something that we're very cautious about we've seen folks in the in the cloud in our space that have had cloud offerings that have pushed out that responsibility to the channels prematurely and the channel wasn't prepared are ready to be able to go as deep and as thorough as we count ourselves. So.
As we're signing up and.
Enabling and going deeper with some of these larger partners, we are very cautious and requiring them to.
Allow them to do.
Oh JT over the shoulder shadowing of our people.
To ensure that they take the time to invest the right resources and the time and energy to be able to do the same quality that we can deliver ourselves and then for us to monitor and over the shoulder on their first implementations and only then will we actually relinquishing allow them to go the full route.
Theres very few doing that.
We have some that are committed to doing that and we'll get them trained up over the next several quarters, but again I'm I'm going to be very cautious because I want to make sure our quality does not does not degrade whatsoever.
Thats been a key part of our success.
As far as attrition on the sales front, we have extremely low attrition.
In the industry.
I would put it up against anybody and especially the case for voluntary attrition. So like any organization our size that's growing youre going to have some folks leave from time to time, but typically it's either a mutual decision or it's one where weve kind of push them.
The door to to move on so.
Been extremely low.
Across the board and that goes for the last four or five years.
Great got it and then just one last quick one if I could.
Tentative landscape have you guys been seeing.
In publication players any increase in the frequency that you guys are seeing them deals.
You know I mentioned earlier.
This market is really a duopoly at this point, we share our win rates and that's really it in contact and Fivenine tend to be in these all in all these big deals.
So we really haven't seen any significant we haven't seen any real material shift in the competitive landscape on that front.
Well take our next question from David Hynes with Canaccord. Please go ahead.
Hey, Thanks, guys nice quarter. So the question earlier was asked on public cloud as it relates to the financials, maybe rolling you could talk on you hit on them.
A new software delivery engine in your prepared remarks, just curious.
How how does that leveraged public cloud I mean is it should we think of it as more for.
International opportunities what does that do for the product any additional color there would be helpful.
Yes, no it's actually so its our engine.
And technology architecture for future development is going to be public cloud based or is public cloud based.
And.
It's not exclusively for international.
Expansion, although thats certainly one benefit it's more about acceleration and leveraging the massive amount of services that are available in the public cloud today five years ago. If you were to build a SaaS service.
You would have to deploy a bunch of it was it was not necessarily clean cut case to go public cloud because you could you could leverage open source and your own datacenter and potentially get better economics now thats really.
Increasingly not the case as as Google and Amazon and Microsoft have flushed out their pass layers, and so thats, providing us with leverage on our R&D. It's a big it's all about leverage really yes, we talked about increasing the spend in R&D.
But all of the new capabilities that we are driving we're really driving towards public cloud. So our AI offer we talked about earlier is will be launched on public cloud.
And the whole and many of the new offers that we are bringing to market will be public cloud sort of hosted now we continue to leverage the on premise the sorry, the our own cloud infrastructure that we host in her own datacenters and colos around the world and there is some benefit there around.
Leveraging the investment we've made as well as the network that we've built up and so on.
But our future development and platform is really public cloud oriented.
Yes, Okay and then.
As you get further into these pilots with AI and the agent assist technologies. How are you thinking about price exploration have you figured out what customers may be willing to pay and any color you could share with us there.
Too soon to tell.
I will keep you posted on pricing okay.
Very good thanks, guys nice quarter.
Thanks.
We'll take our next question from Brent Bracelin with Keybanc capital markets. Please go ahead.
Hey, Brent Collins check your mute function.
Good No response, we'll move to our next caller, Jonathan Kees with summit insights group. Please go ahead.
Great I'm off mute and I want to couldn't do it gradually add my kudos to congratulations for the quarter and to Bury a I have a couple of topics I would like to ask about it should go pretty quickly a one.
Oh regarding the a press regional sort of commentary during the call about the the partnership with Microsoft in the <unk> in go to market and product collaboration I. Just curious is does this mean that they are going to be selling your product to their customers or is it still going be mainly fivenine and how much it taking a step back how much of a needle mover is that.
First off yes true.
Great question, Jonathan This is Dan it's a little premature to know.
As the impact of the needle if you will if it's going to move the needle and how much but it is a two way partnership they will be partnering very closely with us and helping introduce us into their partner and their go to market channels to be able to provide five nine as a contact center solution to go on top of the teams products that those channels already sell so one of the one of the dilemmas is their channels are out selling Microsoft teams.
It's without contact center doesn't have contacts are that that hinders your ability to get into certain enterprises that do want to do.
For a full reset.
As well as going into their existing customer base that uses teams and being able to provide provide contact center. So we see we see them, bringing us more incremental than the other way around.
And then.
Your other question the other topic, yeah them, it's not like a a lot of a great potential there. The other thing I want to ask about is.
Regarding the or new higher from Facebook I guess Im rowing, you have pretty fairly predictable in most of our hiring executive seasoned executives with specific expertise to come over to Fivenine and worked on that work will continue that expertise.
Work just curious.
This senior hires that you brought in a is replete replaced an existing exactly you have in product management product product management and development in contact center. This person who's coming in has messaging and ecommerce background Rohan just curious if you can.
Share some light in terms of your product development roadmap beyond AI and ADW S. And you know <unk>, bringing that was features youve talked minute AD nauseum. So just any new stuff there. Thank you.
[laughter].
I hope you're not tired of it because I'm going to keep going.
So let's go to the non yes.
[laughter] a non worked at Facebook on the messenger for business platform and the messenger for business platform rest really targeted at businesses that wanted to engage with their customers.
Through the Facebook Messenger platform and that's obviously a huge drop for businesses and so many of the lot. Many many large businesses in the U.S., we're engaging with Facebook on that front and non was at the front end and the front end of that so.
I'll speak for non here, but the idea here is that customer interactions are exploding across all of the new channels. That's what's driving the CX really up to the top of the priority stock.
As Morgan Stanley reported recently.
That that customer interactions are on the rise of Gartner says, they're going to go up three and a half times in the next four years.
Over a five year period that ends in 2022 and customers want to incorporate those new channels into their contact centers and we felt that bringing a non.
Yeah and gave US an incredible perspective, because he was at the vanguard of messaging for business at Facebook and so he has got a powerful vision of the contact center.
Given his time at Facebook and he had a chance to interact with a lot of enterprise contact centers and I. As these were building technology in that space and so when an odd and I first met he really explain his vision and around the enterprise contact center business as a huge area of future growth and technology innovation. That's what he was seeing from his lines over there and from our perspective, we got to have someone who really reflected the next generation of.
Preferences of users in terms of how they want to call in how they want to connect or get get helped through messaging and so forth and so that really helps us paying a vision that I think a non is going help us pain, a vision for the future and take us into the into the future. The contact center. So very very excited about him joining.
There are no further questions at this time I'd like to turn the call back over to management for any additional or closing remarks.
Thanks, operator.
So in closing I'm pleased with our strong first half performance, we're making excellent progress on our strategic priorities led by our increased investments in product innovation and go to market.
And we have a fantastic team in place.
So there is tremendous opportunity here for five nine and we look forward to sharing our ongoing progress at our upcoming analyst day in New York on November 12. So please join US there with that I would like to thank everyone.
We wish you a good day.
Thank you operator. This does conclude today's conference. Thank you for your participation you may now disconnect.