Five9 Inc
NASDAQ:FIVN
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Five9 Inc
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Thank you for joining us today. On the call are Mike Burkland, Chairman and 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, customer growth, anticipated customer benefits, company growth, the anticipated benefits from and timing of the closing of our proposed acquisition of Aceyus, Inc., growth in our portfolio of products and features, industry size and trends, our expectations regarding macroeconomic conditions, company market position, initiatives, and expectations, technology, and product initiatives, and other future events are forward-looking statements within the meaning of 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 adverse economic conditions, including macroeconomic deterioration and uncertainty, including increased inflation, increased interest rates, supply chain disruptions, decreased economic output, and fluctuations in currency exchange rates, lower growth rates within our installed base of customers and our ability to close the Aceyus acquisition and achieve the intended benefits from this acquisition and 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 of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the investor relations section on Five9's website at investors.five9.com. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP.
And now, I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland.
Thanks, Emily, and thanks, everyone, for joining our call this afternoon.
I'm pleased to report strong second quarter results with revenue growth of 18% year-over-year, primarily driven by our LTM Enterprise subscription revenue growing 28% year-over-year. Also, we enjoyed a particularly strong quarter for new logo bookings, demonstrating the value of our Intelligent CX Platform and our strong go-to-market execution. Adjusted EBITDA margin for the second quarter was 19% of revenue, helping drive a record Q2 for operating cash flow of $22 million or 10% of revenue.
Turning now to the three key trends that continue to drive our confidence in our market opportunity. First, legacy vendors are retrenching, forcing enterprises to develop concrete plans with an even greater sense of urgency to replace their on-premise contact center solutions. Remember, that in terms of cloud replacing on-premise, we believe the penetration is still less than 20%. Second, companies are enthusiastically pursuing digital transformation initiatives to enhance customer experience, cut costs and increase revenue. Third, AI is becoming a significant catalyst for enterprises to shift to the cloud. Regarding this third trend, given all the recent focus on generative AI, I would like to recap our perspective on its impact on our industry and in particular Five9.
We believe generative AI is the next wave of opportunity for Five9 with the potential to broaden our TAM. Five9 has been riding the wave of AI and automation for the past several years, and we feel we're well positioned to continue to push this industry forward. Not only is the AI revolution a tailwind to our technology and innovation, but it's also a tailwind to our business. We provide software for enterprise clients to manage their customer interactions. As AI drives efficiency and productivity gains in the form of a mix shift toward more automation of interactions, that leads directly to an increase in revenue per customer and a TAM expansion for Five9. AI and automation is clearly an area of focus for enterprises as demonstrated by our nearly 80% attach rate on $1 million-plus ARR new logo wins in the quarter.
Now I'd like to discuss what we view as the three main growth drivers for our business, namely our platform, our march upmarket and our continuing international expansion.
Let's begin with our platform. Today, I'm pleased to announce an important extension of our Intelligent CX Platform, as we have entered into a definitive agreement to acquire Aceyus, a market leader in advanced data integration and analytics. We believe Aceyus will uniquely accelerate our ability to capitalize on two large opportunities: first, streamlining the migration of large enterprise customers from on-prem to cloud; and second, leveraging contextual data to deliver personalized experiences throughout the customer journey, including using this contextual data in our AI and automation solutions. Let me elaborate on these one at a time.
Let's start with streamlining cloud migrations. Using a robust catalog of pre-built integrations, Aceyus software ingests data from CRM, WEM, multiple ACDs, and many other systems. Aceyus's ability to normalize the entire dataset allows the business to transition from legacy systems to Five9 while maintaining consistent reports, data visualization and dashboards. This enables customers to run their business smoothly and take advantage of the Five9 platform during migration and beyond. In short, the continuity of data and insight provided by Aceyus across complex environments allows for smoother large scale cloud migrations with faster time to value.
Now let's talk about the second opportunity, which is to leverage contextual data to deliver personalized experiences throughout the customer journey. This contextual data often lives in dozens of disparate and siloed systems. As a market leader in advanced data integration and analytics for large enterprises, Aceyus will further differentiate the Five9 platform as we integrate their robust, pre-built data integrations to expand our platform's data lake. Aceyus will enable Five9 to access this contextual data to optimize, predict and deliver the personalized journeys customers expect. This applies especially to our AI and automation solutions where the use of this contextual data is critical to the accuracy and efficacy required to deliver joyful customer experiences. Aceyus's customer base includes many Fortune 100 companies and joint accounts with Five9, including some of our largest prospects and customers, two of which Dan will talk about in a moment.
And now I'd like to focus on our march upmarket and international expansion. We continue to see accelerating momentum upmarket with large enterprises adopting Five9 at an unprecedented rate. I'm pleased to report that we booked a Q2 record number of $1 million-plus ARR deals, and Dan will discuss four such new logos which alone represent approximately $42 million in anticipated ARR to Five9. As a reminder, $1 million-plus ARR customers make up more than 50% of our recurring revenue.
This march upmarket and our continued international expansion are accentuated by the strong performance from our ever growing network of global partners and their commitment to leading with Five9. This was reflected by an all-time record for channel bookings, 15 partners that achieved over $1 million in ACV bookings in the quarter, a record high channel pipeline and over 60% of international implementations now being done by partners. This global partner strategy is also paying dividends and helping us expand our international footprint. For example, in addition to the recently announced BT partnership, in Q2, we also signed Telus International as a strategic partner to Five9, which Dan will also elaborate on in a moment.
Lastly, in May, we held our EMEA CX Summit in Porto, Portugal, the location of our new international development hub. I was personally blown away by the energy and enthusiasm at this event by our partners, customers, industry analysts, and employees.
Before I turn it over to Dan, I want to spend a moment to share with you our recently refreshed and re-energized mission and vision statements for Five9. Our mission is to enable our enterprise clients to reimagine their customer experience by providing our Intelligent CX Platform combined with passionate experts to deliver joyful customer experience and better business outcomes.
Our vision is to bring joy to CX. We often refer to this as Five9 Joy, and it shows up in many forms for many stakeholders. For consumers, it means effortless and fluid customer experience. For our enterprise clients, it means better business outcomes such as higher customer satisfaction, increased revenue, greater efficiency and lower costs. For agents using Five9, it means being armed with the knowledge, data, intelligence and automation to deliver great customer experiences. For supervisors and managers in the contact center, it means having the tools and applications to engage and manage their workforce. For our partners, it means providing technology and people that will drive success for our joint customers. And for our employees, it means living by our values every day, resulting in a unique and winning culture, filled with passion and purpose, and one where we enjoy the journey together.
In summary, our goal is to bring Five9 Joy to all involved in CX, as well as the entire Five9 community.
And now, I will turn it over to our President and CRO, Dan Burkland. Dan, go ahead.
Thank you, Mike, and good afternoon, everyone.
As Mike mentioned, we are seeing a renewed momentum on the net new side of our business, but we're still facing some headwinds on our installed base. The new logo bookings were an all-time high for any quarter other than the quarter we booked the healthcare conglomerate, indicating the strength and persistence of the three key trends that Mike talked about earlier. In addition, our pipeline reached another all-time high.
Now, I'd like to share some examples of key wins for the quarter. I normally discuss three key new logos. Today, I'm going to share a fourth given that we already disclosed the $8.4 million ARR regional bank Q2 win in last quarter's earnings call.
The first is a Fortune 50 global healthcare insurance company providing coverage for medical, dental, disability, and life. Over the years through M&A, they had accumulated several disparate systems, leading to tremendous inefficiency while also lacking the modern applications and automation. With Five9, they will enjoy a complete omnichannel experience that's fully integrated to the proprietary CRM and will integrate to their existing Verint solution using our voice stream API. They also chose Five9 due to our Aceyus integration to do precisely what Mike described earlier, helping them make the transition from their legacy existing platforms over to Five9 while maintaining consistent reports, data visualization and dashboards throughout that migration to Five9. We anticipate this initial order to result in over $20 million in ARR to Five9.
The second key win I'd like to highlight is one we touched on last quarter, the regional bank, which booked at the beginning of Q2, they selected Five9 and will be enjoying a full omnichannel experience with deep integration to Salesforce, ServiceNow and Pega CRMs, and the full suite of Five9 WEM, powered by Verint. We also sold Aceyus for analytics and real-time dashboarding to collect and display information from several different data sources. In addition, they purchased our voice and digital IVAs as well as Agent Assist, which will provide real-time agent coaching and automatic retrieval of information to create a personalized customer experience. We anticipate this initial order to result in approximately $8.4 million in ARR to Five9.
The third key win is a healthcare company providing operations, staffing, tools and technology to primary care facilities throughout North America. They had embarked on implementing a competitive CCaaS solution when they made an acquisition of a company who had recently selected Five9. The easy decision for them would have been to cancel the acquired company's Five9 contract and continue implementing with our competitor. Upon further evaluation, they realized Five9 was the superior solution, and will be using Five9 for the entire combined company. We will be integrating to their Salesforce, Epic, and Athena CRMs, as well as using Five9 WEM, powered by Verint. They also have purchased our IVA self-service solution for authenticating caller IDs, scheduling appointments, refilling prescriptions and paying invoices. We anticipate this initial order to result in approximately $8.3 million in ARR to Five9.
The fourth example, which Mike mentioned earlier, is Telus International, where we entered into a reseller agreement. This agreement also included a replacement of their internal use legacy systems, which serve the BPO portion of their business. We anticipate this initial order to result in approximately $5.2 million of ARR to Five9.
And now, as I normally do, I'll share an example of a customer who has expanded their use of Five9. This customer who has been with us since 2017 is a network of independent healthcare providers focused on academic centers, acute care facilities and research hospitals. Separate from their use of Five9, they had an ambulatory support center that was using a competing CCaaS solution, which wasn't meeting their needs. They replaced it with Five9 and also added Five9 WEM, powered by Verint, and our IVAs. This will more than double their ARR spend with Five9 from approximately $1.2 million to approximately $2.5 million.
So, as you can see, we're continuing to see strong momentum upmarket, replacing legacy systems, while enabling enterprises to deliver better experiences to their customers.
And with that, I now would like to hand it off to Barry to take us through the financials. Barry?
Thank you, Dan.
We are pleased with our performance with both top- and bottom-line results exceeding our expectations. Revenue grew 18% year-over-year, driven primarily by our enterprise business, which now makes up 87% of LTM revenue.
Our LTM enterprise subscription revenue, which makes up more than 60% of total revenue, grew 28% year-over-year, in line with the high 20%-s outlook we have been communicating recently. We view the drop in the enterprise subscription revenue below 30% as transitory, driven by the subdued growth in our installed base. We believe we are well positioned to resume historic levels of growth in this part of our business when eventually macroeconomic conditions improve.
Our commercial business, which represents the remaining 13% of LTM revenue grew year-over-year in the high-single digits on an LTM basis.
Recurring revenue made up 91% of total revenue in the second quarter. The other 9% of total revenue was comprised of professional services.
I'll now give more color around revenue. As Mike mentioned, the new logo side of our business, which typically makes up approximately half of our year-over-year annual revenue growth, continue to grow at a strong rate. The deployment of our two mega deals remains on track. We continue to expect the international operations of the parcel delivery company to be substantially deployed by the end of 2023, and the healthcare conglomerate to continue ramping throughout 2023 with full deployment in early 2024. Additionally, our substantial backlog from other enterprise customers that are not yet generating revenue provide us with good visibility. However, I would like to remind you that the four deals that Dan discussed earlier will not contribute meaningfully to revenue this year.
Now, I'd like to turn to our installed base, which continue to be challenged by macro [cross guides] (ph) in the second quarter, with one vertical, in particular, facing the strongest headwinds, namely consumer. As a reminder, consumers are third largest vertical, and it declined sequentially this quarter by mid-single digits compared to mid-single digit sequential growth in the second quarter of last year. This was primarily driven by customers in used order sales, order parts, gifts, apparel, and home improvement. The remaining 16 verticals in our installed base, in aggregate, grew sequentially at a similar rate as in the second quarter of 2022.
Our LTM dollar-based retention rate was 112%, a decline of 2 percentage points sequentially, mainly due to the ongoing macro headwinds causing subdued growth in our installed base. You should expect further minor weakness in LTM dollar-based retention rate until macro conditions improve. Longer term, we continue to expect our retention rate to trend towards a high 120%-s by 2027 due to a higher mix of enterprise customers, especially larger ones, which have demonstrably higher retention rate and higher ARPU from our AI and automation and other offerings.
Second quarter adjusted gross margins was 61.8%, an increase of approximately 140 basis points sequentially and 110 basis points year-over-year. This is the first year-over-year expansion in adjusted gross margins since the fourth quarter of 2020. However, I would like to point out that given the record number of large new logo wins this last quarter, we are making upfront incremental investments to further scale professional services, which may hinder our ability to continue to report further year-over-year growth in adjusted gross margins in the near term.
Second quarter adjusted EBITDA was $41.5 million, representing an 18.6% margin, an increase of approximately a 110 basis points year-over-year.
Second quarter non-GAAP EPS was $0.52 per diluted share, a year-over-year increase of $0.18 per diluted share.
Turning now to cash flow. We generated operating cash flow of $21.9 million, a Q2 record, driven in part by continued strength in DSO performance, which came in at 33 days. We have now delivered 28 consecutive quarters of positive LTM operating cash flow. Second quarter free cash flow of $13.4 million was also a Q2 record. We remain optimistic about our potential for continuing cash flow generation given our long-term model, our substantial NOLs and our low DSO.
Before turning to guidance, some comments on Aceyus. The acquisition is for $82 million in cash, subject to certain purchase price adjustments. We expect this transaction to close by the end of our third quarter. The ongoing acquired revenue and margin contribution will be immaterial to Five9, but as Mike described, Aceyus uniquely positions Five9 to streamline the migration of large enterprises and to leverage contextual data to deliver personalized experiences throughout the customer journey.
I'd now like to finish today's prepared remarks with a discussion of our guidance for the third quarter and full year 2023. For top-line, we're guiding Q3 revenue to a midpoint of $224 million, which represents a 1% sequential increase, in line with the typical guidance pattern heading into Q3. For the full year, we are increasing the midpoint of revenue guidance from $907.5 million to $909 million. As I mentioned earlier, the consumer vertical in our installed base faced macro headwinds in the second quarter. Given that consumer is typically our most seasonal vertical in the second half of the year, we have been prudent for now with our annual guidance of factoring in this uncertainty.
As for the bottom-line, we are guiding Q3 non-GAAP EPS to come in at a midpoint of $0.43 per diluted share. For the full year, we're increasing the midpoint of our non-GAAP EPS guidance from $1.75 to $1.81 per diluted share. Both the third quarter and the annual non-GAAP EPS guidance mirror the prudence in our revenue guidance.
Please refer to the presentation posted in our Investor Relations website for additional estimates including share count, taxes and capital expenditures.
In summary, we are pleased with our second quarter performance. While the current macro environment continues to temporarily challenge our installed base, we remain highly optimistic about our long-term growth prospects due to our significant momentum upmarket, as demonstrated by the new large logo wins, our ability to continue capitalizing on the AI and automation opportunity and international expansion.
Operator, please go ahead.
Thank you so much, Barry. [Operator Instructions] And our first question will come from Scott Berg with Needham.
Hey, Mike, Dan and Barry, congrats on the nice bookings quarter, and thanks for taking my question. I'll make it a multi-part one, though, to get it all in. I guess the question is, during the conference call here, you had a press release on your recent ranking within the new Gartner Magic Quadrant. I guess the kind of the two components in there is, a, what changed this time versus the prior ranking? Because I believe you were not in the Leaders category previously, which you have been ranked in the leaders category now. And then second, I'm going to kind of quote from it that said, because of specific criteria based on your completeness of vision and ability to execute. I guess what did they find in there in particular that was [indiscernible]? Thank you.
Yeah. Scott, great question. Yeah, we're very pleased to be back in the Leaders quadrant. As you may recall, we were there in the past, and it's nice to be back and recognized by Gartner as a Leader in CCaaS. And what changed, quite frankly, I think it's recognition and validation of all the success we're having really across our strategic initiatives. The march upmarket, right, those very large enterprises choosing Five9, our win rates are significantly -- just as high as they've ever been and we're winning some of the biggest deals in the market. I think that's one. Our international expansion is another. And our AI leadership is the third. We've talked about the strategic initiatives for a long time. And I think, Gartner recognizes our progress in those. So we're thrilled, we're happy, we're honored, but we're also not surprised.
Excellent. Congrats on the great quarter again.
Thanks.
Thanks, Scott. And we will now hear from Ryan MacWilliams with Barclays.
Hey, guys. Thanks for taking the question. Great to see the large deal momentum in the quarter. So, how does your large deal pipeline look like for the second half of the year? And are you seeing these generative AI tools put more priority on contact center leaders for moving their contact center systems from on-prem to the cloud at this point? Thanks.
Yeah. I'll take that one on the pipeline, it looks very strong. As we've talked about earlier, that portion of the market is just opening up to CCaaS for the first time here in the last couple of years. By kind of being a first mover and capturing some of those largest opportunities and then getting their validation that we're executing very well, it's got others turning and coming to us. We saw a record number of RFPs. We've seen a vast increase in the pipeline. It takes those companies quite some time to get through a sales and selection process. And we've got a larger pipeline than ever, and we continue to scale the sales team and commensurate with that.
As far as AI driving more interest, it's a combination. Mike touched on it earlier in the prepared remarks. It's a combination of both the legacy systems being longer in the tooth and not getting the investment. And secondly, it's -- the only way you can really implement the AI effectively and do so at scale, is to move to the cloud first. So, most of them are recognizing they need to get there, and, they're -- if they're not already on a well into a process, they're accelerating that process.
It's great color. Thanks, guys.
Yeah.
And we will now hear from DJ Hynes with Canaccord.
Hey, guys. Good to see you. Congrats on the quarter. Dan, maybe one for you. I'd love to get any color on how that $42 million in enterprise bookings compares to maybe the past few quarters. I mean, I don't think that's a metric you've shared with us in the past. And then the follow-up there would just be like, anything you'd call out with respect to channel momentum? I mean, is that being driven by international? Is it just a maturing of that go-to-market motion? Any color there would be helpful.
Yeah. Great, DJ. If you look at the large mega deals, as we refer to them, we have the parcel delivery service as well as the healthcare conglomerate, but never have we had a series of wins of this size. So, when you look three or four deep or even 10 deep on that list of largest deals for the quarter, we've never seen this many at this type of volume. So that's why Mike called out the fact that we're over $40 million there just among those four. So, it's not the super high concentration that may have been the case a couple of years ago, we're seeing this become more of a norm. So that's great sign there.
As far as the channel, that's across the board. We have a very strong partner group that manages and brings on new partners, headed by Jake Butterbaugh. I mentioned him before. He's been with us for several years for, I think, four, almost five years now. And we've really scaled up that part of the organization. And it's not just about going out and signing up new partners, but it's making sure that they view us as being their go-to-market first choice. We spend a lot of effort and a huge investment to make sure that we're catering to our partners and making sure that they can go to market and represent Five9 in the right way and that we always make sure we're doing the right thing for the customer, but we're also doing the right thing for the partner and making it easy to do business with us. And I think through some of the channel checks that are done by many of you, you get that same feedback. We want to continue to be in that pole position, if you will.
Yeah. Makes sense. Look forward to seeing you guys in Boston on Thursday.
Likewise. Thanks, DJ.
And Meta Marshall with Morgan Stanley has the next question.
Great. Thanks. I just wanted to know if you could either quantify or just kind of layout cost savings on Aceyus and kind of streamlining those cloud transitions? And then just maybe on that, does it allow you to not have to kind of invest as much in professional services resources just to transition those customers eventually? Thanks you.
Yeah. I'm happy to start on that, Meta. And, again, the beauty of Aceyus is that they are so entrenched in the Fortune 100 large enterprise contact center market. And that's quite frankly they got our attention in these joint accounts that we were winning with them. They are beloved by their large enterprise clients. In fact, we see RFPs fairly frequently where there's a requirement in the RFP as to integrate with Aceyus. And we've even heard just verbally anecdotally from a lot of our largest prospects that the one thing that we're going to require from our CCaaS provider is that they integrate with our Aceyus, because well, that's how we run our business. So, that's first and foremost something that I want to make sure everybody understands.
They are very, very strategic to us. They've got a fairly sizable installed base and large enterprise on-premise and their ability to have these data integrations across so many back-end systems is really what allows to streamline this. Remember, we talk about migrations from on-premise to cloud is very similar to a heart transplant, right? This is a major business transformation and the fact that these large enterprises can continue to run their business during the migration with continuity of data, that's how they run their contact centers. So, as they're migrating off of legacy on-premise and onto Five9, that's really what we mean by streamlining. It's the ability to kind of have continuity across their business throughout that migration time period and beyond.
And then the second real leg of the stool is that contextual data that Aceyus brings to our platform in the ability to leverage that contextual data across all these data silos in the enterprise to deliver that personalized customer experience.
So, it's really two very, very significant value propositions and strategic reasons why we did the acquisition.
Great. Thanks so much.
You got it.
And we are moving on to Peter Levine with Evercore.
Thanks guys for taking my question here. Mike, you mentioned something in your prepared remarks 80% of the $1 million-plus deals in the quarter had AI. So, I guess if you look across your installed base today, what's the attach rate look like? And perhaps like what's holding customers back from going all? Is it they're just not ready internally with the data? Is it the macro? Is it budget? Just kind of help us understand what's really stopping customers from going all in?
And I could squeeze in a second is just help us on pricing. I know there's a lot between how you charge and other contact centers if it's on a per user basis or is it a consumption model. But just curious if you can share with us the conversations today that you're having with customers around price in AI. Thanks.
Yeah. Sure, Peter. I'll start with the pricing. Again, we have eight products in our AI and automation portfolio. They range in terms of pricing as to most are capacity-based pricing, in other words, per port, if you will, or, oftentimes it's -- we offer usage-based pricing as well. So, we're pretty flexible across the spectrum of pricing options. In the end of the day, it's all ROI driven, right? And the efficiency gains and the productivity gains that our customers enjoy from our AI products is very significant, and that's really what drives that price point.
In terms of what's -- your question about holding back, I actually think that almost every enterprise that we talk to is very interested in AI and automation. There is definitely an education process that has to occur. Most large enterprises are also looking at how to implement AI across their enterprise, in general, not just in their contact center, but how to avoid some of the pitfalls, if you will, that are out there in the press. So, I think it's just an education process more than anything, but don't -- I think that 80% attach rate to our large enterprise deals is a very good data point in terms of the interest level in AI and automation across our prospect base.
Thank you, guys.
You got it.
And our next question come from Samad Samana with Jefferies, whose video isn't quite working. I'm going to bring him on, but I don't think you can see him. So, I'll probably just leave them off. Dan, Mike and Barry, so you're not going to see him. But please go ahead and ask your questions, Samad.
Wow. Emily, thanks for the lead in. Gents, yeah, some technology issues here, but I appreciate you taking my questions. Barry, just, I wanted to ask about the guidance. I appreciate the clarity on the consumer vertical and the impact in the second quarter. I think you can see it in kind of the sequential uptake in subscription revenue in 2Q as well. I guess I just wanted to understand, one, had it not been for that -- because I think prior guidance implied more of, like, a low 20%-s exit rate for subscription revenue as the year progressed. One, I guess I'm trying to understand, is that the right way to think about it that now you're thinking more like a mid -- like a high-teen subscription revenue number exiting the year based on the current guidance? And just, it was because of the consumer vertical or is there anything else factored in to not rolling forward the full 2Q beat?
Yeah. Thanks, Samad. Let me sort of start at the back end over there and not putting through the [full amount] (ph), that's right. We put through 17% of the total beat in Q2. This is really a function of this pocket of weakness that we had in consumer, because you may -- and we need to be cautious when we go into the second half in these uncertain times. We have data from our customers. We're highly metric-driven. We also have macro data. The consumer -- if you go by the federal data, consumer spending, it started with a roar in January at 12%. February went down to 8% and March to 4%, and then in the second quarter, it was 3%, 3% , 2% for the three months. If you look -- excuse me, if you look at the credit card spending on discretionary items, that too has been coming down quite dramatically.
So, we just want to be careful over here. Our retention rates stay very good. And when that part of our business experience a benefit of an eventual pickup in the macro, we will participate fully in it. So the second half -- to finish off, the second half is largely due to the fact that we did enter the second half of the year with slightly lower revenue in our consumer part.
Perfect. Appreciate the color. Thank you so much.
And we will move on to Taylor McGinnis with UBS.
Team, thanks so much for taking the question. Maybe just to piggyback off of Samad's question, so when you think about the second half of the year and then some of the seasonality that you're talking about in these different verticals, any color you can give on the contribution that consumer has to the second half? And I know you've talked about some weakness in other verticals in prior quarters. So, I guess any additional color you can give on what you're baking in for those verticals? And as a second part to the question, in terms of when we should start to see some of these newer enterprise deals maybe offsetting some of this macro weakness, I guess, what does the ramp look like from here on, on those as well? Thanks.
Okay. So, in terms of the contribution to the -- from the consumer, we're assuming something similar to what we had last year, previously assumed. We just don't want to go out too far. So being a little bit cautious over there. There are other 16 verticals that we track in the second quarter, they grew very similar to what's happened in the second -- in the prior year with low single-digit growth in both last year and this year, and we're putting in similar growth in the second half of the year.
In terms of when we would see the kick in of these bigger deals, they -- I think somebody said earlier on, we've got now the volume of these deals. It's going to be a while before they kick in, but you'll see the fact that we are reporting the numbers that we are is in part due to the fact that this weakness that we have in this last quarter on the consumer side has been largely offset by the growth in the new logo, which is very strong.
Got it. Thanks so much.
And William Blair's Matt Stotler has the next question.
Hey, thank you for taking the question. Maybe just a follow-up on Aceyus. Interesting to see that acquisition. Obviously, I think the strategic rationale that you laid out made sense. Would love to maybe just double click on how you're thinking about the opportunity there. Whether that's ultimately expanding the TAM, right? And any associated incremental monetization you can do there? Or is this more so just helps to open up maybe that on-prem TAM especially at market that maybe it was harder to crack or both? We'd love to give some additional thoughts there.
Yes, Matt, I'll start with that. Again, think of this as -- I don't want to repeat what I already said, but I think one of the big opportunities here, big rationales besides what I had said is the pull-through value, right? So, we would -- we always -- whenever we make an acquisition, there are obvious revenue synergies that we look at. But I think when you think about Aceyus, the number one kind of revenue opportunity is really the pull-through. Our win rates in large enterprise are already very, very strong. But this just solidifies our competitive advantage upmarket by having Aceyus as part of the Five9 platform. This is something that is very unique in the market, and it's going to be very difficult for competition of ours to have a similar offering. So that's going to allow for pull-through continued wins upmarket and large enterprise for us. That's a big lever.
Got it. Thank you.
You got it.
Jim Fish with Piper Sandler. Please go ahead with your question.
Hey, guys, thanks for the question. Good to see you. Going back to Peter's question on the 80% attach rate for the $1 million-plus deals, any sense as to what that was last quarter or last year at this point? And what is differentiating Five9's AI versus the other CCaaS vendors in your view?
And then, Dan, just quickly for you, on that big healthcare win, nice to see. Is this going to act like that large parcel delivery company and we'll see further regional expansions given their 50,000 seats in aggregate? Or how are you viewing the potential expansion from here?
Yeah, great questions. First, I'll hit the 80% attach rate. I don't have the measurements from the previous quarters exactly. But I can tell you that's a very common trend in what we're seeing and it's only been increasing. I mean, as AI and automation becomes that much more important, it's asked for in virtually all the RFPs today, it's presented whether asked for or not, and we can find use cases for customers across the board now that we have this full portfolio of eight different applications that we can deliver and combinations where you combine the two and deliver a pretty unique use case. So, we're seeing that a lot of brainstorming within the new customers. They use it to justify their business case to move to Five9 and to the cloud, in particular, but they also in the installed base. We can see tremendous ROIs. And so we see a better attach rate there, as Mike alluded to earlier.
Moving over to the second part of your question, now I don't recall what it was.
So is this going to act like large parcel...
Yeah, I got you. Yes, the account we mentioned. It very well could. Bear in mind, these transitions take time as they come on to the platform. They will continue to expand their use of various applications that we did not sell them initially. We have certain things that were preexisting that we're integrated to. In that case, as an example, Aceyus was already -- they were already a customer of Aceyus. We're doing that integration, directly with that as a strategic element. They already have Verint throughout their many, many different sites that's on-prem. We're going to integrate to that via our voice stream API. Eventually, they'll look to probably upgrade the Verint solution to our cloud and the Verint cloud that we integrate with.
So, we'll be providing many add-ons just like most of our large enterprise customers, the CAGR of the ads and the expansion that they experience with us is tremendous. So, when you look at our dollar-based retention rate and you look at the further upmarket you go, the higher that percentage is just because they tend to buy everything on the truck, so to speak.
Thank you.
Yeah.
Our next question will come from Michael Turrin with Wells Fargo.
Hey, great. Thanks. Appreciate you taking the question. I think, look, a lot of the questions have been on the initial reaction around the beat and the raise. But if I look at the filings, Barry, the RPO metric is up 45% year-on-year. I think it's up double digits again sequentially. So, maybe you can just tell us more around your view of the significance of that RPO metric. Is that becoming more valuable as you move upmarket and may be reflective of some of the momentum that you're highlighting? And maybe you can just help level set considerations we should be making around conversion of bookings to subscription revenue over time as well? Thanks.
Yes. Thanks, Michael. So indeed, 13% sequential growth, 46% year-over-year growth, $1 billion in total. The situation there though, Michael, is that, that only captures part of the picture, and a volatile part of the picture. Why? Because it includes only contracts that have more than a year to run. And that's not all of our business. Now, we've always said that the only thing you can really use the RPO concretely for is to see directionally which way it is heading. And the work that Dan and the team have done and the market that they're going into, makes it really clear that the direction on the new business is up and to the right.
Is there anything you can say around just the composition of top types of customers that are showing up in RPO versus what's the case? So, I just want to get a sense of multiyear today versus what that used to look like historically?
Yes. It is so much across the board. I mean, the contact center industry is a horizontal industry. There is some concentration in our business in terms of healthcare, financial services, consumer, but then a whole smorgasbord of other industries below that. Frankly, I don't have a detailed analysis of that, that I can share, in part because it is not a key management metric for us.
And if I may add one thing to that, Michael. Bear in mind, we don't incent our customers or provide additional discounting for longer contract cycles because we're so confident in the renewal rates. Our contracts automatically renew each year, every year. So oftentimes, we look and say, "Well, how long is the term of this customer?" And we don't know, because we're just -- we put the contract in the drawer, and it never gets opened again. It's an auto renewal. So it's the beauty, and it's also one reason why we have a lot of annual one-year contracts, but we have a fair amount of three-year and five-year as well. Mostly, it's because the customer wants to protect themselves against price increases when they do multiyear.
Appreciate the details. Thank you.
Yeah.
Moving on to Matt VanVliet with BTIG.
Hey, good afternoon. Thanks for taking the question. So, I wanted to dig in maybe a little more on the attach rate and contribution on the AI side. So you mentioned 80% of the larger deals. But can you give us any sense for how much of the ARR of those deals is actually sort of tied to these AI features? Presume it's up year-over-year, but maybe more importantly, where do you think that goes in the next three to five years? Can it be 20% or 30%? Or what's sort of the upper bound of what people are going to pay for?
Yes. I'm glad you brought that up, and I'll start it and Mike, you can continue. If you look at the attach rate, yes, 80%, a big number. If you look at the revenue contribution, small number, a very small number. And the reason being is we're at the very beginnings of really implementing AI and automation in the right use cases. Today, you have a very simplistic straightforward question that gets asked repeatedly within the contact center; well, if you automate that, you can let the customer self-serve for, and that's great. So a lot of customers are looking at deflecting 3% to 5% of their calls over. And if you think about the pricing that we've dictated, well if you -- so if you put in 6% to 10% of the revenue contribution from that customer because they're deflecting that many calls over, yes, we make more on those automated calls than we do non-automated costs, but it's still a small percentage.
So in three to five years, boy, I'm optimistic that, yes, the crystal ball says more and more use cases will become prevalent. Consumers will get more used to and comfortable talking to a machine versus a human. But for the consultations and the sales calls and all the other things that you need to really speak human to human, that's where we implement automation to help that human-to-human conversation. And we assist making it more powerful and more efficient in delivering data to that agent more quickly and effect -- and more accurately. So there's automation we can apply to help a contact center be more efficient and effective.
But across the board, where I'm going here is, it's really hard. We have some customers that go all in and put multiple applications in, and it's a much higher percentage and others where they're just barely scratching the surface. The beauty here is, over time, we know it's going to increase. We know it's going to be more prevalent. We know some is going to be based, as Mike said earlier, on a per port or capacity based. We're going to have others that are transactional or per minute or on a usage basis. And in all those scenarios, it's Five9 software being delivered to help enterprises deliver a great customer experience. And so our revenue per customer without a doubt will continue to increase and do so handsomely.
All right. Great. Thank you.
Siti Panigrahi with Mizuho has the next question.
Hey, thanks for taking my question. I want to ask about the margin. Look, you guys have like 100-plus -- 100 bps plus margin -- gross margin expense and also operating margin. Should you expect this trend to continue? Or how should we think about your investment, especially with this AI opportunity? And also, could you talk about the Aceyus, how is that going to impact your margin?
So, let's break it into the two components: growth and operating expenses. In terms of gross margin, if you look at over the longer term, it is very clear that that's going to go up. Why do I say that? It's simple -- there are a number of factors, but the biggest single one is the leverage between fixed and semi-fixed costs. And sometimes to understand what's going to happen in the future, you need to look at what's happened in the past. And if you look at the past 10 years, nine out of those 10 years, the gross margin on our subscription business expanded. The only exception was we will be doing some heavy investments in the cloud and in international. And the rough numbers, software already accounts for approximately 75% of the total revenue. So it's a growing proportion. And when we went public, it was certainly less than 60%. So, we have that tailwind. Currently, we're in the low 70%-s, but on our way to the 80%-s like we've demonstrated we can improve over time.
The near term, though, on [superior] (ph) margins and gross margins, that is very revenue dependent, as I just alluded to, and we are making some additional investments, particularly while Dan is bringing in these mega deals that require some incremental investment until we really get scale fully.
In terms of the EBITDA margin, we're very serene over there. We've got a long-term model that -- if we take all three components, we have 47%, this I'm talking about 2027. We're currently at 43%. So, we can actually still go up and still make our 23% EBITDA margin that we're anticipating.
Thank you.
Moving on to Will Power with Baird.
Okay. Great. Thanks for taking the question. I think probably for Dan, great to see the multitude of new big wins. Maybe just zeroing in on the Fortune 50 healthcare win, it would be great just to understand kind of what that process looks like? Who you replaced? I'm sure you competed with your competitors. What really kind of helped you stand apart there? And this seems to be part of a string of healthcare wins. Maybe cover more broadly on what's going on with healthcare for you? I mean reference accounts probably helped. And I guess the extension of that is how do you replicate that in these other verticals?
Yes. No, great question, Will. I appreciate it. And if you look at the upmarket expansion and the penetration we're making across many verticals some that are very prevalent with large contact centers are certainly healthcare and financial services, large consumer product companies. I mean think about who we all as consumers contact every day, right? Healthcare is one that's not going away ever, especially as our population grows older.
So, if you look at the insurance company that we sold across the board has several legacy systems. It wasn't one particular one, but it's the typical three that we've talked about in the past. And that's the issue, right? They've grown. The healthcare companies and insurance companies have all done M&A activity over the years and you get these systems that are a decade or too old. And they don't do a whole lot. And what they do, they do it for that given building, right? They're premise-based systems that operate for that one set of resources or users that are in that facility. And that creates silos of efficiency, small ones, and that creates great inefficiency when you think about what a virtual contact center can do like Five9 because just the sheer moving of calls from the cloud straight to the resources as if they're under one roof is a tremendous saver that we've had for years. Well, they now can take advantage of that. They also can take advantage of all AI and automation that we deliver from the cloud.
So it's a great vertical for us. It's one that's leaning into to CCaaS right now, primarily because of those AI and automation solutions and the old legacy platforms they're on. But also it's one that they're leaning into because they are going through a rapid change themselves in M&A activity and want to be -- want to have the flexibility to do so in the future.
Thank you.
And our next question will come from Deutsche Bank's Matthew Niknam.
Hey, guys. Thank you for taking the question. So obviously, new logos, you talked about a very strong quarter. Can you talk a little bit about where you're taking share from? How it's evolved in the last few quarters? And then just any color you can provide on linearity of bookings during 2Q? Thanks.
Yes, taking share, it's still primarily moving off of the legacy Avaya, Cisco, Genesys. Genesys has a massive -- they're also a cloud competitor, but they have a massive installed base, some estimate over 2 million seats out there that they've indicated are being end of life and need to be replaced. They're going to get a big share of that. They've already demonstrated that in some of the figures that they've already disclosed. But we're going to get some too. It's an opportunity for most to go shopping and really put on RFPs and see what's in the market. And we love that opportunity and we get a great share in those opportunities. So, it's those three.
And then on occasion, we do find that their CCaaS providers that have either gone through a partner that wasn't really astute and up to speed on being able to really maximize the value for that company to extract the value for that product. And sometimes it's just the wrong fit for the enterprise. And so they do make a change. So, we do have CCaaS providers that we replace.
And one example I gave was in the prepared remarks was a company that had already embarked on a competitor implementation of ours. And the company that they acquired had made a recent decision prior to that to go with Five9, but hadn't started an implementation. So they basically contacted us to cancel that contract. And we ask them to take a closer look and give us a chance and evaluate the two side by side, even though they were several months into another implementation, and they ultimately made the decision that we were the better fit for them, and they went our way.
And just on linearity, any color there over the course of the quarter?
On the course of the quarter, linearity in our business, I'd love to achieve it. I've, for a few decades now, strive for that. The deals at the lower end of the market, we can get more linearity and more predictability because we see the lead flow and the sales cycle, and we know our close rates are very consistent. On the high end of the market, it's really tough. It's lumpy, because we have these big deals that make a huge swing. We had quarters where --- even talking about the top three or four, we've had quarters where that number is far lower than in other quarters where we've dwarfed it with some big numbers like this one. And so it's hard to get linearity until we get the higher volume, but that's something we're certainly striving for.
Thank you.
Thank you so much. And we do have time for one additional question, which will come from Catharine Trebnick with Rosenblatt.
Hi, thank you very much for taking my question. Hey, Dan, could you piece part a little bit? You did WWT, BT and Telus is all new partners in the last couple of months. How long does it actually take to put the go-to-market strategy and generate revenue from these big partners?
Yes. Wonderful question, Catharine, and that's something -- and I'm glad you mentioned it because it is something we want to make sure folks realize that it's not a sign them up and open the floodgates. You got to train them, educate them, have them make the investments in their go-to-market and some of the back-office support that they're going to provide to the customers. In many cases, these large service providers, like the ones you mentioned, they're doing this not just to bring product to their customers but to really get services around them.
We have something we've referred to as project pull-through, which is enabling these varied types of partners to be able to enable the implementation services, professional services, if you will, as well as ongoing support for at least Tier 1 and Tier 2. That gives us in the long run, better margins, and it gives them an ability to make money off of the services that they're used to delivering on their legacy solutions and it gives them an incentive to want to bring us into their opportunities because they recognize, "I'm going to get the services business for this. It's not just the margin on the markup."
So, how long does it take? It varies. But usually, it's at least six to nine months before we really start to see a pipeline built up and probably a year to year-and-a-half before we see some revenue contribution, because again, there's a sales cycle there and most of these are going after customers that are on the larger end of the scale.
And congratulations on the acquisitions.
Thank you.
Thank you, Catharine.
Yes, thank you, Catharine.
Well, and again, everyone, that does conclude today's Q&A. So, I'll turn things back to Mike for closing comments. Mike, over to you.
Yes. Thank you for joining us, everyone. As we cross the mid-year mark and just -- I couldn't be more thrilled than what I've seen -- with what I've seen in terms of momentum in our business. We talked a little bit about it in terms of upmarket momentum, the deals that Dan talked about. It's an exciting time for Five9. It's exciting time in our industry. And we look forward to continuing the conversation with you all. Thanks for joining us.