Five9 Inc
NASDAQ:FIVN
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Five9 Inc
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Good day ladies and gentlemen and thank you for standing by. Welcome to today’s Five9, Second Quarter Fiscal Year 2020 Earnings Call. As a quick reminder, today’s program is being recorded.
And at this time I’d like to turn the floor over to Ms. Lisa Laukkanen. Please go ahead, ma'am.
Thank you for joining us. On today's call are Rowan Trollope, CEO; Dan Burkland, President; and Barry Zwarenstein, CFO.
Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors.
Actual events or results may differ materially and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate, including the impact of COVID'19 pandemic. The other risks discussed under the caption Risk Factors and elsewhere in Five9's Annual and Quarterly Reports filed with the Securities and Exchange Commission.
In addition, management will make reference to non-GAAP financial measures during this call. A discussion as to why we use non-GAAP financial measures and information regarding the reconciliation of our non-GAAP to GAAP results is currently available in our press release issued earlier this afternoon, as well as in the appendix of our investor deck and available in the Investor Relations section on Five9's website at investor.five9.com.
And now, I'd like to turn the call over to Five9's CEO, Rowan Trollope.
Thank you, Lisa, and thanks to everyone for joining our call this afternoon. I couldn't be happier with our second quarter results with revenue and $99.8 million accelerating to 29% year-over-year growth and 5% sequential growth. Both year-over-year growth and sequential growth are Q2 records for Five9 and as our subscription revenue grew 33% on an LPN basis. On the bottom line adjusted EBITDA margin was 18.3%, one of our strongest Q2 showing.
I also want to highlight that we are experiencing booking strength on all fronts, for both commercial and enterprise, and for both new logos and installed base. With Q2 being our most challenging seasonal quarter and our teams contending with the COVID disruptions, these are truly exceptional results. I’ll go into more detail shortly, but there are four factors driving our performance.
First, there are two trends that have been building for some time. The shift from on-premises to cloud and the importance of digital transformation, both of which COVID-19 is potentially accelerating.
Second, our increased go-to-market investments are clearly paying dividends, most notably the systems integrators and AT&T.
Third, our enhanced and expanded engineering leadership and the increased investments we’ve armed them with is resulting in faster and more product innovation. And finally, fourth, transcending all of this our team is executing like clockwork. My thanks go out to all the Five9 partners and especially the entire Five9 team who just keep on delivering. We truly have an amazing team. Whatever happens with the macro environment we’ll strive to continue delivering this superb execution.
Now, I’ll share some details on each of those four drivers starting with recent market dynamics in the contact center space. As I mentioned earlier, we believe the migration of on-premises to the cloud is steady if not accelerating due to COVID-19. So customers now recognize the critical nature of business continuity plans for their contact centers and there's an increased appreciation for the fact that cloud solutions can address these needs far better than on-premises solutions.
In addition, in the current environment customer service and customer retention have become even more critical. Contact center engagements are moving to the forefront of customer experience. COVID-19 has effectively converted jobs from brick-and-mortar retail sales and service people to contact center agents, making contact centers the new front door for many businesses.
We've also heard from enterprise customers that they see this as an opportunity to disperse their agents geographically for risk management purposes and to access a wider talent pool. While we don't know the extent to which companies will shift back to the way things were, there are indications that COVID-19 has permanently changed the way that we work and that customers will continue to implement the work-from-home model to some degree. Five9 has consistently proven we deliver on this and we're well positioned to take advantage of this trend.
Next, let me provide an update on our go-to-market initiatives and highlight a key factor in our success, which is our clockwork like execution. This execution has played a massive role in driving our strong Q2 results and pipeline. While we still feel the effects of the pandemic on many aspects of our lives, I'm particularly proud of our management team and our entire workforce for their relentless effort to maintain the high standard for liability that Five9 is known for, even while being 100% remote.
Our financial guidance in today's earnings press release and which Barry will touch on shortly is indicative of our business being fully operational and on track. I'm pleased with the progress we've made on each of our go-to-market initiatives, including our new enterprise coverage model and our strategic shift with commercial, but let me focus today on the partner front.
Our partners have been very key to the results you see today and our investments on that front are paying off big time. I'm happy to report that not only were booking from global SIs more in Q2 than all of 2019 combined, but also represented an all-time record as we continue to strengthen our partnerships with Deloitte, IBM, Slalom, EY and Accenture. This momentum validates the number of large enterprises embarking on digital transformation and cloud migration projects. In addition, our master agents and resellers continue to execute for us with an increase of 53% year-over-year in bookings and strong pipeline grow.
Now, I'd like to share some terrific news with you. I am very, very pleased to announce a strategic partnership with CDW, one of the largest technology providers in the U.S. The CDW team is really great to work with and they've got a dedicated contact center team supporting hundreds of CDW sales reps. I couldn't be happier to be increasing our investment the CDW and I look forward to working more with the team there.
Finally, I'm thrilled with the progress of our AT&T partnership as our key initiatives are taking shape with sales and implementations progressing and accelerated pipeline, training of several hundred go-to-market personnel and the advancement of our OEM integrations and customizations. As we stated, we look forward to this contributing nicely to our 2021 revenue and momentum, so that’s go-to-market.
Now, let me turn to products. We've continued to make considerable progress here, which I can illustrate with a few concrete examples. First, our summer release is being rolled out right now to very positive initial feedback. This release delivers 139 new features, including over 20 features from Global Voice, and a major up-leveling of our support for digital channels, including deep integration into an omnichannel agent console, supervisor interface, as well as CRM, workforce optimization and reporting integrations. This allows our customers to be where their customers are and choose how they would like to engage, without compromising on the rigor of running a contact center.
Next, we announced four new package workflow automation applications powered by Whendu, our no code platform. These packages cover operational dashboards in social listening and also emphasize proactive communication through digital channels, building on our up-leveling there. We’re especially proud of the fact that our teams made them available within 90 days after our acquisition, so these apps are showing excellent early traction.
Finally on our AI initiative, we lost Five9 virtual assistant, our best-in-class IVA, Interactive Voice Assistant that leverages conversational AI to automate manual tasks and answer common questions in the contact center. Our virtual assistant provides a natural conversational response to customer inquiries quickly and efficiently, resolving common issues.
We leveraged our Whendu technology and strategic partnerships with Google and others to accomplish this. Additionally, we received commitments from 10 customers to implement our Agent Assist product, and about half of them are expected to go-live with production traffic this month. We also have our chat-bot integrations with intelligent routing and escalation to an agent now in general availability. These product launches and enhancements, our added reseller partners and increased systems integrator alliances are helping us win more and even bigger enterprise customers.
In conclusion, as the migration of premises to cloud and digital transformation accelerate, Five9 is in an extremely strong position, especially given our proven execution track record even in these extremely challenging times. Given this favorable market trends and the proven ability to execute, we believe we can maintain 30’s level enterprise subscription growth.
Now, I'd like to turn the call over to our President, Dan Burkland. Dan, go ahead.
Thank you, Rowan. Once again we continue to execute up-market with larger and more complex enterprises. Our Q2 bookings set an all-time record. Our pipeline continues to grow to an all-time high and is again 2x what it was a year ago, and our ecosystem of partners continues to influence over 60% of our deals.
In terms of sales hiring, while we did slow the pace during the initial brunt of the pandemic, we’ve since resumed pretty aggressive hiring once it became clear that we have a special opportunity to increase our share in such a strong market.
And now as we normally do, I'd like to share some examples of key wins for the quarter. The first is a Fortune 1000 company and one of the largest mortgage lenders in the U.S. They were using a cloud solution that did not deliver the functionality, compliance requirements nor the reliability they need. Five9 was able to deliver an end-to-end solution, along with PCI Level 1 compliance and TCPA compliance for their collections department, as well as improved reliability.
While they are U.S. based, Five9 is providing a global solution to over 1,000 agents worldwide. They also are leveraging the Five9 WFO solution powered by Verint for quality management and workforce management. We anticipate this initial order will result in approximately $2.3 million in annual recurring revenue to Five9.
And now, I'm excited to share with you two of our largest deals in our history. The first is a logistics company that helps state governments and managed healthcare organizations with transportation service. They had been using an Avaya system which did not give them the automation and the operational efficiencies they desired. They looked at the leading cloud solutions and selected Five9, including our recently announced IBA solution powered by Google, to fully automate the bookings process for transportation.
Also with Five9 workflow automation, we're able to trigger automatic booking confirmations, send SMS reminders, give status of rides, as well as provide follow-up surveys. Five9 WFO is also being used for workforce management, performance management and gamification. With over 2,000 concurrent agents, we anticipate this initial order to result in approximately $4.8 million in annual recurring revenue to Five9.
Just two weeks after closing that business, we won our largest ever initial order, which was a retail servicing company that works with some of the largest brands in the world. They have been using Cisco, which lacked the integration requirements to multiple CRMs, including Salesforce, Oracle and Zendesk. In addition to Five9 they considered Amazon and Genesis.
Five9 was selected for the robust omnichannel solution, along with the full WFO suite, including speech and desktop analytics, workforce management and performance management. They also purchased video engagement and our visual customer feedback survey application, enabling them to deliver unparalleled customer experiences. We anticipate this initial order to result in approximately $5.9 million in the annual recurring revenue to Five9.
And now as we normally do, I'd like to share an example of an existing customer expanding their relationship with Five9. Due to COVID, a leading apparel brands who had been a Five9 customer for over five years needed to convert their storefront from over 400 retail outlets to one virtual online e-commerce website.
In doing so, they expanded their contact center to accommodate the additional traffic that comes with processing online transactions and all the associated follow-up questions and inquiries. They added several hundred seats along with WSM to more than double their current spend with Five9, bringing their total anticipated spend with us to over $1.5 million.
So as you can see, we continue to win and successfully execute on delivering up-market for larger, more complex and more demanding enterprises. It is a testament to our product and engineering teams, as well as our customer first culture from our go-to-market teams, who are always looking to provide services and programs to help our clients deliver great customer experiences.
So with that, I'll hand it over to you Barry.
Thank you, Dan. Before going into the specifics, I remind you that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website.
We had a very strong quarter, with both top and bottom line results far exceeding our expectations. As Rowan mentioned earlier, revenue grew 29% year-over-year and 5% quarter-over-quarter, both all-time highs for Q2 as a public company. The strong growth was driven primarily by enterprise business. The execution revenue increased 32% year-over-year on an LTM basis. Enterprise now makes up 82% of LTM revenue and our commercial business represents the remaining 18%.
Note that despite an initial downturn in late Q1 and early Q2, our commercial business has come back quite strongly and grew year-over-year in the teens. As a reminder, in the Q2 revenue guidance that we discussed during our last earnings call, we’re expecting higher than normal reserves due to COVID given payment extensions, specifically we have forecasted receiving $3 million in requests for extensions and estimated that $1.5 million or 50% will be reserved against revenue.
We ultimately received a meaningfully large amount of $4.7 million in payment extension requests due to COVID related challenges; however, a large majority of the customers became current on their accounts resulting in reserves of $800,000, which represented only 17% of their requests. This $800,000 was a headwind of approximately 1 percentage point on the Q2 year-over-year corporate wide reported revenue growth.
As you would expect, we continue to see some industry disproportionately impacted by COVID-19. For instance, customers in travel and hospitality have been reducing seats as expected, but consumer discretion have been mixed with some customers increasing, while others decreasing seats.
The best performance industry continues to be communications, education and technology. Our three largest industries, financial, healthcare and business services continue to grow steady. Recurring revenue accounted for 92% of our revenue, the other 8% of our revenue was comprised of professional services.
LTM DBRR increased to 105% from 103% last quarter. As a reminder, our continued success in winning larger and larger enterprise customers is expected to continue the core fluctuation as they come on to platform at different times and ramp at different rates.
Second quarter adjusted gross margins were 65.7%, an increase of approximately 70 basis points year-over-year. Second quarter adjusted EBITDA was $18.3 million, representing an 18.3% margin. This is a decrease of approximately 30 basis points year-over-year. Second quarter non-GAAP net income was $14.1 million or $0.21 per diluted share.
With regards to the balance sheet and cash flow highlights, DSOs remained at 34 days in Q2, a performance we are very happy with, given the COVID related liquidity strains. Second quarter operating cash flow was achievable record of $14.8 million and we remain optimistic about our potential for continuing cash flow generation given our long term model, our substantial NOLs and our low DSOs.
I’d like to finish today’s prepared remarks with a brief discussion of our expectation for the third quarter and full year 2020.
In terms of the top-line we are guiding third quarter revenue to a mid-point of $101 million, which represents a 1% sequential increase and a 21% year-over-year growth. For 2020 we are raising the midpoint of our annual revenue guidance from $382 million to $400 million, which represents an increase in year-over-year growth rate from 16% to 22%.
Both our Q3 and our annual revenue guidance closely follow the pattern that we have established over the years with prudence to allow for the difficult to forecast seasonality in the second half and the ongoing macro uncertainty.
As for the bottom line, we are guiding third quarter non-GAAP net income to a mid-point of $12.1 million. This represents a $2 million quarter-over-quarter decrease that is relatively in-line with the sequential declines that we have guided to every Q3 for the past six years.
The Q3 decline was primarily driven by our back-end loaded hiring in key strategic areas, particularly in go-to-market and the R&D, as well as reduced net interest income driven by the low rate environment and by slightly higher coupon on the newly issued compatible bond. Despite these increase expenses, we are raising the midpoint of our annual non-GAAP net income guidance from $49.8 million to $53.7 million.
In terms of GAAP net loss, we are guiding to a mid-point of $18.4 million in Q3 and $55.4 million in 2020, which reflects the amortization on our newly issued convertible bonds and a partial repurchase of our existing client base, as well as a loss on extinguishment on our existing client base as detailed in our GAAP to non-GAAP reconciliations.
Finally, here are the customary estimates for modeling purposes. For calculating earnings per share, we expect our diluted shares to be $69.1 million and basic shares to be $64.9 million for the third quarter of 2020 and $68.1 million and $64.2 million respectively for the full year 2020.
We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $100,000 for the third quarter of 2020 and $320,000 for the full year 2020, which excludes the $2.9 million valuation allowance tax benefit associated with our Virtual Observer acquisition in the second quarter. Our capital expenditures for the third quarter of 2020 are expected to total approximately $5 million to $6 million. For the full year we expect our capital expenditures to be between $23 million and $25 million.
In conclusion, we are very pleased with our second quarter performance. We continue to execute against the massive opportunity and remain nimble in order to navigate effectively through this uncertain macro-economic environment, while investing in key areas to capitalize on accelerating market drivers.
Operator, please go ahead.
[Operator Instructions] Our first question is going to come from Sterling Auty with J.P. Morgan.
Great! Thanks for taking my question. This is Zack [Inaudible] on for Sterling tonight. I think our first quarter really is on the large deals. I think you know Barry you mentioned you were expecting some potential disruption due to the COVID, but signing two of the largest initial deals in the company's history certainly doesn’t sound disruptive. So do you feel it’s actually because it maybe part of the pipeline, and maybe report downward [ph] because of the conditions out there?
Yeah, this is Dan. Thanks for the question. Yeah, both of those deals were ones that we've been working for some time and they were in the pipeline already prior to COVID, absolutely.
But I just had a quick follow-up. I mean could the environment have an effect of accelerating these decisions because they just needed the performance to get up and running faster with our cloud performance?
Yeah, it’s hard to say, you know where they afforded more time to really focus in on this and pull the trigger so to speak earlier than they would have otherwise. I think one of the two certainly could have had that into effect, but again as we’ve talked about with organizations this size, the rollout schedule and the ramping up of the seats is a several months or several quarter process in and of itself.
So not a whole lot of acceleration due COVID, it’s just simply the – in these cases it was digital transformation and they were driving their behavior to move to the cloud, which they hadn’t worked on; yeah, I think in one case over a year ago and the other one was about nine months ago that they began those sales processes.
Understood! Okay, thanks for taking my question.
And moving on to the next question, we have from Meta Marshall with Morgan Stanley.
Great! Thanks and congrats guys. Just wanted to – a couple of questions from me. Just understanding maybe like same store or like same reseller partner. So basically trying to get a sense of if you saw that same acceleration in partners like Deloitte, or was the acceleration mostly due to the addition of new partners? And then the second would be, I know any investments that are needing to take place in professional services to kind of handle this accelerated volume of new deals. Thanks.
That's a great question and it really – fortunately, it’s been across the border. I mean when you look at our existing partners, and I think as Rowan mentioned in the outset, the SIs once again had a quarter that was larger than the entire 2019 year combined.
So you could say, yes Deloitte. If you consider the IBM, Slalom, EY and Accenture business newer, its newer than Deloitte, but not brand new partners to us, but they're all contributing which is great. They’ve all recognized the need – you know the importance to move to the cloud as well as digital transformation projects and more and more enterprises are hiring them to help them move that without effort.
So the SIs are certainly helping, hit on all cylinders. We are seeing increased pipeline from AT&T and others and it just feels that’s it’s happening across the board.
And Meta on your second question, this is Rowan, yes, there are incremental investments needed in professional services and you know we’ll be making those, but not out of the sort of run rate, not different than what we’ve been doing, but certainly we expect to continue to increase our investment in PS to handle these large, large customers.
Got it, thanks.
Yeah, thank you.
Alright, next it looks like from Canaccord, we have David Hynes.
Hey, thanks guys. Congrats on the quarter. So one of the topics that comes up in some of my customer conversations is just how much of the change we're seeing in the industry is structural, right. So I'd be curious, in your perspective, from your customer conversations right, for those that have you know lots of bodies and a traditional contact center, what are you hearing in terms of what the back-to-work model is going to look like in a post-COVID world?
Yeah, if I have to be anecdotal on that and you know there's been other, some other studies that have been done on this, I think it sums up as we're not going to go back to the way things were; we're not totally sure exactly how much of a shift it’ll represent by customer and I think it really depends on the customer type.
So we’ve heard everything from one customer in Salt Lake City who just recently signed up with us about 500 agents who said that they were going to leave those agents working from home three or four days a week, and it affected their real-estate build out of their new contact center, because they said look, if we’re only going to have our agents in a couple of days a week or one day a week we can stagger them out and save on real-estate costs.
So – and we've heard everything from that which is sort of similar, you know kind of balanced in the middle to 80% of my agents will stay working from home and this is a brand new model for us, and then on to some of the more conservative industries that said no, we’ll probably see most of our agents go back to the office.
So we are not sure how that's all going to play out at the end David, but you know certainly we think it benefits cloud. Just any incremental work-from-home benefits cloud because it's just so much easier, and we'll just have to continue to stay close to our customers and see what they need us to do.
Candidly the other thing I think I would point out is, that you know in a 100% work-from-home model or even if you're just leveraging it in a small way, there are new capabilities needed to manage a contact center and frankly you have to bring in more technology to operate that way. So you’ll get some savings on real-estate obviously, but you will need to deploy more technology.
So we’ve had increased interest in our virtual observer platform that we acquired and that's I think going to be an increasingly important component of any work-from-home solution. So we are well set-up for this transition, however big it is.
Yeah, that’s helpful color. And then Dan maybe a follow-up for you. Just, what are you seeing in terms of sales cycles inside of the AT&T channel?
Inside the AT&T channel, you know not that different, really. They bring us into opportunities. We anticipate that they are likely to condense slightly, because they have an existing contract in place with AT&T, but they still want to go through the rigor of evaluating the solutions, understanding the capabilities and going through their process.
We do see them providing quite a bit of lead flow in the commercial space and so naturally those are shorter sales cycle. But nothing too significantly different, but certainly we're seeing a build-up of the pipeline and that's extremely healthy and we are excited about what’s in front of us.
Okay, congrats on the momentum. Thanks.
Thank you.
Alright, moving on to the next question, we have Michael Turrin with Wells Fargo Securities.
Hey there! Thanks and good afternoon. Maybe with the guidance raise here to start off, maybe just remind us what you typically see in terms of the shape of second half activity and seasonality? Is there anything you've seen or observed that would lead you to believe that shape could play out somewhat differently this year given some of the macro changes and various puts and takes and even to make that seasonality more or less pronounced than in prior years?
Yeah, I’ll take this one if you don't mind Rowan and Dan. So typically in the past when H1 and H2 split had been either 48%-52% or 47%-53% of the total years revenue, this year we don't really know for sure, because we had a compounded complexity of not yet seasonality. We know there’s going to be seasonality, but we don't know the extent, but also the macro environment.
We at this stage are assuming something similar to the prior years, because if you look at the guidance that was given for Q3, that is very similar to the guidance we’ve given in prior years, 21% year-over-year growth, which is within the range of the – at the end of the range of 17% to 20%. In fact most of the time it's not – it's been like 21% is the highest, so very strong guidance for Q3.
Q4 with the big turnout and being more seasonally effective in Q3, we’re being a tad more cautious at this stage and a 13% year-over-year growth, which is reflective of that macro uncertainty and is seasonality uncertainty and within line of what we've done over the past years, which had been 13% to 17%.
I appreciate the color there. And then just a quick follow-on, the retention rate looks like it picked up nicely here even with all the moving pieces. Any additional comments or anything you can add around some of the key factors driving that?
Yeah, so the improvement is mainly as you would expect on our enterprise line and we've seen a number of our larger customers wired to [ph] in particular that had benefited from COVID that have ramped appreciably, and we saw that improvement in our spot rate that are going from Q1 to Q2, and that manifested itself in the corporate environment.
Okay, thank you.
You’re welcome.
And the next question will come from Scott Berg with Needham.
Hi Rowan, congrats on a great quarter and thanks for taking my questions. Dan, I wanted to see if you can expand on the CDW partnership in terms of maybe how they are selling your products? Is it a Five9 legal product that supports white label, but maybe through AT&T?
And then as you look through these new sales channels over the next couple of years, how much of their bookings do you think – I guess what percentage of bookings do you expect these partners to contribute, say maybe three to five years down the road. I know you’ve given the data points on influence percent of your deals historically, but this is kind of a different angle when they are selling themselves. Thank you.
Yeah, thanks Scott and it definitely is a different angle, because when we talk about increment of 60%, we're talking about you know all of our partners, including you know master agent resellers, SI’s and our CRM and other ISV partners, even our technology partners, they just may be in a deal endorsing us.
When it comes to CDW, very excited. They're a huge global technology provider. Now this is not a white label scenario like AT&T is for us. We’re added to the portfolio, but we’re one of their very first cloud based solutions. So they may have a half a dozen other offerings that they can bring to the table, but most of them are the legacy on-premises systems and now they have a market leading cloud solution.
So we look at it very promisingly. The pipeline is already building rapidly and it's really because of two factors. One is, they have hundreds of sellers throughout the world. They sell all sorts of technologies, but they have a contact center overly team that specializes just in contacts and we've been highly educating and training them as we signed on and as they signed us on and got that going. So we’ve already seen our first yields and looking forward to big things ahead.
It’s hard to say when you talk about that three to five year – now boy, I wish I had that crystal ball, but I can tell you we're extremely bullish on the market making this transition to cloud and the fact that we're you know by estimates anywhere from 15% give or take penetrated the opportunity is huge. So the company want TBW and AT&T that can walk us into more enterprises. It only bodes well for us, so we're excited about that.
Got it, helpful. And then from a follow-up perspective Rowan, you talked about some of the new product releases in summer and I think we’re evolving, waiting to understand what the impact of some of your new AI initiatives will look like.
But how do you think about pricing impact with the new product going forward? Obviously some of it may feature functionality enhancements that are just built into it again on price, but you know new models obviously will expand that over time. Do you think some of the new products that you released here this year or you’re looking to release maybe by the back half, do they increase ASPs over time, maybe 10% or 15% or should we be thinking about them differently? Thank you.
Yeah, thanks Scott. We're definitely thinking about them as incremental to our existing products, so we’re pricing all of these as add-ons, particularly the IVA that we just announced and launched and you know there are the established pricing, so IVA’s in the market already, so we can probably closer – get a closer approximation of that.
From an Agent Assist perspective, you know we’ve got our first five. We've got a handful of these customers actually in production now and taking live calls, so we're starting to see the real results and you know get it – being able to measure their expansion of seats, so that they see the technology is valuable. So I think the jury is still out on what kind of pricing that will drive.
You know as I think Scott we talked before, there’s one or two other companies out there talking about this kind of technology, so there's an established market pricing that we shared before. I’d have to say, to put any kind of number on an AFP uplift yet until we get a little more experience, but now what's great is we now have product out there you're both sort of telling the IVA and in production systems and testing for our customers on the Agent Assist side. So I think we’ll pretty quickly start to see some results and give you some more insight into that.
That was our key goal for 2020 as we had talked about, was get this early technology into production and get a product into market, so really, really happy with the results. We’ll keep you posted on how we're seeing the pricing unfold.
Excellent! Thanks for taking my questions. Congrats again.
Thanks. Thanks Scott.
And moving on, looks like we have Matthew VanVliet from BTIG.
Yeah, hi guys. Thanks for taking the question. I wants to maybe dig in a little bit on the tempo sales and pipeline build, both through the quarter and then through July. If you can just walk us through kind of what the initial reaction was for a lot of your customers and potential customers that they sent all their employees home in March and April and then maybe throughout the quarter had a little more clarity in terms of the longevity that this was going to persist through much of the year, and how that impacted both deals getting closed, but also pipeline build up to today.
Sure, great point. Initially you're exactly right, there was an immediate panic of you know hunker down, shutter the business and a lot of our customers suffered for you know a few weeks early stages.
And what we saw following that in April and May was a lot of the organizations really figuring out how to change their business and pivot to you know more of an e-commerce web based solution, whatever their products and services were, and I think it's a time for consumers too to cope from that immediate paralysis to oh! Okay, we've got to figure out how to continue living our lives and what we found was more of our customers then they took one or two paths. Either they shrunk slightly and went into kind of a hold mode where they pivoted and like I talk about in the example earlier, they had to figure out, how do we go from a retail business to you know an online e-commerce business?
And you know many of those that we thought would naturally suffer when you look at retail, and frankly their overall revenues have suffered. But the percentage and the amount of business they are doing through their contact center has gone through the roof. So in many cases we've seen you know many of those adding hundreds of seats and lots of traffic into the business and it's one that surely a lot of them will likely retain a portion of that; yet to be seen.
So as far as closing business, you know I had anticipated that we could get down to crunch time near the end of the quarter for large businesses and they would say well, too much uncertainty, let's not place the order for millions of dollars of commitment for a contact center and I thought we’ll have some pushes and we didn't.
You know certainly we had a couple that always pushed. That pushed and we had a couple that accelerated, so we kind of had an offsetting factor there as far as the enterprise business. But as far as looking, you know moving forward the pipeline continues to grow as to our bookings. We haven't seen a change to that momentum as you said, as we move into Q3, so we're very bullish.
As I mentioned we're continuing to hire against that increased demand if you will and against that increase in pipeline that comes from, I’ll say two different factors; the first factor being that the two items that Rowan mentioned, right. Digital transformation and movement to the cloud could accelerate the timing of companies saying, let’s embark on that process. It’s no longer a question of if they are going to move to the cloud. It's a question of when and I think more businesses now are saying ‘okay, let's take a look at this because of what’s occurred.’
And because of that move to work-from-home and the uncertainty of kind of what percentage, the combination and the uncertainty runs itself very well for the caller, right. We give the flexibility of, ‘hey, you can work you know shifts that rotate, you can put some people at home some people in the office, you can have the small office, home office or remote office and the fact that companies are now recognizing they can draw on talent from you know not just within a 30 mile radius of a contact center, but you know anywhere in the world and still leverage at that talent, so that's exciting for them as well.
And then as we move into Q3 and beyond, you know we're seeing a strong momentum. The second factor is really the partnerships, right. As the channels become more and more feet on the street representing Five9, we’re naturally seeing more demand and increasing pipeline and we're staffing accordingly.
Great! And then I'll – tell us if you saw much in terms of maybe non-traditional business, that kind of the environment in both the change for larger enterprises, whether that's you know standing up something like internal employee experience, you know hotlines or contact centers or even you know areas that have been traditionally direct selling, needing to have a more formalized process and then you mentioned the retailer that kind of stood up a more complex contact center, but curious if you saw much in terms of you know something completely net new that might be a longer term driver for you as kind of a new use case.
I thank – I’ll answer kind of the end of that first and I’ll keep the best new use case, because more companies – we've had technology that would allow work-from-home for more than a decade, and a lot of companies were reluctant to do that, because they thought that they would lose control and visibility of those agents, right. They wanted to have them in a brick and mortar center where they can walk up and down the halls and you know listening on their calls, manage their behavior, really understand what was going on. They felt a lack of control when they moved from home and what they found was the technologies are now available to observe your agents.
If you think about it today, I can not only observe and monitor the voice call of the agent, I can now monitor and record their desktop session and see what they're doing on the desktop, where their browser is going even in between calls and if you know technologies like you know video meetings like Zoom provides, you could now peer in and use the camera to observe the environment of where that agent is, to make sure they're in an environment that is suitable for being a contact center agents.
So the flexibility I think is one and that lends itself to cloud being ‘oh! This is an option, we want to have that flexibility’ and I think the second one is business continuity. When you really look at companies that say we went through a very painful process to move our agents home if they were on a premises based solution, and that's because most of the premises based solutions, if that’s sitting within that office building that you're evacuating, somebody's got to manage and maintain that set of servers and manage the hardware, and you've got also to figure out how to give agents from home – do they have a hard phone at home, do they now convert to a softphone, do they have the right security to access that system that’s sitting in the office that they used to be tethered to, you know right within the local area network. Now they've got to be tethered to it from far, and so there were a lot of difficulties.
We had some customers that still had a combination of cloud with Five9 in their premises based solution and they struggled with – while it was really easy with Five9, it wasn't so easy with the other premises based solution. So I think that's that new use case that we'll see moving forward. It might accelerate. Thanks.
Very good, thank you.
Yeah.
[Operator Instructions] Next from Craig-Hallum, we’ll hear from Jeff Van Rhee.
Got it. Thanks for taking our questions guys. I guess just if I’m going to try to stick to one here, you know the work-from-home shift in certain premises proved invulnerable over time to the cloud for a lot of reasons and I think, and you were just touching on it. But maybe just expand a bit further in terms of the, you know the sort of relative impact on bookings with rates, sales cycles in terms of – I guess is premise increasingly vulnerable based on its inflexibility or inability to accommodate the work-from-home. How well did they move home and have you seen that reflect in actual substantive win rates in the pipe or in the market?
Yeah, I’ll take a bit of that, and let Dan on it as well if he wants to add anything, Jeff. So we have seen it land with customers. So you mentioned prem sort of showing its, showing the gaps and the cracks and the solutions when it comes to work-from-home and while it is possible to move your contact center to a work-from-home model if you have a premises based solution, it's not easy, and that's what customers definitely saw.
One example is an insurance company that we serve and they’ve got, we are in one division and not in another, and the division that was sort of evaluating cloud had to go through that painful process of setting up VPNs and soft clients on their agents desktop and so on and so forth and recognizing that, that's not easy for them to do. They talked to their peers who are on the cloud and who basically said, you know like what migration to home? We didn’t really have to do anything, we just sent the agents home with their computers and that was that.
So I think that recognition is definitely seeping in and it’s just one more straw on the camel's back if you will, that sort of is going to eventually break. It is beginning to now break that back of that camel of the premises camel, that’s what's happening, and this is one more of those things; of course there is many others.
It’s not just that configuration of the agents though. I would also say look, if you're maintaining your own infrastructure, you know that means you've got your own data centers, you got your own IT staff, they have to configure those, they have to scale them, you have to be ordering more hardware, plugging it in with the company like Five9 or any other cloud solution. You don't have to worry about any of that. So it's just much less of a headache, much less management, far less to go wrong.
The other thing that we noticed during COVID and this definitely drove some of the some deals was the need for companies to scale up or down really quickly. Of course this is another well-known benefit of cloud. We had some customers come onto the platform with tens of thousands of lines in days. That would be virtually impossible for those customers to configure an on-premises solution in that amount of time, it's not impossible and then also scaled down.
Some of our customers in affected industries who weren’t that many of them, who were lucky in that sense, you know they didn’t have to continue to eat the cost of that additional on-premises hardware and bandwidth and everything else. So I think that, again, my view is it's another straw on the back and that back is breaking now, that’s how I view it.
Dan, anything to add?
Yeah, just one thing to add. I think a lot of companies were afraid and now have been forced to do the work-from-home and recognized and the light went on for me. We can get productivity out of work-at-home agents and they just didn't want to believe before. It was a risk factor there that I think they solved in many cases and it's for all the reasons we've talked about.
But also what Gardner has indicated to us, is you not only can draw on a broader workforce, but you can draw on a more educated work force and a higher level of agent. And what they've indicated is often times that can, you can pay those agents less for the convenience of allowing them to work-from-home and have flexible hours.
So a lot of agents, if they can have flexible hours, some of them are doing that for that reason and it allows you to open up the work force to special needs, people with disabilities, people that were otherwise limited or challenged by being able to go into a formal contact center every day and so we're seeing that open up as well and companies are recognizing that opportunity.
Okay, helpful thank you.
And then ladies and gentlemen moving on from Summit Insights Group, we have Jonathan Kees has the next question.
Great, thanks for taking my question and yeah, congrats on the quarter. I guess I'll make my question to be about the regions we are – you've seen the openings happen. I know you're more domestically focused, but you have some international. Just curious, in those areas, you know even domestically like you know in the tri-state New Jersey, New York area where they have been opening up, have you seen a deceleration in that demanded? Have you seeing it going back to the more normalized levels in terms of growth versus the pre-COVID spike and you went hunkering down saying we need to work-from-home and do this ASAP, I’ll leave it at that.
No. Yeah, thanks. We really haven’t seen it slow down, pipeline still at record highs and growing and I think this is kind of like one truth you can’t unsee and so from a customer perspective it's like, okay it doesn't matter if they're going back to the office. Cloud is recognized and increasingly being more superior.
So again, most of the vast majority of the acceleration of the business that we saw was not really related to COVID at all and you know while it could have been a factor in some of it, we are just continuing to see the business beyond Five9. So I don't think as we open up that’s going to really change our business.
Got it. Thanks.
Yeah.
And moving on, next question will come from Will Power with Baird.
Hey, you guys. Thanks for taking the question. This is actually Charlie Ehrlich on for Will.
I wanted to ask about the AT&T partnership. It sounds like some really good early signs. Just wondering, you know in terms of the speed with which the pipeline is built so far, how has that track relative to you expectations at the onset of that partnership and has that speed of the pipeline bill change with thinking around the timing or the magnitude of any, you know potential meaningful revenue contribution. Thanks.
Yeah Dan, do you want to talk about that one?
Yeah, we couldn't be more excited about the momentum we're seeing with AT&T. They are building up a pipeline and the beauty there is they get so many sellers and teams that we trained and they're bringing us deals of all sizes. So this should help us both with the enterprise business, as well as our commercial business. And yeah, like we’ve talked about before, that's just starting and so the pipeline is building up and we’ll start to have more of a significant impact to the revenue numbers in 2021 rather than maybe at the very end of 2020, but most likely 2021.
So all going great and exceeding our expectations. And on the product side we’re continuing to integrate very tightly with the other office that AT&T has as you know they had to bring central EFC offering. Its critical and that integration we’ve done as well as the OEM portions of our product being able to white labeled as an AT&T product and that’s going extremely well also.
Great! Thanks and congrats on the quarter.
Yeah, thank you.
Thank you.
Moving on ladies and gentlemen, from Stephens we have Ryan MacWilliams.
Great! Thanks for taking the questions. So from our check it seems like offshore contract centers are even further behind the cloud adoption cure than U.S. contract centers. Have you seen cloud demand from these types of contract centers or from business process outsources change as a result of COVID?
Dan?
Yeah, not significantly. We – I say that and then I turn to – if you look at the one example there that we provided, they have – they take business from many clients in the retail space and other space and they had a need for flexibility in the solution. And you know for years the BPOs have been stuck on of Avaya and Cisco and other premise solutions that just didn't give them the flexibility, and so I think there's some change there. It's just those guys can't move, they don't move very fast.
So to say, has there been a big shift? No. Has there been continued interest in moving their solutions to the cloud? Absolutely. So there is a shift there that’s been happening, but I wouldn't say it's two dramatically different because of COVID; it’s been going on for two three years now.
If I could just add there a little bit Dan if you don’t mind, more broadly speaking, through now there is more than half the contact centers agents abroad and we have been making quite a considerable number of investments in order to be able for the time to take advantage of that, including moving to the public cloud, increased hiring in Europe with partners and alike, because there's been a focus area for us.
Alright, next we’ll move on to Terry Tillman who is with SunTrust.
Hey guys, thanks for taking the question. This is David Unger filling in for Terry Tillman tonight. Can you guys talk a little bit about the massive market opportunity dynamics that you mention related to retail sales personnel, increasingly being split by contact center agents and your strategy to win this evolving trend? Thanks.
Yeah absolutely, I'll cover that David. Thanks for jumping on today. You know think about brick – what we’ve seen with some of our customers who are in the retail space, with the COVID transition is a big acceleration in their e-commerce business and a shift essentially of the way that customers are engaging with them from you know walking into a store to calling into a contact center.
You know often of course that starts with a website e- commerce interaction, but will perhaps involve you know an SMS or a messaging engagement with the customer, some sort of a digital channel first usually. But then often you know those customers may have challenges instead of being able to talk to a brick-and-mortar retail employee, the only option for them really is to go to the business directly and that is of course the contact center. So you could see that the analogy here is sort of a like for like transition of brick-and-mortar retail sellers and brick-and-mortar retail service people into contract centers.
So in the retail space, that's what we've been seeing, and how – you know I don't think that the huge – you’ve seen that on a macro level anyways with e-commerce sort of spiking with COVID. And the question is from a macro perspective as retail, you know as we go back to retail stores opening, are you going to see all of that e-commerce transition sort of evaporate as people go back, race back to run into retail stores and my perspective is that I don't think that's going to happen. I think certainly retail it's going to continue to be massive, but the shift to the convenience of online, I think when people start to see that with various brands, it can introduce permanent shifts and that's what we are seeing what our customer.
So we'll have to see how that plays out as folks go back to opening their retail shops and so on, but my perspective is, this is a sort of a one-way function. It's going to increase e-commerce, decreased sort of traditional brick-and-mortar in a variety of industries and it won't go back – it maybe go back somewhat, but it will just have essentially come down to ‘Wow! That's just accelerated the e-commerce transition’ and we sort of benefit from that. Because in that world where you're moving into e-commerce, contact center becomes the virtual front door to your business and hence contact center becomes much more critical as an infrastructure piece to support your customers.
Thanks a lot for that great detail.
Sure, thanks David.
On the FastTrack Program, I don’t know if you guys provide any metrics as well as the business. I’m just curious that you’ve invested in sales people or reorganizing sales people to kind of target that opportunity.
Yeah, I can talk to that. The FastTrack Program was really just a notification out to the marketplace that’s say, ‘hey, if you got an urgent need, an emergency to get contact center agents to home, we can do that, and we'll do it for you in under two day.’
It was just a mention to the market place so that they knew they could make this transition quickly, because a lot of companies assume that, hey this is a, you know two or three month transition to implement new provision and normally it is, because we want to take time and do it right and do that collaborative planning and design. But by all means, this is one where it was just more of a notification.
We had a couple, you know a under handful of customers that took advantage of that. We have a couple of COVID hotline through the cities of Detroit, New York and Orlando. We turned up the SBA hotline for the small business loans, but that was not a sales effect. It was just making sure that the market place acknowledged and knew that we could do that if they needed us.
Understood, thank you.
And ladies and gentlemen, that is all the time we have for questions today. Once again, we do thank you for participating, but at this time I’d like to turn the floor back to management for any additional and closing remarks.
Well, thank you. Thanks everyone for joining the call today. This was a terrific quarter for Five9 and we're clearly seeing the benefits of the execution focus we've had as a company. I'd like to thank all of our employees who have done a terrific job getting up here and also just thank all of the partners that have really been helping to accelerate the business. It’s going to be a continuing trend for us and we thank you very much. Thank you. Operator?
Of course sir. Once again, ladies and gentlemen that does conclude our call for today. We thank you again for joining us and you may now disconnect.