Five9 Inc
NASDAQ:FIVN
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Five9 Inc
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Please standby. We are about to begin. Good day. And welcome to the Five9, Inc. First Quarter 2018 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.
Thank you, Operator, and good afternoon, everyone. And thank you for joining us on today’s conference call to discuss Five9’s first quarter 2018 results. Today’s call is being hosted by Barry Zwarenstein, Interim CEO and CFO; and Dan Burkland, President. Mike Burkland, Five9’s Executive Chairman will also be on the call today.
During the course of this conference call, Five9’s management team will be making projections and other forward-looking statements regarding the future financial performance of the company, industry trends, company initiatives and other future events or recently announced management transitions.
You are cautioned that such statements are simply predictions and should not be unduly relied upon by investors, and 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 Five9’s future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of certain of the risk factors that could cause these forward-looking statements to be inaccurate that you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in Five9’s filings with the Securities and Exchange Commission.
In addition, management will make reference to non-GAAP financial measures during this call. Management believes that this non-GAAP information is useful because it can enhance the understanding of the company’s ongoing performance and Five9 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 than the non-GAAP financial information provided by other companies in our industry.
The full reconciliation of the GAAP to non-GAAP financial data can be found in the company’s press release issued earlier this afternoon and it is also available on the Investor Relations section of Five9’s website.
Now, I’d like to turn the call over to Five9’s Executive Chairman, Mike Burkland.
Thank you, Lisa, and welcome everyone. I have very exciting news to report on two fronts. First, we delivered an exceptional quarter, exceeding our expectations on both top and bottomlines, with revenue growth of 25%, including 38% growth in LTM enterprise subscription revenue and adjusted EBITDA margins of 12.7%.
And second, I am thrilled to announce that industry veteran Rowan Trollope will be the next CEO of Five9. Rowan comes to us from Cisco, where he led their Applications Group, a $5 billion business, including collaboration and contact center.
Prior to joining Cisco, Rowan spent many years in the Internet Security industry and led Symantec’s sales, marketing and product development teams as Group President, focusing on their cloud strategy. Rowan also holds a variety of patents in computer security and operating systems.
Over the past few months, the Board and I took an extensive look at many qualified candidates. It was critically important for us to find an individual who could not only take Five9 to the next level, but also sustain our unique and thriving culture.
Rowan is a proven superstar and one of Silicon Valley’s most sought after executives. He is a seasoned veteran with an extensive track record of creating value, driving innovation and scaling large technology organizations.
Rowan’s valuable domain experience in cloud technologies and the context center market will be a huge benefit to Five9 and we’re really fortunate to gain a leader with his experience, talent and vision.
In addition, we believe Rowan has the right character and personality traits to carry on our special culture. Rowan will be joining as the CEO on Thursday, May 3rd when he returns from a personal overseas trip.
As you know back in December, I transitioned from CEO to Executive Chairman due to health reasons. I will continue as Executive Chairman and look forward to working with what I consider to be the dream team of Rowan, Barry and Dan.
Now, I’d like to turn it over to Barry and Dan to take you through the Q1 highlights.
Thank you, Mike. Welcome everybody to our first quarter 2018 earnings call. I am very pleased to report that our first quarter result significantly exceeded our expectations on both the top and bottomline.
Revenue on the ASC 606 was a record $58.9 million up 25% year-on-year. Revenue under the prior ASC 605 standard would have been $58.2 million, an increase of 24% year-on-year continuing our consistent pattern of revenue growing every quarter in the low to mid 20s. This revenue growth continues to be driven by our enterprise business, which now makes up three quarters of our overall revenue mix.
We believe the key enterprise revenue metric to focus on is the growth in LTM Enterprise Subscription revenue. I am pleased to report that the LTM Enterprise Subscription revenue growth was 38% in the first quarter, as we continue to successfully address this massive underpenetrated market opportunity.
We continue to enjoy considerable leverage in our business model. For the first quarter 2018 adjusted EBITDA was $7.5 million, representing a 12.7% margin. This was an increase of 7.2 percentage points year-over-year, of which 3.6 percentage points was due to the ASC 605, ASC 606 transition.
The adjusted EBITDA improvement continues to be driven by the strong growth in our Enterprise business, which enjoys excellent unit economics, and as just mentioned, it’s consistently increasing as a proportion of total revenue and by the operating leverage we have consistently achieved.
I will now turn the call over to Dan to highlight the success we are having in the Enterprise market.
Thank you, Barry. I am pleased to report that we started 2018 with another first quarter record for Enterprise bookings. In addition our pipeline reached another all-time high. As a reminder, our strong bookings continue to be driven by the push towards digital transformation including the modernization of contact center and customer service technologies, the favorable market landscape, the growth in our direct sales force and the increased leverage from our expanding ecosystem of partners.
This ecosystem of partners, which includes master agents, referral partners, resellers and other integration partners influenced more than 55% of our enterprise deal flow in the first quarter of 2018.
As you know, Five9 has deep partnerships with the industry leaders in areas such as CRM with the likes of Salesforce, Oracle, Zendesk, Microsoft and ServiceNow, and WFO with the likes of Calabrio, Verint and CSI, and in unified communications with Microsoft teams formally Skype for Business, Fuse, as well as Cisco and several others.
This ongoing success in our enterprise business continues to be driven by six key factors. First, a massive market opportunity estimated at $24 billion in annual recurring revenue where cloud penetration is still only 10% to 15%.
Not only is the market opportunity massive, but it has a number of appealing aspects, namely it is not a land grab, but a steady replacement cycle lasting over a decade or more. The evangelical phase of this replatforming is clearly over. Nowadays, most RFPs include a cloud option as a matter of course.
Second, our end-to-end solution providing the industry’s most robust omni-channel solution. Third, our investments in growing our enterprise quota-bearing sales headcount plus strong traction in our channel expansion initiatives. Fourth, our high-touch on-site implementation process performed by our professional services team, as well as ongoing personalized premium support service provided by our technical account management team.
Fifth, we continue to deliver best-in-class reliability, security, compliance and scalability that meets the standards of large enterprises. We are extremely proud of our uptime performance which averaged 99.995% over the last 12 months.
And sixth, our customer first culture, which starts with our team of top tier talent, combined with a do-whatever-it-takes mentality and a rigorous focus on cross-functional customer success KPIs.
Our ongoing momentum in this enterprise market was demonstrated by our win rate. We estimate once again average more than 75% against our two key cloud competitors in the first quarter of 2018.
I am also very enthusiastic about the product innovations and enhancements we plan to deliver throughout 2018. Five9 will soon be announcing the first of its kind workflow engine which will incorporate AI-driven omni-channel interactions for the contact center by leveraging NLP, machine learning, while also integrating to industry-leading engines such as IBM Watson and Salesforce Einstein. This will help customers achieve their digital transformation objectives and deliver personalized experiences like we’ve never seen before.
In addition, analytics and insights continue to be drivers for companies to optimize their operations by giving added visibility to monitor, act or even redirect and interaction in real time. Our Supervisor Plus, as well as enhanced performance dashboards will give valuable data to agents, supervisors and executives, including data from Five9, as well as from third parties to deliver enriched insights.
Now I’d like to share some key enterprise wins we had for the quarter. The first is a national home improvement company which had been using a premise based Cisco System for their contact center and UC solutions.
They were in the process of upgrading their Salesforce CRM from classic to lightning. They embarked on their digital transformation strategy, which included moving their contact center, WFO and UC solutions to the cloud.
After reevaluating several cloud options they selected Five9 to provide an end-to-end solution including Five9 virtual contact center, Five9 cloud WFO powered by Variant and Microsoft Skype for Business for UC, all contracted implemented and supported by Five9. We estimate this customer to generate over $1.3 million in annual recurring revenue.
Another key win in the quarter was a financial services company specializing in various mortgage products. They were using several of higher premise-based solution and one hosted solution serving 10 contact centers across the U.S.
As they were looking to modernize their technology suite, including both CRM and contact center. They concluded the Five9 and Salesforce together would provide a much deeper and seamless integration, and allow them to meet their digital transformation objectives. Five9 and Salesforce teams work very closely together to demonstrate this unique advantage. We anticipate this customer will generate over $1.1 million in annual recurring revenue to Five9.
The third example is a health and wellness company, which was using a premise-based solution from Cisco for contact center and UC. They were moving their corporate headquarters which included one of two contact centers, the other being in Ireland.
As they were syloid solutions, they knew they needed a global enterprise wide solution, but we’re apprehensive to move to the cloud. So they turned to their trusted adviser a master agent, as well as Gartner to ensure they only evaluated the leaders in cloud contact centers.
They chose Five9 for our end-to-end solution including our virtual contact center, our cloud WFO powered by Variant and our cloud UC from TetraVX. The President’s feedback was that they trusted Five9 more and Gartner validated this with our number one ranking in ability to execute, which gave them comfort in choosing Five9. We estimate this customer will generate over $800,000 in annual recurring revenue to Five9.
Now, I’d like to share an example of an installed base customer who continues to expand with Five9. A leading streaming service provider of live programming entertainment and movies to millions of subscribers in the U.S. has been a Five9 customer for a couple of years. Their inbound contact center runs on Five9 and Salesforce CRM, supporting their continuously growing customer base.
In an effort to use their agent resources more efficiently and to improve overall customer experience, they continue to expand their Five9 VCC seats and recently added 800 seats of Five9 WFO powered by Calabrio for quality management, speech analytics and compliance recording.
This customer now represents over $1.5 million in annual recurring revenue to Five9. As you can see, we continue to provide our industry leading solutions to help larger enterprises achieve their digital transformation objectives.
In summary, I am extremely pleased with our momentum in the enterprise market demonstrated by our strong enterprise subscription revenue growth of 38% on an LTM basis. Customer experience has become more strategic to enterprises as customers become more empowered, more mobile and more digital.
The first step on this digital transformation journey is to move the CRM and contact center infrastructure to the cloud, which then enables the adoption of innovation and emerging technologies.
Forward thinking enterprises of today who are undergoing this digital transformation are focused on enhancing their customer experience and increasingly interested in leveraging emerging technologies including AI with machine learning to deliver effective personalized experiences for every interaction.
We believe that our powerful differentiated cloud contact center software combined with our continuing execution puts Five9 in a great position in the customer experience market that is still in the early days of a massive shift of the cloud.
I will now turn the call back over to Barry to provide more color on the first quarter financials.
Thank you, Dan. During today’s call, we will review our first quarter 2018 financial results according to the new revenue recognition standard ASC 606. With the certain income statement items, we will also provide the first quarter 2018 results as they would have been under the old standard ASC 605. This is in order to maintain consistency for year-over-year comparisons for the first quarter 2017 results, which are only available under ASC 605, given a modified retrospective approach to the adoption of ASC 606.
We will conclude by discussing our financial guidance for the second quarter and the full year 2018 according to the new standard ASC 606. Reconciliations on GAAP to non-GAAP results and from ASC 606 to ASC 605 are included in the appendix to our investor presentation in the Investor Relations section of our website.
Revenue was a record $58.9 million up 25% year-on-year. Revenue under 605 standard would have been $58.2 million, an increase of 24% year-over-year. This reflects a continued strong growth in our enterprise business and now makes up 75% of our LTM revenue. Our commercial business, which represents the other 25% of LTM revenue, is growing in the single digits as we focus on investments on the higher ROI enterprise business.
Recurring revenue accounted for 92% of our revenue in the first quarter of 2018 or 94%
under the 605 standard. Recurring revenue is made up of monthly software subscriptions, which are based on the number of agencies, plus usage which is based upon minutes. We enjoy a high retention rate on these recurring revenues.
Our annual dollar base retention rate in the first quarter of 2018 was 98%, the same as in the prior three quarters. Note that DBRR is based on the net invoicing and is not affected by the switch from 605 to 606. The other 8% of our revenue in the first quarter was comprised of personnel services fees generated from assisting clients in implementing and optimizing the Five9 solution.
First quarter 2018 adjusted gross margins were 62.3%, an increase of 50 basis points year-over-year. Adjusted gross margins on the 605 would have been 62.2% an increase of 40 basis points year-over-year. Year-over-year adjusted gross margins have now increased each quarter for the last 21 quarters.
We believe this consistent gross margin improvement is an excellent indicator of the strength of our market position and the potential for cash flow generation. We expect adjusted gross margins to decline modestly in the second quarter, due to seasonally lower revenue set against continued strong hiring in professional services and steady somewhat linear hiring and take offs in customer service.
In a seasonally stronger second half of the year, we expect gross margins to be flat to up slightly in the third quarter and to increase in the fourth quarter. Looking further ahead, we continue to expect to close the remaining 5.2 percentage point GAAP to the midpoint of our intermediate term model of 65% to 70% adjusted gross margins via three main drivers. First, subscription margins continuing to increase as we continue to scale revenue on fixed and semi-fixed costs.
Second, professional services margins improving and turning positive as the investments we are making in this area are pay off. Third, a gradual shift of two percentage points to three percentage points per year in the mix between the portion of recurring revenue that comes from subscriptions and the portion, which comes from usage.
As we have mentioned before, this mix shift is being driven by two factors. First, we are seeing more add-on subscription products being purchased as we move into larger accounts. And second, a small percentage of new enterprise accounts decide to utilize their own carriers for usage.
Turning now to expenses, which I will again discuss in the order of the remaining gap to close to reach the intermediate term adjusted EBITDA margin of 22% plus in the second half of 2019. Non-GAAP G&A expenses in the first quarter of 2018 were $6.4 million or 10.9% of revenue, a year-over-year decline of a 110 basis points despite the increased expenses associated with the implementation of 606, and the enhancement of our Sarbanes-Oxley compliance.
We expect these expenses, particularly those associated with ASC 606 to continue in the current quarter and then largely anniversary out. Non-GAAP G&A expenses as a percent of revenue has now declined year-over-year for 14 consecutive quarters. The remaining GAAP to the midpoint of our intermediate term model or non-GAAP G&A is now 3.9 percentage points.
We plan to continue to close this remaining gap by operating leverage, although it may not be a linear process due to the temporary expenses associated with ASC 606 and the potential for other less predictable G&A expenses. Non-GAAP G&A R&D expenses in the first quarter of 2018 was $6.7 million or 11.4% of revenue, the year-over-year decline of 140 basis points.
The remaining GAAP to the midpoint of the intermediate term model or non-GAAP R&D is now 1.4 percentage points. We’re trying to close this remaining gap by operating leverage and this also may not be a linear process.
First quarter 2018 non-GAAP sales and marketing expenses under ASC 606 was $16.1 million or 27.3% of revenue. First quarter non-GAAP sales and marketing expense under ASC 606 would have been $17.7 million or 30.5% of revenue, the year-over-year decrease of a 100 basis points.
Looking ahead for most quarters, we plan to remain with the intermediate term target of 26% to 30% for non-GAAP sales and marketing expenses under ASC 606. For the first quarter 2018 adjusted EBITDA was $7.5 million representing a 12.7% margin. This was an increase of 7.2 percentage points year-over-year of which 3.6 percentage points was due to the under ASC 605, ASC 606 transition.
This quarter marks the 18th consecutive quarter of year-over-year adjusted EBITDA margin expansion. The adjusted EBITDA improvements continued to be driven by the strong growth in our enterprise business which enjoys excellent unit economics and is a consistent increase in proportion of the total revenue and by the operating leverage we have consistently achieved all factors that we expect to persist.
Non-GAAP net income in the first quarter 2018 was $4.5 million. GAAP net loss in the first quarter $607,000. Finally, before turning to guidance, some balance sheet and cash flow highlights. Capital spending in the first quarter 2018 was $3.2 million of which $2.8 million was financed by a capital leases and the remaining $400,000 was paid for in cash.
We generated $80 million $8 million in operating cash flow in the first quarter of 2018, our ninth consecutive quarter of positive operating cash flow. In the last 12 months, we generated $19 million of operating cash flow, a significant increase compared with the $7 million generated in the 12 months through March 31, 2017.
We continue to be particularly pleased with the operating cash flow performance since it illustrates our strong unit economics and the operating leverage inherent in our business model as well as our low working capital intensity driven by our low DSOs, specifically, DSOs for the first quarter 2018 were 27 days.
As I remarked before, the DSO performance is an indication, not just a payment terms and of the mission criticality of our solution, but also of the level of customer satisfaction.
Looking ahead, we expect DSO to increase gradually as the mix shift to enterprise from commercial continues. I’d like to finish today’s prepared remarks with a brief discussion on our expectations for the second quarter and for the full-year 2018.
Note that we continue to guide where there to be no material difference in revenue between ASC 606 and ASC 605 and that the bottom line benefit from capitalizing and amortizing a significant portion of commissions will be between $5 million to $7 million for the year.
And now for the guidance under ASC 606. For the second quarter of 2018, we expect revenue in the range of $55.8 million to $56.8 million. This reflects the typical seasonality of our business and includes the impact of the expected fall off from the strong seasonal tailwind.
GAAP net loss is expected to be in the range of $5.9 million to $4.9 million, or $0.10 to $0.08 per basic share. Non-GAAP net income is expected to be in the range of $1.7 million to $2.7 million or $0.03 to $0.04 per diluted share. This guidance for the current quarter includes impact of the higher cost and expenses relating to the ongoing hires we have been making and continue to make to go after this massive market opportunity, and the expenses incurred for ASC 606 and Sarbanes-Oxley.
Note that this guidance includes a $1.5 million improvement to the bottom line due to the lower commission expenses under ASC 606, which is the midpoint of the $1 million to $2 million range for the current quarter we’re expecting from this accounting change.
For 2018, we expect revenue to be in the range of $235.8 million to $238.8 million. GAAP net loss is expected to be in the range of $13 million to $10 million or $0.22 to $0.17 per basic share. Non-GAAP net income is expected to be in the range of $15.4 million to $18.4 million, or $0.25 to $0.30 per diluted share. Note that this guidance includes a $6 million improvement to the bottom line due to lower commission expenses under ASC 606, which is the midpoint of the $5 million to $7 million range for 2018 we are expecting from this accounting change.
With respect to the profile of revenue by quarter for the second half of 2018, we expect sequential revenue to increase modestly in the third quarter and more strongly in the fourth quarter following the seasonal pattern we have experienced in past years. Given the shape of this revenue curve and the fact that we ramp expenses in a somewhat linear
And the fact that we ramped expenses in a somewhat linear fashion during the year. Most of the sequential improvement in the bottom line performance is expected to occur in the second half and especially in the fourth quarter which has been our strongest revenue quarter.
To illustrate the pattern in a different way, consider that for each of the last three years 53% of our revenue has been recognized in the second half of the year given that we enjoyed very high margin profitability on the incremental revenue, we have a strong natural lift in adjusted EBITDA margin in the second half of the year.
For modeling purposes, we would like to provide the following additional information. For calculating EPS, we expect our diluted shares to be 61 million and basic shares to be 57.5 million for the second quarter of 2018, and 61.5 million and 58 million respectively for the full year of 2018.
We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $60,000 for the second quarter of 2018 and $225,000 for the full year of 2018. Our capital expenditures for the second quarter of 2018 are expected to total approximately $3 million to $4 million. For the full-year 2018, we expect total capital expenditures to be between $14 million and $15 million.
In summary, we are very pleased with our first quarter performance. Our customers, our partners, and our employees place a high value on consistent execution in all key areas of the business. This manifests itself in our financials, which includes consistent 20% plus year-over-year revenue growth, over 10 years of consistently increasing revenue sequentially each quarter, except one which was flat, over five 5 years of consistently increasing year-over-year gross margins each quarter and over four years of consistently increasing year-over-year adjusted EBITDA margins each quarter.
Looking forward, we’ll continue to drive for solid revenue growth and progress towards the intermediate term and long-term adjusted EBITDA margins of 22% plus and 27% plus respectively. Our confidence in meeting these targets is based upon the persistence of the factors which have driven our year-over-year improvements up until now, a massive underpenetrated market strong unit economics of our enterprise business, which is constantly increasing portion of total revenue and operating leverage.
Lastly, before we turn to your questions, I’d like to announce the upcoming conference participation. We will be presenting at the SunTrust 2018 Internet and Digital Media Conference in San Francisco on May 9, the Jefferies Global Technology Conference in Los Angeles on May 10. The Needham Emerging Technology Conference in New York on May 15, the 46 Annual JPMorgan Technology Media and Communications Conference in Boston on May 16, the 15th Annual Craig-Hallum Institutional Investor Conference in Minneapolis on May 30th and participating in the Bank of America Merrill Lynch Global Technology Conference in San Francisco on June the 3rd. Additional details on these events will be available in upcoming press release.
And now we’d like to open the call for questions. Operator, please go ahead.
[Operator Instructions] We’ll take your first question from Sterling Auty from JPMorgan.
Just based on some of the case studies you gave, sounds like some of the initial deals are getting larger. Can you give us a sense of what you’re seeing in the trends of initial sized deals?
This is Dan Burkland. We’re seeing a tremendous amount of continued interest from enterprises of all sizes and as companies of larger and larger sizes get more and more comfortable with cloud and the reliability and security and scalability, as well as the innovations that we can deliver to them they continue to open up and bring the market to us. And that’s what we’re seeing as, as the trend continues to get us further and further up market.
And how about in terms of the expansion deals, whether it’s more data centers, more geographies, more divisions, what are you seeing in terms of what people are looking to expand with I guess in the deals that you saw in the quarter?
Well, you just mentioned three and there - those are all very clear ones, whether it really depends and it runs the gamut across the market. Some do it by geographies and add geographies. Some do it by departments and add departments. Some do it by applications where they continue to add more and more SKUs as we continue to innovate and offer more to the market.
We will move next to David Hynes from Canaccord.
Congrats on lending. Rowan it sounds like a good win for the team. Maybe this question is best for Dan. I wanted to ask just a couple of competitive questions, maybe two competitors at opposite ends of the spectrum right. Avaya was talking a bit more about their cloud efforts. I know they made an acquisition earlier this year in the space. Obviously they’ve successfully relisted and then Twilio with that Enterprise Connect introducing their contact center platform.
So obviously it doesn’t seem to be impacting win rates. But I’m curious in the field are you seeing any pace in the - any change in the pace of decision making, if buyers I guess have to consider new or more alternatives?
Great question, and I think you hit it right on which is opposite ends of the spectrum. If you look it, I’ll take a Via first, if you take the acquisition I’ve spoken that they made recently and put a lot of messaging around cloud and multi-tenancy, what we understand is it’s primarily a BPO focused solution to allow them to take a switch that they serve multiple clients with and partition that are divided up so that they can serve those clients with the assurance that one client can’t interfere or see data from another client.
And that’s really - and some AI innovations on top of that that they’re playing with or doing proof of concepts with, but for the most part that really hasn’t changed the competitive landscape. They’re still a via - they always will be, we see them, try to hold on to their base and they have quite a base as we all know, and it’s a matter of customers who want to wait for them to truly get a cloud solution or innovate on the solution that they have.
And many customers just don’t want to wait that out or don’t have faith that they’ll get there because they continue to be hamstrung a bit from a wherewithal standpoint.
As far as Twilio, like you said opposite end of the spectrum, there’s really a developer based tool even when we heard the hype that they were coming out of the enterprise connect with something new and exciting it was something new and exciting for developers, and it was positioned just that way that if you have an IT shop that wants to be in R&D shop for contact center applications and solutions, you can kind of build around so to speak, very few enterprises have the staff for the wherewithal to go build their own and then test these applications and work through bug cycles and so forth. It’s hard enough for companies like us that do nothing but that. I can’t imagine somebody trying to do this in their quote spare time with the small staff.
And then you know, obviously lots of buzz about intelligence in the context center and you alluded to some of your efforts in the prepared remarks. Curious how you’re thinking about rolling out AI to your customers, I know at Enterprise Connect you talked about this idea of practical AI, I mean where are our customers in terms of readiness to adopt these types of technologies?
Great question, because AI is coming at companies from all directions. And there are so many different ways that they’re being asked to implement AI and it’s not just in the contact center of course. The question is, how do we best apply it within the contact center that can result in real tangible ROI and real you know, obvious improvements in the customer experience.
And that’s where it’s very important to be practical about it, right. Certainly there’s companies experimenting that want to hire one of the big SIs to come in and spend millions of dollars customizing a solution and building it from the ground up. But we’re trying to look for solutions that are repeatable and that can be applied to many enterprises across the board.
And so, we’ve worked with the Salesforce, with IBM, with Deloitte and really look to where are areas that we can build a repeatable, strong return, and we demonstrated some of those examples in - at Enterprise Connect, as well as the Oracle User Group that they had modern CX. And really it comes down to being able to leverage the intelligence of a natural language processing engine typically a transcription engine, so I transcribe a conversation in real-time, I use NLP to search those words that are now converted into text, and then be able to interrogate a knowledge database to give - to fetch valuable information that can then be displayed to an agent, and I’m getting down in the weeds there for a moment.
But what that does is it allows the agent then to have assistance, okay not rely on every agent to go do their own searching and hunting for information, but let the system go find it and deliver it back to the agent, and we call that Agent Assistance, probably one of the very first ways in which companies will adopt AI in the contact center because it helps those agents become more efficient and actually more consistent in the experience that they deliver to the end consumer.
We’ll hear next from Raimo Lenschow from Barclays.
I have two. If I stay on that subject, Dan, can you talk how you see that AI was playing out because there is obviously the front office - yes, like the front office guy like front office is the wrong word, but the front end guys like the Salesforce, Zendesk, et cetera, and then you guys on the back end, who is going to provide that AI functionalities, does it need to be you or a combination of the two of you, how does that going to play out in your mind?
Well, it’s a great question and it’s a combination of several different entities right. If you stop and think about it, there’s going to be certain components that are best served by a CRM. They can do things like transcription servicing and so forth and transcribing conversations. There’s engines like NLP, and machine learning that we can do that we use for leveraging either fetching information from a database or using the information we’ve collected to do more intelligent routing because we’re the routing engine and then there’s going to be third parties platforms like ours have to have the open APIs so that we can leverage what third parties come up with.
There’s a lot of AI companies out there of all sizes that are trying to come to market with an application and the question is, how well we can leverage those applications and bring them in for our customers. So it’ll be a combination of all the above.
But it that helps. They are totally interesting. The question for Barry, like, can you talk a little bit about your Q1 cash flow, because it was very, very strong. Where there any specific items in there that you want to point out?
Raimo, thank you very much for asking that question. A great question. So we had another very good quarter for operating cash flow, $8 million, $19 million over the last 12 months and the $8 million in this quarter basically all came from the income statement, $7 million of it. So nothing unusual at all.
Remind you Raimo that, we’ve been consistently positive on the operating cash flow and now for years. Q3 was another one, $8 million and the thing I would really point to is two things I would really point to. The inherent profitability of the business, this is mission critical stuff that people are willing to pay for, if they get a good solution that’s maintained and secure that is enhanced.
And the second thing is working capital intensity with DSO of 27 days, will go up over time, but not dramatically and not quickly. And so as the business grows, we’ll be able to bring a lot of the improvements in operating cash flow without draining in into operating asset.
We’ll move next to Scott Berg from Needham.
Congrats on a great quarter. I have two questions. Let’s start with the new CEO, Rowan. Mike can you help us maybe fill us in with, what specifically in his background or his experiences did you think would transcend best within the Five9 built product and end markets?
So we’re just thrilled to have Rowan at the helm to take Five9 to the next level. Obviously he brings an incredible and rare combination quite frankly of experience, talent, and I would say character that gives us really the entire team here, the board, the C Staff and the very high confidence that he’s the right leader to take us to that next level and beyond. But also to carry on the Five9 culture which is very unique, it’s a very, very important strategic and competitive advantage for us.
And I got to know Rowan very well through this process and he is going to be an absolute superstar. He is one of the most sought after executives in Silicon Valley. Our timing was perfect to be able to take him out of a, a C level job at Cisco where he was running 5,000-plus person organization and reporting to the CEO. He’s one of the superstars in our industry and I personally, I am just thrilled that he’s going to be our next CEO.
And my follow-up is probably for Dan. Dan, I think it was in your remarks you mentioned one of your big wins was a customer that moved on-premise to cloud based on their migration to the salesforce lightning platform. I always thought that could be an interesting catalyst over the next two years for you guys of that exact example.
But are you seeing that a little bit more out there as customers are having to make that platform, this is becoming a catalyst to kind of look like - at all these different applications that interact with the CRM system.
Sure Scott, and that’s - you hit right on, which is customers are being encouraged certainly by sales force to make that transition from classic to lightning. And it’s important for us to make sure that when we innovate, that we’re writing through to lightning and making sure integration is there.
We’ve because of our tight partnership with sales force, we get early access to software that not all of our competitors do. And we’re able to innovate and write to lightning, I think sooner than our competition so that gives us certainly an advantage and it gives comfort to customers that we’ve got that early visibility into their software.
Terry Tillman from SunTrust Robinson Humphrey. Your line is open.
First question just relates to maybe Dan for you in terms of the enterprise strength in the quarter. One thing I’m just kind of curious about, obviously you have secular drivers like a digital transformation and just modernizing contact center infrastructure but it may be some of the more economically sensitive industries you serve.
Did you see anything that was maybe kind of a incremental activity or maybe more agents, transaction volumes or just a greater amount of business than you would have expected in some of the more economically sensitive industries?
Business as usual when it comes to that. Let me remind you that we do have some seasonality at the end of the year that comes in typically late Q3 or early Q4 in certain segments, healthcare, retail as they ramp up, healthcare because of open enrollment and some ACA enrollments. And then just overall in consumer products, a little bit from education in Q3.
But then I think we’ve just seen a thriving economy and continued business that takes place and more calls and more transactions are taking place across the board.
Well, you’ve created quite the track record, we’ll expect a record quarter every quarter on the enterprise booking. But yes, one thing in terms of AI and machine learning, what I’m curious about is there’s plenty of talk and there’s been plenty of talk about RPA. What is your all stance on RPA, whether it’s assisted or unassisted going forward in the contact center. So beyond analytics, but actually maybe certain tasks just completely being taken over with an RPA type model?
I mean you see the visionaries point out that in 10 years, it’s completely robotic, completely automated and we’re not going to have agents at all. And I think we see that tendency come about every 10 years back around the 2000s with the advent of the Internet, it was like, nobody is going to get service from a contact center or call center. They’re just going to get it online.
And then you had speech enabled IVR where people could talk to the machine and they would find the answer and give it back to them and we’d all self-serve. So I think that comes about and there are going to be places where AI fits. I don’t think it’s a replacement. I think it’s an enhancement. And that’s what I think when you look long-term we’ll use it for things like age and assistance to make them more effective.
Some of the self-service things that are very mundane, repeatable, check by balance, the people do that already online and through other means rather than call an agent. But that hasn’t really reduced the - that has not been at the expense of agent Talk Talk. Companies are now investing more and willing to spend extra time on the phone to enhance that customer experience, whereas you know five years ago it was about cost reduction, reduce the time on the call, get to the next one, do more with less, it was all about cost reduction and now it’s about investing the extra time and spend a few extra minutes on the phone to create customer delight.
Okay. And just the last question relates to you did mention, you guys did mention in the prepared remarks, and I think, maybe it’s a part question about add-on purchases and good expansion scenarios after you land the customers, is there anything different going on or are you doing anything to maybe turn a lever to go after that opportunity more aggressively or is just the natural kind of progression of when somebody is delighted with the software. They’re going to buy more, what are you doing on the go-to-market side, are you doing anything to maybe kind of turn that dial more? Thank you.
Yeah. Great question and we’re not doing anything new or unique. We’re always turn to that lever. We always have turned it. But it’s just like you said, you’ve turned up the customer. You get them excited about what they’re using it for and the applications that it’s serving and if they’re expanding their business, they’ll take more of it. If they’re expanding and innovating on their own then they’ll take more skews and more add-on products that we offer them.
All right. Thank you.
We will hear next from Brent Bracelin from KeyBanc Capital Markets.
Hello. This is [Clark] on for Brent. Mike, I was hoping I could get your perspective on evolution of the business, now that we’re at the doubling of revenue on a run rate basis since the IPO. We’ve seen a few competitors get acquired and now you have a Cisco executive at the helm. Is this an opportunity for a change in appetite maybe more aggressive move whether that would be M&A or acceleration in sales investments, basically any color on, is this is wide open as it’s ever been or is this going to be stay the course and continue to pursue the opportunity?
Yeah. Clark, I’m happy to take some time to talk about that. So, again, the beautiful thing about our business is, while we’re turning the page on a new chapter for the company with Rowan rowing at the helm. I’ve been here 10 years and it’s been an exciting journey for 10 years. But again we feel like we’re just getting started. This is a wide open market that is still 10% to 15% cloud, its $24 billion in annual recurring revenue in terms of the size of the worldwide opportunity.
We’ve gone through a few chapters as an industry with some of that consolidation of some of the players recently by some legacy players which, again I think those were done for very specific reasons related to those companies that got acquired. We think we’ve got just an extended runway to keep running very, very fast and very consistently through time to continue to capture market share.
I think with Rowan at the helm, he is just a extraordinary visionary leader. But at the same time he knows the great momentum we’ve got as a business and the market opportunity we’ve got right in front of us. So, he will be solving for continuation of momentum in this great, large open market space that we’ve got, but at the same time, he will be solving for extending our leadership position in the market.
Perfect. And just one clarifying question on the workflow engine, will this be functionality that was previously serviced by maybe at a WFO that was maybe involved as a partner or is this kind of net expansion opportunity monetizing in-house versus expansion of overall contacts center spend with this?
Yeah. Clark, sorry, could you repeat that, sorry, I was distracted.
I was wondering whether or not the workflow engine, will that be expansive to a customer’s contact center spend or will this be Five9 offering in WFO functionality that may have been previously serviced by a partnership?
Yeah. So, Clark this is Dan. Let me clarify the difference there. What we’re talking about is a workflow engine that will be doing the routing of a variety of different solutions. So, today, whether we’re routing voice, routing our chat, whether we’re routing our email or one of our CRM partners chat or email, what we want to do is make sure that we’re the routing engine and that we’re taking it to the next level by calling it workflow because we’re going to take objects. We’re going to route cases. We’re going to route whatever. There may be cost elements from the other providers and other solutions that they want to feed into our routing engine.
But if you think about this the routing engine itself is going to be able to take our product guys like to say, hey, you want to route pizza, we can route pizza. You take the object that is presented to us because we control the agent state and the agent skill level and we have real time visibility into the presence of that agent. We can be the true routing engine to say whatever kind of interaction you want to get the best skilled available agent. We’re the ones that will direct that traffic to the right resource.
And so think of the workflow engine as the routing portion because we see agents but also the engine that’s going to collect valuable data that allows us to then either again through kind of the AI engine be able to enhance routing, right. I talked about a very simplistic example there which was I’m going to get information. I’m going to find the right resource.
The question there is how do I find the right resource that may be looking up a phone number, it may be collecting data like we do today from an IVR, but it may also be based on a lot of other information that I get either from a database about their history, it maybe from their buying behavior, it may be a lot of different personality matching. There is lots of different variables that can go into that equation and that’s what we want to be as the routing engine.
Fairly different, as opposed to it’s not workforce, not WFO piece. That’s more on the, a little bit more on the back end of recording speech analytics, although they do some real time speech analytics and again in that case we could leverage what they’re doing rather than reinvent it.
So, again, it’s going to be all through partnerships and we’ll supply the actual engine and where we need to leverage whether it’s a transcription engine or whether it’s a real time speech engine, we can certainly take advantage of our partners and one more reason why we partner with the leading WFO players.
Right. Perfect. Thank you for clarifying.
Jeff Van Rhee from Craig-Hallum. Your line is open.
Great. Just a couple left for me. From a capital intensity, your sort of CapEx outlook how do you envision, look out next year, two years, three years, any meaningful changes there and then along with that any thoughts about increasing potential reliance on cloud guys AWS, et cetera?
Yeah. So in terms of the capital spending the way we think about it is that typically we spend 5%, 6% or 7% of revenue, and mostly cuts around 6%. And that’s primarily to accommodate growth. There could be a case where in Europe, we might spend some additional money for CapEx, we’ve done it in the past, we have data centers there, but nothing dramatic.
In terms of the public cloud with our announcement last summer of the global voice, it actually puts us in a very good position in the sense that we can go into a number of different countries at a much lower cost with a local point of present in as we do already in countries like Australia, Brazil, Ireland, Japan and so on.
Okay. All right. And then I guess just secondly from a sales process, I mean, you obviously just been a machine from a sales recruiting and ramping process historically, any changes at all that are notable with respect to the recruiting on-boarding processes and along those same lines, any changes in outlook or expectations about the sales capacity likely to be added this year?
No real changes of significance, we’re going to continue to scale our enterprise sales force domestically and opportunistically and carefully globally in the international markets, but we’re seeing a very, very good return when it comes to investing in those resources and we’ll continue to pace that commensurate with the expansion of the business. So I wouldn’t anticipate any changes there.
Got it. Okay. Yeah, great quarter and congrats on the addition of Rowan.
Thanks, Jeff.
We’ll move on to Nikolay Beliov from Bank of America.
Hi. This is actually Jacqueline Cheong on for Nikolay. I have a couple of questions. First of all, you’ve noted consistently in the past that enterprise sales hiring is trending at about 30% to 40% a year. At the same time, we noticed that enterprise sales is also growing going at 30%, 40%. So my question is why aren’t we kind of seeing leverage from the sales channel and pull-through of business from salesforce and Oracle and -- yeah.
Yeah. Great, great question Jacqueline. Thank you, and yeah, to just make that distinction, when we are getting leverage and access into accounts and leads through our ecosystem. So when Salesforce introduces us into an account that gives us leverage and we get an endorsement from them as well.
When we get introduced through our other channels, whether it be the master agents, resellers, referral partners, VARs, et cetera, that gives us leverage, but we also assign our direct sales team to go in and work into the deal, make sure that it’s properly represented.
This is complex integrations in a mission critical application. It’s really hard to have the channels have the depth, that we can have ourselves. We certainly get leverage from them. We always have and will continue to rely on that to not only help us have access but to help us through that process and help nurture the customer.
Got it. Makes sense. Thank you and my second question is how focused are you on the commercial segment at this point. Can we see the growth rate go kind of to the from the high-single digits to low-single digits?
We’re continuing to see a great demand from that commercial business and we’ll continue to invest there. It’s not the growth engine that enterprise is, but it’s still growing and part of that is because we define the commercial business in a sub-50 C market. It’s got a ceiling on it right. They go above that. They belong in our enterprise space. So we make that distinction and so that market because it’s restricted in its size, it’s growing at a little slower rate than the enterprise space.
And Jacqueline, this is Mike. I would just add that that’s a strategic decision we made years ago and we continue to kind of standby, which is the ROI that we get and the enterprise market is so significantly greater than what we get in the commercial market that that is where we’re placing our bets. That’s where we’re expanding our sales capacity. That’s where we’re investing our marginal dollars and that’ll continue, but we continue to see an opportunity to grow our commercial business. But, again, we’re not investing aggressively to do that and it really just comes down to that marginal ROI differential.
Got it. Got it. And lastly I know we touched upon this a little bit already, but can we talk about how Global Voice helps drive new incremental enterprise business?
Sure. So, yeah, Global Voice was an announcement we made last summer and what that does is it allows us to have voice pops or points of presence in local regions and markets around the world, so that they don’t have to bring the voice all the way home run back to our data centers where our application lives.
They can park those calls in region and then have that voice pop, ping the ACD and IVR that’s here in our data centers domestically and we can see all agents understand their presence and skills, and then respond back to that voice pop about where to ultimately terminate that call.
The great thing there is, we are able to often times terminate it right there locally in region which means it cuts down on cost, improves the call quality because there’s less latency. And it allows us to keep calls where they belong in region and we do that by these voice pops being built in public cloud facilities like AWS.
Got it. Thank you.
Mike Latimore from Northland Capital Markets. Your line is open.
Thanks. Congratulations on the higher-end quarter there.
Thanks Mike.
In two of the three deals you highlighted new customers, there was a cloud you see deployment as well, are you seeing kind of a combined contact center, you see -- you’re seeing that sort of dynamic increase as a percent of the pipeline here?
I wouldn’t say it increases. There’s always that subset of customers that do want to bundle it together and make a joint decision, a simultaneous decision if you will. But there’s still a great many of that realize these are two very different solutions and they want to have separate many times, it’s different departments, different decision makers and they make completely separate decisions.
Got it. And then, how important is the international market for your or how material is that for your plans for this year?
Yeah. So not dramatic -- no dramatic changes there, Michael. So we as you probably recall have some 10% of our revenue from international based upon bill to address like 6%, 7%. It’s something that we’re doing in a steady pace with no major increases in investments currently.
Yeah.
And the basic and the basic reason over there is that, we have a very, very good business here domestically with a very good returns and inevitably it takes away some of the return when you go internationally.
Yeah. It makes sense. Thanks.
Thanks, Mike.
At this time, there are no additional callers in the queue. I would like to turn the conference back over to Mike Burkland for any additional or closing comments.
All right. Thank you, Operator. Thanks everyone for joining us today. I just got to tell you I’m extremely enthusiastic about the next chapter for Five9 under Rowan’s leadership. I think we have a great position as a company. We’ve got a very strong momentum in a very large market that is still in the very early days of a massive shift to the cloud. So, I’m just pleased to have Rowan at the helm to take Five9 to greater and greater heights and thank you for joining us today.
And that does conclude today’s teleconference. We thank you all for your participation.