Five9 Inc (FIVN) 2015 Q1 法說會逐字稿

Good day, and welcome to the Five9 Incorporated first-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Five9's first-quarter 2015 results. Today's call is being hosted by Mike Burkland, CEO, and Barry Zwarenstein, CFO.

During the course of this conference call, Five9's management team will make projections and other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are simply predictions, and should not be unduly relied upon by investors. And actual events or results may differ materially, and the Company undertakes no obligation to update the information in such statements.

These statements are subject to substantial risks and uncertainties that could adversely affect our future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of the risk factors you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during the call. Management believes that this non-GAAP information is useful because it can enhance the understanding of the Company's ongoing performance, and Five9 therefore uses non-GAAP financial information internally to evaluate and manage the Company's operation.

This non-GAAP financial information should be considered along with, and not as a replacement for, financial information reported under GAAP and could be different from the non-GAAP financial information provided by other companies in our industry. The full reconciliation of the GAAP to non-GAAP financial data can be found in the Company's press release issued earlier this afternoon and available at Five9.com.

Now I would like to turn the call over to Five9 CEO, Mike Burkland.

Thank you, Lisa. Welcome, everyone, to our first-quarter 2015 earnings call. We are delighted to report a great start to 2015, with results for the first quarter that exceeded our expectations across all metrics.

Total revenue for the first quarter with a record $30.3 million, up 25% year over year. Our revenue growth, which was entirely organic, was a blend of our fast growth enterprise business and our steady growth SMB business.

We continue to strike a balance between solid top-line growth and significant progress on our path to profitability, as evidenced by our EBITDA margin improving by more than 1,600 basis points over the last four quarters. Based upon our strong first-quarter results, we are raising our guidance for both revenue and bottom line for 2015.

Before going into specifics of our business momentum, I would like to highlight what sets Five9 apart from our cloud competitors. First, we are moving upmarket on top of our already strong SMB business; second, our PBX strategy is to integrate with best-in-class enterprise grade PBX and UC solutions, such as Cisco and Microsoft Lync; and third, we have a business model which is 100% cloud, with revenue growth that is 100% organic.

Now, turning to some of the business highlights for the first quarter, we continue to build momentum by adding new enterprise clients and expanding deployments with existing enterprise clients. And we remain extremely enthusiastic about our continued success in this enormous market opportunity.

We had very strong win rates against our key competitors, driving the strongest first-quarter bookings in the Company's history. This success is a direct result of our ability to help our clients improve agent productivity, enhance customer satisfaction, and reduce total cost of ownership.

We also continued to increase our average enterprise deal size due to a number of factors, including our comprehensive end-to-end solution, our deeper integrations with enterprise CRM applications, our strong implementation and support capabilities, and our excellent stability and uptime performance.

In addition, our go-to-market strategy includes a highly productive direct sales force, combined with leverage from our growing ecosystem of partners. For example, we recently announced a partnership with Netrix to deliver cloud PBX and unified communications solutions, including Cisco and Microsoft Lync, integrated to our cloud contact center software. This strategic initiative allows businesses to deploy an enterprise-class end-to-end solution for PBX, UC, and contact center applications all in the cloud.

Now I would like to share a few examples of recent enterprise client wins. The first is a rapidly growing solar company that turned to Five9 to transition to the cloud as they expand domestically and internationally. The Company had been using a premise solution to manage and route their inbound and outbound calls and to handle the complexities associated with scheduling field appointments. Their prior solution gave them limited visibility and control, resulting in extreme inefficiencies.

Five9 was selected over other competitors due to our robust end-to-end solution, including inbound, outbound, and blended call management, as well as the ability to give them real-time and historical visibility into their overall contact center operation. By using Five9's workforce management solution powered by NICE and integration to their salesforce CRM, Five9 is delivering an enterprise solution for over 400 agents with expectations for further growth.

The second example is a Fortune 500 manufacturer of industrial tools that chose Five9 over multiple premise and cloud competitors. Five9 is delivering a complete suite of applications, including inbound IVR ACD, outbound dialing and salesforce CRM integration, replacing their legacy on-premise contact center solution. By providing this customer with complete carrier redundancy, a full suite of Five9 applications in the cloud, plus a secure MPLS connection to their agents,, Five9 is uniquely positioned to deliver and manage this end-to-end solution.

Finally, I'd like to share an example of a leading manufacturer of cycling and other sporting components. Through our strategic partnership, Five9 was brought in by Oracle to replace this customer's contact center solution. The customer required its contact center solution to be integrated with Oracle CRM and fully implemented in two weeks. Five9 was chosen for our functionality, our integration with Oracle, as well as our ability to execute and guarantee that integration in such a tight timeframe.

In summary, we are extremely pleased to report a great start to the year. We are experiencing strong momentum and our business as enterprises continue to shift contact center solutions to the cloud. We believe we are very well positioned to capture a large share of this growing market opportunity.

I will now turn the call over to Barry to provide more color on the financials.

Thank you, Mike. As Mike just stated, we are extremely pleased with our first-quarter results, which further validate our ability to drive solid at revenue growth while improving our bottom line. Across the board, our Q1 results were considerably better than our expectations, as we experienced strong momentum in the enterprise market and continued improvement in gross margins, while maintaining diligent expense control. We remain focused on meeting our EBITDA and cash flow breakeven objectives.

Turning to our results, revenue for the first quarter of 2015 was $30.3 million, up 25% from the first quarter of 2014. Returning revenue accounted for 97% of our revenues in the first quarter.

Recurring revenues made up of monthly software subscriptions, which are based on a number of agencies, plus usage, which is based upon minutes. The other 3% of our revenue is comprised of professional services fees generated from assisting clients and implementing the Five9 solution and optimizing its use.

Gross margins, adjusted to exclude all non-cash charges, was 56.6% for the first quarter, compared to 51.1% for the first quarter of 2014. We also posted a sequential improvement in adjusted gross margin from 197 basis points, despite the January 1st reset of FICA, and other federal and state contribution limits.

Adjusted gross margin came in higher than we expected for two main reasons. First, [the lease cost] routing technology that we deployed during the fourth quarter delivered larger than anticipated increase in usage of gross margins; and second, the leverage of higher subscription revenues set against fixed and semi-fixed costs.

It is important to point out that while our usage revenue generates gross margins below our subscription margins, usage revenue comes in with very minor incremental operating expenses, and therefore, generates considerable bottom-line leverage.

Please note that a reconciliation of our GAAP gross profit, adjusted gross profit, as well as other reconciliations on GAAP to non-GAAP results is provided with our earnings press release and in our investor presentation on our website. The investor presentation also includes details of the non-GAAP adjustments to operating expenses.

GAAP R&D expenses for the first quarter of 2015 totaled 20% of revenue, compared to 22% of revenue for the first quarter of 2014. The year-over-year improvements reflects the continuing success in growing our R&D investments at a meaningfully lower rate in our revenue increase, and we plan to continue to do so as we arrive to our long-term model for non-GAAP R&D expenses of 9% to 11%.

GAAP sales and marketing expenses for the first quarter of 2015 totaled 33% of revenue compared to 37% of revenue for the first quarter of 2014. This year-over-year improvement is due to increased efficiency from our enterprise sales organization. Our long-term model for non-GAAP sales and marketing expense remains 28% to 32%.

GAAP general and administrative expenses for the first quarter of 2015 totaled 24% of revenue, compared to 25% of revenue for the first quarter of 2014. We do not anticipate any step-function increases in G&A going forward, and hence, remain confident of our ability to reach our long-term model for non-GAAP G&A expenses of 6% to 8%.

Adjusted EBITDA loss declined to $3.2 million for the first quarter of 2015, compared to an adjusted EBITDA loss of $6.5 million for the first quarter of 2014.

Our adjusted EBITDA margin improved by 1,635 basis points from a loss of 26.8% of revenue in the first quarter of 2014 to 10.4% of revenue in the first quarter of this year. This improvement came from the year-over-year expansion in gross margins, diligent expense control, and from operating leverage.

GAAP net loss for the first quarter of 2015 was $8.9 million, or $0.18 per share, compared to a GAAP net loss of $8.3 million, or $1.48 per share for the first quarter of 2014. Non-GAAP net loss for the first quarter of 2015 was $5.9 million, or $0.12 per share, compared to a non-GAAP net loss of $8.7 million, or $1.35 per share for the first quarter of 2014.

Our DSO performance remained strong, and DSOs for the first quarter ended March 31, 2015 were 24 days, compared to 22 days in the first quarter of the prior year.

As of March 31, 2015, our cash and short-term investments totaled $70.6 million. Cash outflow from operations for the first three months of 2015 was $5.8 million, and capital spending in the first quarter was $1.5 million, of which $1.3 million was financed by capital leases, and the remaining $0.2 million paid for in cash. Free cash outflow, defined as operating cash less capital spending paid for in cash, was $6 [million] for the first quarter of 2015.

As of March 31, 2015, our debt, made up of term notes and our revolver, totaled $37.7 million. Obligations under capital leases as of March 31, 2015 were $9 million.

I'd like to finish the day's prepared remarks with a brief discussion of our expectations for the second quarter and full year of 2015. For the second quarter, we expect revenue in the range of $28.7 million to $29.7 million. GAAP net loss is expected to be in the range of $10 million to $11 million, or a loss of $0.20 to $0.22 per share. Non-GAAP net loss is expected to be in the range of $7.6 million to $8.6 million, or a loss of $0.15 to $0.17 per share.

For the full year, we expect revenue in the range of $120 million to $124 million, compared to the February 23, 2015 provided range of $117 million to $122 million. GAAP net loss is expected to be in the range of $34.7 million to $37.7 million, or a loss of $0.69 to $0.75 per share, compared to the February 23rd provided range of a loss of $37.1 million to $40.1 million, or $0.73 to $0.79 per share.

Non-GAAP net loss is expected to be in the range of $24.4 million to $27.4 million, or a loss of $0.49 to $0.54 per share, compared to the February 23rd provided range of a loss of $27.4 million to $30.4 million, or a loss of $0.54 to $0.60 per share.

For modeling purposes, we would like to provide the following additional information. In calculating EPS, we expect our shares to be 50.1 million for the current quarter and 50.3 million for the full year. We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $110,000 for the year. Our capital expenditures are expected to total approximately $8 million to $9 million for 2015, the same range as previously provided.

In summary, we are very pleased with our first-quarter performance. We will continue to be focused on driving solid revenue growth and making significant progress on our path to profitability.

Lastly, before we turn to your questions, I would like to mention our upcoming conference participation. We will be presenting at the 43rd annual JPMorgan Technology Media and Telecom Conference in Boston, on May the 20th. We will also be participating in the Bank of America Merrill Lynch 2015 Global Technology Conference in San Francisco on June the 3rd.

And now, we'd like to open the call for questions. Operator, please go ahead.

(Operator Instructions )

Sterling Auty, JPMorgan.

Yes. Thank you. Hi, guys.

Hi, Sterling.

So, looking at the dollar value retention in the quarter, it would seem to me that you had a pretty robust new customer bookings quarter. You gave us a couple of examples of that, but any additional color that you can give in terms of the strength in that new customer bookings, how much of that was coming from enterprise? And also maybe some color on what was happening in the SMB?

Yes. Happy to do that, Sterling. This was a record first quarter for the Company, and it was really driven, as we said, by the enterprise traction. We had a really strong win rate against our key competitors, over 65% against our key cloud competitors.

I have talked in the past about our sales capacity in enterprise growing on a year-over-year basis at 30% to 40%, and I can tell you our bookings in enterprise outstripped our growth in sales capacity for the first quarter. I'm very, very pleased about that result.

And I would add that I've talked about in the past our SMB sales capacity growing at about 10% year over year, and I can add that our bookings in Q1 for SMB actually outstripped that growth in sales capacity for that group as well.

So when you look at the SMB, anything changed in terms of -- was it the uptake of new SMB customers? Was it expansion of existing? Because it feels like this is a little bit of a change in tone in the SMB part.

Well, again, I just want to be careful, Sterling, not to mislead you. Our strategic opportunity is enterprise. It's where we are putting most of our investments; a very large disproportionate amount of our investments are going into enterprise, but we continue to execute very, very well in the SMB market.

We've been in that market for a long time, it's been a steady growth business for us. We've got a direct telesales effort that is an absolute machine, and I'm really proud of just the execution that team has been able to achieve.

Okay, that's fair enough. And last question would be just on the gross margin. You mentioned both the least cost routing and then just the leverage that the subscription. Any additional insight in terms of the magnitude of which one contributed? And just want to make sure we understand the sustainability of the improvements on the gross margin line?

Yes. So Sterling, in terms of the ranking, the improvement in the gross margin did outrank the improvement on the subscription side. The gross margin improvements came from the fact that the benefits from the Q4 installed least cost routing technology would have came bigger and faster than we had thought and we'll guard them as imminently sustainable.

The second one is the familiar refrain that we have a large proportion of our subscription costs that are fixed or semi-fixed. And as the months and quarters and years roll by, we've seen a consistent pattern of those gross margins improving because of leverage, and Q1 was no exception.

Great. Thank you.

Michael Huang, Needham & Company.

Thank you very much and good afternoon, guys. Just a couple questions for you. Great to hear about the strong win rates north of 65%. Could you remind me just, either directionally or if you have a number handy that would be great, like what was that win rate either last quarter or last year? And then to the degree that it's improving, what's changed? What's driving that?

Great question, Mike. So we've been consistently in the 60% range against our key competitors. Again, I think it's just a good indication of our ability to move our product and our platform forward.

As you know, we're winning business against our key competitors for a number of reasons. Our end-to-end solution for inbound/outbound and blended call management, the fact that we have one unified product for those various call flows, as well as multi-channel, as well as probably the deepest and best integration with CRM solutions in the marketplace.

I would add that we're also getting additional leverage from our channel partners or ecosystem partners. We have worked diligently with a number of CRM partners, and most recently, have had a lot of traction with Oracle in addition to our great traction with salesforce. So I would say it's a combination of things that continues to move our win rate higher, and we're very pleased with it.

So if I were to peruse through some of the commentary by some of your hybrid cloud peers over the last like week or two, it seems like everyone that seems to be doing pretty well. Was wondering, is that -- from your standpoint is that just a rising tide of floats off boats? Or are you seeing any change with respect to your end customer signing on the dotted line and willing to get that deal across the finish line these days versus maybe like a year ago?

Yes, definitely. I think the best indication of our market being very, very robust and healthy is the fact that our average deal size has grown significantly. We are seeing larger and larger enterprises move their contact center infrastructure and software and hardware solutions from -- away from on-premise solutions and into the cloud on solutions like ours.

So overall, this market is a very, very good one. As you know, it's a massive market; there are 14.5 million call center and contact center agents around the world. And Gartner and other analysts estimate that 90% to 95% of those agencies are still running on legacy on-premise solutions.

So we're disrupting a huge market, but we also have most of this market opportunity ahead of us. So it's a great time to be in this space that we're in.

Great. Thank you very much. Appreciate it, guys.

Nikolay Beliov, Bank of America.

Hi, thank you for taking my question and nice start to the year, guys. Good performance. Just wanted to confirm, last quarter you gave specific timeline for EBITDA and cash flow breakeven. I just wanted to confirm that you guys are still on track for that.

Yes. A great question, Nikolay. The answer is yes, we're on track for that. But based on our wonderful performance in Q1, we have an even greater degree of confidence in our ability to make those goals.

Got it. And then, when I look at the retention rate trend line, 95% this quarter, down from 100% a year ago and 96% last quarter, just if you can just talk about the puts and the takes here, is it that maybe the SMB out performance is bringing this down a little bit more than you expected?

No. Nikolay, this is Barry. The are two drivers for that year-over-year reduction in the dollar base retention rate. The first one is that we have a current client who is a major user of our international price -- of our international usage. And at the time, we were not competitive, and they had moved that business off.

And given that they were one of our bigger clients, for both usage as subscription, and still for subscription, that has adversely impacted the rate. And that will continue to be the case for a quarter to two more.

And then the second of the two reasons is that we had a BPO customer, a major BPO customer that went out of business and adversely affected the rate.

Got it. Thank you.

Brendan Barnicle, Pacific Crest Securities.

Thank you, guys. I was following up some work you've been doing this quarter. We had seen generally, at the margin, better strength out of some of the SMB players, and then we did out of some of our enterprise players. I know you guys see nice strength in both segments, even though you're more focused on the enterprise side.

Mike, did you see any difference in demand, even though you had good execution, any difference in demand in the enterprise versus the SMB at all?

Yes. Brendan, good question. We continue, as I said, to invest aggressively in that enterprise market opportunity for a reason, and there are several reasons, actually. We have a higher ROI opportunity in the enterprise space. We do occasionally do [KAK LTV] analysis, and again, the rates are higher for us in the enterprise market.

We've also been able to invest on the margin and make a higher ROI in that opportunity, a higher growth opportunity for us as well. And quite frankly, it's a larger opportunity. All that said, we continue to execute in the SMB market, and it continues to be a very, very healthy grower for us.

Great. And then, Mike, you mentioned Lync a few times in your prepared comments, and it made me think about whether there is an opportunity for you guys to partner more extensively with Office 365.

Yes. We clearly see an opportunity there, Brendan. If you look at the enterprise PBX and unified communications market, Microsoft Lync is really becoming the gorilla in the space. There are a lot of legacy players as well, and our partnership with Netrix did deliver our contact center solution integrated with Microsoft Lync, all in the cloud.

It's a very strategic opportunity. It's early days for us, but we view that as a really, really important opportunity for the Company going forward.

And what are the next steps you'd have us watch for to show -- see that you are making progress there?

Yes. Over time, and again, it won't happen immediately, but over time, as we deliver that integrated solution, we will be bringing customers on to our platform, integrated with Lync, and we will be talking about that, the proof points of that in future calls.

Great. Thank you, guys.

You got it. Thank you.

Richard Davis, Canaccord.

Thank you. First off, it was nice to hear Barry playing the piano on the hold music. He was pretty talented. It's live, I know. But anyway, it was difficult.

First question just a down sequential guide on revenues, is it just trying to set the high jump bar sufficiently conservative is one? And then the second is just hiring environment, because everyone is trying to hire people. And that would be my questions. Thank you.

Yes. Sure, Richard. So I'll let Barry fill in any blanks, but the sequential revenue, as you know, we have a seasonal pattern to our business. And we've historically seen more seasonality as we go upstream into the enterprise market. There are certain industries that have year-end activities, as well as some that spill into Q1. And our Q2 revenue guide reflects that seasonal pattern in our enterprise business.

And, again, it shouldn't be a surprise. We've talked about it in the past, and I think we're just -- we've gotten a lot better at understanding those seasonal patterns in our business. So that's what that reflects. As you know, we are increasing guidance for the full year.

Right.

And that's that. And in terms of the hiring environment, again, we continue to invest in sales capacity and the enterprise part of our sales organization. And we've had wonderful success in just continuing to bring on top talent from legacy, vendors that have been in this space for a long, long time. Most of our enterprise sales people have been in the industry for 10 plus years.

We have a great network, if you will, of sales leadership, and their networks, so we continue to bring on people that they knew and worked with in the past. I think it's a strategic advantage that we have in this market.

Got it. Great. Thank you very much.

Thank you.

(Operator Instructions)

Raimo Lenschow, Barclays Capital.

Hi guys. This is Barry Higher on for Raimo. Thank you for taking the question and congratulations on a good quarter. Clearly a good result from the bigger customers; it's good to hear that generally it seems as though acceptance of SaaS is bolstering your growth story here. But any obstacles you are still seeing from enterprise customers in terms of verticals, geographies, or anything else? What are you still getting in terms of pushback?

Yes. Good question. Our industry is one that has been around a long, long time. The call center industry has been around and dominated by these legacy vendors that we are replacing and disrupting. I think, if anything, when we're in larger enterprise opportunities, the biggest enemy, so to speak is the status quo.

But I can tell you this: we're getting so much better at knocking down those barriers of the status quo and staying with a legacy solution for one more year. Mainly because if we walk into a large enterprise, they typically have Avaya, Genesis, and Cisco all running in different contact centers within their environment. And if we talked to a given business unit that might be running Avaya, they typically are running several revs behind on that solution. Mainly because if they upgrade their solution, they typically will break all their integrations to CRM and other enterprise applications.

So there's just a lot of pain around maintaining the status quo for a lot of these large enterprises, not to mention the fact that they can't take advantage, if they stick with those legacy solutions, they can't take advantage of some of the cutting-edge technologies that we are delivering, such as social media routing, and visual IVR, and some of the real innovative things that we're doing.

Got it. Great. Thank you very much.

Thank you.

That does conclude our question-and-answer session. I'll turn the call back to management for closing comments.

All right. Well, Thank you, everyone, for joining us today. As I mentioned earlier, we are extremely pleased with our Q1 results as we drove solid top-line revenue growth, while continuing to make significant progress on our path to profitability. So in summary, I'll just say our momentum in the enterprise market is stronger than ever, and we look forward to a great rest of 2015. Thank you again for joining us.

And once again, that does complete today's call. We appreciate your participation.