Five9 Inc (FIVN) 2015 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Five9 Inc.

second quarter 2015 earnings conference call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Tony Righetti with the Blueshirt Group.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone, and thank you for joining us on today's conference call to discuss Five9's second 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 caution you that such statements are simply predictions and should not be unduly relied upon by investors, and actual events will 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 certain risk factors that could cause these forward-looking statements to be inaccurate, and that 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 this call.

Management believes that this non-GAAP information is useful because it enhances an understanding of the Company's ongoing performance, and Five9, therefore, uses non-GAAP financial information internally to evaluate and manage the Company's operations.

This non-GAAP financial information should be considered along with, and not as replacement for, financial information reported under GAAP, and could be different than the non-GAAP financial information provided by other companies in our industry.

The full reconciliation of the GAAP to non-GAAP financial data can be found in the Company's press release issued earlier this afternoon and available at www.five9.com.

Now I'd like to turn the call over to Five9 CEO Mike Burkland.

Thank you, Tony.

Welcome, everyone, to our second quarter 2015 earnings call.

We are very pleased to report results for the second quarter that once again exceeded our expectations across all key metrics.

Total revenue for the second quarter was $30.3 million, up 23% year-over-year.

Our solid top line growth was complemented by a significant improvement in our EBITDA margin of over 2,000 basis points from a year ago.

Bookings were another highlight as we set a new second quarter record.

Given our strong results, we are increasing our revenue and bottom line guidance for 2015.

Our ability to help clients improve agent productivity, enhance customer satisfaction, and reduce total cost of ownership is resulting in strong bookings momentum, solid win rates, and increasing average deal size.

We believe these metrics are clear indicators of our strong competitive advantages.

Accordingly, we remain extremely enthusiastic about capturing more of the enormous [context] in our market by leveraging a number of factors that are unique to Five9 including our comprehensive end-to-end solution, our deep integrations with leading enterprise CRM applications, strong implementation and support capabilities, and excellent stability and uptime performance.

Now I would like to share a few examples of recent enterprise customer wins.

First, a large higher education institution chose Five9 to deliver a 300-plus-seat solution to improve their recruiting, admissions, and enrollment process.

In particular, this client required a sub-minute response timeframe on inbound Web inquiries.

We were able to more than meet this requirement by showing a 70% reduction in the time from when a potential lead registers on their website to when this person is contacted.

The second example is a publicly traded global footwear and apparel company that selected Five9 integrated with Zendesk to replace their legacy solutions.

This comprehensive implementation included our PCI-compliant recording, workforce management powered by NICE, our multi-channel offering, and our MPLS agent connect solution to ensure the highest quality voice connections for every call.

Five9 was able to vastly improve their operations while also providing them with all the benefits of moving to the cloud, such as no technology footprint, no costly upgrades or maintenance, and ease of cloud-to-cloud integration between Five9 and Zendesk.

The third example is a large global publishing company that required deep integration with their sales force CRM.

Critical to their decision was the requirement to enhance the reporting capabilities they had with their legacy Avaya system, and to give them added flexibility and control over the reporting engine itself so they could generate custom reports in the unique look and feel desired.

Five9 met that requirement with our enhanced reporting portal, as well as our real-time custom dashboard portal.

In addition to these key customer wins during the quarter, we also announced our latest software release called Freedom.

The Five9 Freedom Release includes an intuitive modern agent user interface.

This new interface leverages agent-centric design principles that allow agents to deliver a more effective and positive customer experience in today's multi-channel world.

It empowers agents with more relevant customer context and guides them to the information they need to help their customers, resulting in a more engaging experience and increasing agent productivity and performance.

The Freedom Release also gives our customers enhanced integrations with our key strategic CRM partners and deeper and richer APIs.

Before I turn the call over to Barry, I'd like to spend a moment reflecting on the progress Five9 has made over the last year so since we went public.

During that time, we have consistently delivered year-over-year revenue growth of 20% to 25%, all organic, with even higher growth in our core enterprise business.

We've increased the cadence and scope of our product releases.

We have delivered best-in-class stability and uptime.

We've significantly and consistently expanded gross margins, significantly and consistently demonstrated operating leverage, and cut our EBITDA loss by two-thirds, from $6.9 million to $2.3 million.

In summary, we have successfully executed on our business model by delivering solid top line growth, while making tremendous progress on our path to profitability.

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

Thank you, Mike.

As Mike just stated, we are extremely pleased to have outperformed our expectations by driving solid revenue growth in conjunction with improvements to our bottom line.

We remain focused on meeting our EBITDA and cash flow break-even targets.

Turning to our results, revenue for the second quarter of 2015 was $30.3 million, up 23% from the second quarter of 2014.

Returning revenue accounted for 96% of our revenues in the second quarter of 2015.

Recurring revenue is made up of monthly software descriptions which are based on the number of agent seats, plus usage which is based upon minutes.

The other 4% of our second quarter revenue was comprised of professional services fees generated from assisting clients in implementing the Five9 solution and optimizing its use.

Gross margin, adjusted to exclude all non-cash charges, was 58.7% for the second quarter of 2015 compared to 51.5% for the same period in 2014.

Adjusted gross margin came in higher than expected for two main reasons.

First, the least-cost routing technology we implemented in the fourth quarter of 2014, again, delivered larger than anticipated increases in usage gross margin and, second, the benefit of higher subscription and professional services revenue growing against a base of largely fixed or semi-fixed costs.

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

Please note that a reconciliation of our GAAP gross profit to adjusted gross profit, as well as other reconciliations from GAAP to non-GAAP results, is provided with earnings press release and in our investor presentation on our website.

The investor presentation also provides details of the non-GAAP adjustments to operating expenses.

GAAP R&D expenses for the second quarter of 2015 totaled 18% of revenue compared to 22% of revenue for the second quarter of 2014.

The year-over-year improvement reflects our continued success in growing our R&D investment at a meaningfully lower rate than revenue, and we plan to continue to do so as we drive to our long-term model for non-GAAP R&D expenses of 9% to 11%.

GAAP sales and marketing expenses for the second quarter of 2015 totaled 35% of revenue compared to 39% of revenue for the second 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 expenses remains at 28% to 32%.

GAAP, general, and administrative expenses for the second quarter of 2015 totaled 20% of revenue compared to 14% of revenue for the second quarter of 2014.

The second quarter of 2014 GAAP G&A included the one-time benefit of a $2.8 million contingent sales tax reversal.

Similarly, the second quarter of 2015 included the one-time benefit of $325,000 for imputed interest on the previously accrued interest free and now finalized SEC penalty.

Excluding these items, the G&A comparison is 21% this year versus 25% last year.

Looking ahead, although we expect a minor sequential increase in the amount of G&A spending, we do not anticipate any [step] function increases in G&A and, hence, remain confident in our ability to reach our long-term model for non-GAAP G&A expense of between 6% and 8%.

Adjusted EBITDA loss declined to $2.3 million for the second quarter of 2015 compared to adjusted EBITDA loss of $6.9 million for the second quarter of 2014.

Our adjusted EBITDA margin improved by 2,050 basis points from a loss of 28% of revenue in the second quarter of 2014 to a loss of 7% in the second quarter of this year.

This significant narrowing of the adjusted EBITDA loss was primarily due to a $5.1 million increase in adjusted gross profit, of which approximately 60% came from higher revenue and 40% from higher gross margins, while at the same time continuing to manage growth in our expenses.

We are extremely pleased with the improvement in adjusted EBITDA and remain confident in the projection that we made when we reported our fourth quarter results, namely, that we are modeling EBITDA to be at or close to break-even in the fourth quarter of next year, and that we expect to achieve cash flow break-even six to nine months later and to do so with ample cash to spare.

And I should add that our confidence in that projection has further increased given the significant top and bottom line out performance in recent quarters.

GAAP net loss for the second quarter of 2015 was $7.4 million, or $0.15 per share, compared to a GAAP net loss of $8.7 million, or $0.18 per share, for the second quarter of 2014.

Non-GAAP net loss for the second quarter of 2015 was $5.1 million, or $0.10 per share, compared to a non-GAAP net loss of $9.5 million, or $0.20 per share, for the second quarter of 2014.

Our DSO performance remains strong and DSOs for the quarter ended June 30, 2015 were 23 days compared to 25 days in the second quarter of the prior year.

As of June 30, 2015, our cash and short-term investments totaled $65.3 million.

Cash outflow from operations for the second quarter of 2015 was $4 million, and capital spending was $1.3 million, of which $1.1 million was financed by capital leases and the remaining $0.2 million was paid for in cash.

Free cash outflow, defined as operating cash outflow plus capital spending paid for in cash, for the second quarter of 2015 was $4.2 million compared to $8.5 million in the second quarter of 2014.

As of June 30, 2015, our debt totaled $38.7 million made up of a $12.5 million revolver and $26.2 million in term debt.

This term debt has extended maturities with only one-third coming due by the end of 2016, another third due in the subsequent two years, and the final third not due until 2019.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the third quarter and full-year 2015.

The following outlook reflects our prudent approach to modeling the seasonal uptick that is typical in the second half of the year for customers in industries such as retail, healthcare, and education.

In addition, we are planning to ramp investments relating to our rapidly growing enterprise business, in particular implementation and support staff, as well as sales personnel and [in] marketing programs.

Given our strong performance in the second quarter, we are again raising guidance for the full year.

Specifically, we expect revenue in the range of $122.5 million to $124.5 million compared to a May 12, 2015 provided range of $120 million to $124 million.

GAAP net loss is expected to be in the range of $31.1 million to $33.1 million, or a loss of $0.62 to $0.66 per share compared to a May 12, 2015 provided range of a loss of $34.7 million to $37.7 million, or a loss of $0.69 to $0.75 per share.

Non-GAAP net loss is expected to be in the range of $21.5 million to $23.5 million, or a loss of $0.43 to $0.47 per share, compared to the May 12, 2015 provided range of a loss of $24.4 million to $27.4 million, or a loss of $0.49 to $0.54 per share.

For the third quarter, we expect revenue in the range of $30 million to $31 million.

GAAP net loss is expected to be in the range of $8.2 million to $9.2 million, or a loss of $0.16 to $0.18 per share.

Non-GAAP net loss is expected to be in the range of $6.1 million to $7.1 million, or a loss of $0.12 to $0.14 per share.

For modeling purposes, we would like to provide the following additional information.

For calculating EPS, we expect our shares to be 50.3 million for the current quarter and 50.1 million for the full year.

We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $80,000 for the year.

Our capital expenditures are expected to total approximately $7 million to $8 million for 2015 compared to the May 12, 2015 provided range of $8 million to $9 million.

In summary, we are very pleased with our second 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 2015 Needham Interconnect conference in New York on Wednesday, August 5; the Pacific Crest 17th Annual Global Technology Leadership Forum in Vail on Tuesday, August 11; and the Canaccord Genuity 31st Annual Growth conference in Boston on Thursday, August 13.

And now we would like to open the call for questions.

Operator, please go ahead.

Thank you.

(Operator Instructions)

David Hynes with Canaccord.

Hey, thanks a lot, guys.

So maybe just first, Barry, if you can help us think about the guidance?

So the guidance for the back half of this year implies kind of high-teens revenue growth.

You guys are coming off of kind of two record bookings quarters, so maybe just help us square up those comments and speak to maybe the level of conservatism in those kind of projections?

Sure, DJ.

We, as you just alluded to, our second half is indeed the seasonally stronger one, part of the year for us.

But we've taken what we consider to be a realistic outlook just on how much the seasonal uptick will take place and that we will enjoy after the summer.

If it turns out that we are being too conservative, we will, of course, be happy to revise the outlook in the next quarter.

Got it.

And then, Mike, maybe a little bit on the [proserv] business.

I know you have a new leader in place there, I guess, it's maybe about four months.

I realize it's a small part of your total revenue picture, but I think there could be some material implications on gross margin.

So maybe you could talk about -- an update on the changes that have been made in that organization, and then maybe you could touch on kind of potential implications on the numbers on the gross margin front?

Yes, happy to do so, David.

We brought a new leader in over our services organization.

Mike Crane joined us from Cisco a few months back, as you mentioned, and he has hit the ground running.

Part of the revenue performance in the quarter was actually driven by -- mainly by our enterprise business including our professional services business towards that enterprise deployment effort, of our enterprise customers, I should say.

So Mike's hit the ground running.

There's a lot of things that we are doing in and around our professional services offering.

I think the best evidence is coming in increased percentage of bookings that we see that involve professional services.

As we continue to move upstream into larger and larger enterprise opportunities, our deal size continues to increase quarter-to-quarter, and the larger enterprise customers, quite frankly, are looking for us to provide more consultative implementation services which we are beginning to do.

Got it.

Okay, that's helpful color.

Thanks, guys.

Thank you.

Michael Huang with Needham & Company.

Thanks very much, good afternoon, guys.

I apologize for the background noise here.

Couple questions for you, just to follow-up on that last point that you made, Mike, around ASPs.

If we're to look at the enterprise segment specifically, are you seeing increasing ASPs kind of across the enterprise segment, perhaps driven by higher average seat count, or is this just a -- was that a comment that it just reflects the fact that you are moving upmarket which, obviously, (technical difficulties)

Yes, great question, Mike, and I'm glad you asked it.

We are seeing increasing deal sizes, specifically, just within our enterprise deal flow.

And I think we talked about those in prior calls and quantified those average enterprise deal size, and that is specifically what I'm talking about.

It has nothing to do with the mix, this is specific to just our enterprise business.

And, again, it's increased seat counts for the most part with an ability for us to actually increase our price per seat, as well, within the enterprise market.

Great.

And are you comfortable sharing kind of with respect the range of -- the high end of the range of the enterprise opportunity that you are seeing?

Do you have some other peers out there that are starting see some interest in cloud opportunities that are up to 1,000 to 5,000 seats?

Are you seeing a significant uptick in those kind of opportunities, as well?

We certainly are seeing the ceiling be raised, if you will, in terms of the larger transactions that we are involved in.

As I alluded to on prior calls, the average annual recurring revenue deal size in enterprise is -- was $350,000 and annual occurring revenue, that was during all of 2014.

We've actually seen sequential increases in that deal size in Q1, as well as in Q2.

So we're just really, really pleased about kind of the opening up of the market, so to speak, above our sweet spot historically.

And I think it is just a great indication of the momentum that's occurring in our business.

Great, okay.

And then last question, so, obviously, you guys are a pure SaaS which means that you are going to be streaming out product innovation continuously.

So you called out the Freedom Release, is there anything about this that actually is more meaningful than other releases that you have brought out to market, or is there anything that is kind of special about this that, perhaps, could be a catalyst for any opportunities that you guys may be working on?

Thanks.

Yes, yes, thanks, Mike.

This is a game changer release for us.

This is leaps and bounds -- the Freedom Release is really leaps and bounds ahead of our prior product releases relative to the user experience, agent paths.

So if you think about modern user interface.

We internally like to use a lot of analogies, but, again, the idea here is that we've built a user interface that is so simply smart.

It is amazingly easy to use for agents, but very, very powerful and guides the agent through a customer interaction to help them solve problems and find answers very, very quickly and get context around the end consumer on the other end of the call, for example.

So this is revolutionary.

It's why we call it Freedom, and we do expect this to just extend our competitive advantage in the marketplace that we already have when it comes to usability of the Five9 solution.

Thanks very much, guys, appreciate it.

Thank you.

Sterling Auty with JPMorgan.

Hey, thanks.

It's actually Darren Jue on for Sterling.

Thanks for taking the question.

Maybe a question for Barry on gross margins.

I know you mentioned that the least-cost routing was part of the explanation for the out performance, as well as, the better usage revenue.

But I wonder if you could maybe give us a little bit more color on how much of a factor the least-cost routing was in the quarter?

It was a considerable driver.

It -- things were strong across the board, usage, subscription, PS, and in terms of the particular sequential improvement, the ranking would be first on the usage side, second on the PS, and, third, subscription.

Okay.

Maybe a separate question just on -- I know there's been a lot of conversation around enterprise, but perhaps you could just update us on how things are looking in terms of the SMB market?

Yes, very good question, Darren.

And, again, we do tend to focus on our enterprise business.

Again, it is becoming a majority of our business over time, it has become, it is actually making up roughly 62% of our revenue.

All that said, our SMB business continues to be a bedrock, a very, very solid business with attractive returns.

It is just that our enterprise market opportunity and growth opportunity is greater, as well as the incremental return on investment we see in enterprise is higher.

So it's not to discount the fact that we're doing very well in the SMB business, as well.

All right, thank you.

Thank you.

Nikolay Beliov with Bank of America.

Thank you for taking my questions.

I just wanted to clarify, the 62% enterprise was [that] for the second quarter?

The way we report it, it's for the last 12 months.

Okay, got it.

Last year you called out the healthcare vertical during the 3Q call as a headwind, and now in you're prepared remarks [nationally] is going to be a tailwind.

Just wanted to see what has changed here, and if you can also update us on the BPO vertical?

Let me ask Barry to fill in any blanks here, but when it comes to healthcare, I think in prior comments, Nikolay, we probably were talking about kind of the Q1 tailwind through healthcare, right.

It's really a Q4 and Q1 open enrollment season where we've seen -- not seen -- we do get a nice tailwind.

And the end of open enrollment is February 15, so we don't get any of that in the second quarter.

I think that was our point before.

When we look at kind of the go forward, and we look at the seasonal nature of the back half of the year, again, that's where we get a strong tailwind from certain industries like healthcare and others where Q4, especially, seems to be getting a nice tailwind.

And, Barry, a question for you.

If you can you comment on the retention rate, so like the trajectory there, and when the [orientation] is going to bottom out?

Yes, when looking at our retention rate year-over-year, the thing to keep firmly in mind is what we've just been talking about, which is the Affordable Care Act.

If we go back to the 2013, 2014 season, you'll recall that that period was characterized by repeated extensions of the sign-up deadline, with a final deadline only occurring on April 15, 2014.

In contrast, in the 2014, 2015 sign-up season it ended firmly February 15, and as a result, our dollar base retention rate declined year-over-year at the end of June.

If you take that into account, it's basically slightly up -- excuse me -- flat.

And with respect to the inflection point, it takes some time to reach it.

It is, in a way, reflective of what's happening in terms of our overall revenue.

We've got the faster growing enterprise business, we have got the growing but somewhat slower growing SMB business, and because it's over 40% of the total, it takes it time to show up in the total corporate number.

The same thing with the dollar base retention where, as you can imagine, the retention is below 100% on the SMB business, and above 100% on the enterprise.

And my last question is -- thank you -- and my last question is for Mike.

Mike, can you give us an update on the enterprise sales force build up?

Are you [carrying] according to plan, are you ahead or below, and how hard it is to find sales people?

Yes, great question.

So as we've said in the past, and we will continue to say, we're extending our sales capacity in enterprise at the rate of 30 to 40% year-over-year.

I think it's a competitive advantage of ours in that we are able to hire very, very, consistently proven enterprise sales talent that produce.

And, again, I think it's a competitive advantage we have given our sales leadership.

It's a borderline network effect that we have amongst our sales organization in that we bring on great people and they bring on people that they have worked with in the past in the contact center industry that have domain expertise and can do solution selling that's required in the enterprise market.

And that's, as I said, it is just a pretty significant competitive advantage that we continue to benefit from.

Thanks so much.

Thank you.

(Operator Instructions)

Brendan Barnicle with Pacific Crest Securities.

Thanks so much.

Barry, I wanted to just follow up on Nikolay's question on dollar base retention rates.

Can you remind us again of how you calculate that, and then kind of walk through what the puts and takes are that are causing the downward pressure?

Yes.

So the way we calculate it is that we take a 12-monthly average for the most recent 12 months, if we are calculating the current number, and for each of those 12 months we compare the retention rate for the customers that were, are now, roster a year ago, and what the revenue was then and what is now, and we take in the 12 monthly averages.

And with respect to the downward pressure, it is, as I just alluded to, Brendan, largely due to the ACA.

It's quite a strong impact and without that we would've been basically flat year-over-year.

So would that mean that we've now anniversaryed that ACA, because that was an issue last year, that as we go forward we should start to see that pick back up from these levels?

Yes.

That's a possibility.

We're not making a projection, though, at this stage, Brendan, because as we've alluded to in the past, it can be other factors.

If you go back one quarter, I believe it is, we did mention that we had a BPO that went out of business.

And these sort of inherent, unpredictable events make us reluctant to say exactly when we reach the inflection point.

What we do know, though, is that if you take into account the fact that we have an enterprise business that's more than 100%, and that eventually will come to constitute not just 62% of the revenue, but, say, 70% or 80%, it will clearly start going up.

We just are not able to say exactly what that timing is.

Great.

And then, Mike, last quarter when we asked you about competition you said you were winning about 65% of the engagements.

Is that still the right metric, have you seen any change around that?

Yes, good news there, Brendan.

We've actually seen it inch higher.

In this quarter, our win rates against our key cloud competitors was north of 70%, which, again, I think is a really good indication of competitive advantages and differentiators around our solution.

And they range from our end-to-end solution, our deeper integration with strategic CRM partners like Oracle and Salesforce, our superior implementation and support, as well as our reliability and uptime that is second to none.

And then just following up on your ASP commentary, if you take out those deals like the ACA and some of those sort of one-off type deals, if we look at the impact, or something like that, if we look at just your general enterprise deals, at the high end, how much larger would you say your high-end deals are, not overall ASPs, but those high-end ones and how big are those getting to now?

Yes, so we are seeing more and more deals get done for us between 500 and 1,000 seats.

We tend to look at -- our businesses is continually evolving.

If you look at our target market and you look at the North American enterprise market for contact centers, the good news is there something like 52% of the available seats between, in contact centers, that are between 50 and 500 seats.

But we're clearly seeing north of 500-seat deals more and more in every quarter.

So we're really pleased with that.

And, again, I just think you'll continue to see us move upstream in a more consistent fashion, as we have, I should say.

Great, thanks a lot guys.

Thanks, Brendan.

Raimo Lenschow with Barclays.

Hi, guys, this is Harry on for Raimo.

Thanks for taking the question.

A couple of quarters ago, you talked a little bit about your data center in Europe and kind of providing, as a strategic motivation, just providing a little bit more of a global footprint for your multi-national customers.

Can you just talk a little bit about your international customers and what you've seen over the past quarter or two, changes in demand, increased usage, whatever it may be?

Yes, great question, Harry.

So we did, as you know, put up our data center late last year in the UK.

We have made some significant strides.

We've now put on our first sales team, our feet on the street, so to speak, internationally, and have closed our first handful of deals over there and are in various stages of deployment on those new customer wins over there.

That said, we've also got existing customers that we've been working with to support local agents in Europe.

So all in all, this is, as we've said in the past, a pilot proven scale international go-to-market effort, but I'm really, really pleased with the progress we're making over there.

Great, thanks.

Thank you.

Thank you.

And at this time, I'll turn the conference back over to management for closing remarks.

All right, well, thank you, everyone.

We really appreciate you joining us on this earnings call.

As I've said earlier on this call, we're just very, very pleased with the results we're delivering quarter in and quarter out.

It's been nice to see our progress since our IPO of a little over a year ago.

And, again, I just appreciate you guys all joining us, and we will talk with you soon.

And that will conclude today's conference.

Again, thank you all for joining us.