Five9 Inc (FIVN) 2016 Q3 法說會逐字稿

Good day, and welcome to the Five9 third quarter 2016 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Tony Righetti of the Blueshirt Group. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Five9's third quarter 2016 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 the future financial performance of the Company, industry trends, company initiatives, and other future events. You are cautioned that such statements are simply predictions, should not be unduly relied upon by investors, and actual events or results may differ materially. And the Company undertakes no obligation to update the information in such statements.

These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of certain of the risk factors that could cause these forward-looking statements to be inaccurate 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 can enhance 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 a replacement for financial information reported under GAAP and could be different than the non-GAAP financial information provided by other companies in our industry. The full reconciliation of the GAAP to non-GAAP financial data can be found in the Company's press release issued earlier this afternoon. It is also available on the investor relations website of Five9.

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

Thank you, Tony. Welcome, everyone, to our third quarter earnings call.

Our third quarter results were once again outstanding. Our revenue grew 27% year over year, resulting in record revenue of $41 million. This revenue growth was driven primarily by the continued acceleration in our enterprise business, which delivered 43% growth in LTM enterprise subscription revenue. This is a key metric which we started reporting in the third quarter of 2015, when it was 35%. It has accelerated each quarter since then.

Furthermore, we continue to enjoy exceptional leverage in our business model, resulting in record adjusted EBITDA of $2.7 million. Hence, our IPO adjusted EBITDA margins have increased by more than 34 percentage points, to 6.7%. This trajectory gives us a high degree of confidence in attaining our intermediate-term goal of 20%-plus adjusted EBITDA margin.

Our results continue to be driven by strong enterprise gains, which are delivering high marginal profitability. We believe we are still in the early days of a massive push towards modernization of customer service and contact center technologies. Given our leadership position in this market and the strong momentum in our business, we are again raising 2016 guidance.

I'm also extremely pleased that we set a third quarter record for enterprise bookings and that the pipeline again reached a record new high. Our exceptional bookings were again driven by continued expansion of our direct sales force coupled with the increasing leverage we are getting from our expanding ecosystem of partners including CRM vendors, resellers, master agents, referral partners, systems integrators, VARs and ISVs. This expanding ecosystem of partners influenced more than half of our enterprise deal flow in Q3.

Our channel program continues to grow nicely, and we remain extremely pleased with this program, which is yielding significant results and is exceeding our expectations. We continue to invest in our direct sales force and our channel program, given that the enterprise contact center market is very large, underpenetrated, and represents a significant ongoing growth opportunity for Five9.

There are 15.8 million contact center agents around the world, representing an estimated TAM of $24 billion in annual recurring revenue, three-quarters of which are enterprise and where cloud penetration is still around 10%. Not only is there an ongoing opportunity in this massive market as penetration continues to increase, there is, we believe, also a perceptible increase in the rate of cloud adoption.

In addition, the legacy on-premise vendors continue to be stuck in transition. The following highlights demonstrate our accelerating momentum in this enterprise market -- first, 43% growth in LTM enterprise subscription revenue and continuing acceleration from 35% in the third quarter of last year. We believe that this is a key metric reflecting the payoff from our ongoing enterprise go-to-market investment. Second, enterprise revenue has grown to 68% of LTM revenue versus 63% a year ago. Third, we estimate that our win rate against two key cloud competitors once again averaged over 70% in the third quarter. Fourth, we continue to move upmarket as our average deal size continues to increase.

Now that I've shared with you some of the key metrics of our enterprise business, I'd like to remind you of some of the specific reasons why Five9 is being selected by enterprise customers for both new and expansion deals, starting with our key product and platform differentiators. The first is user experience. Our award-winning agent interface, built on HTML5, is an intuitive browser-based design providing easy visualization of customer profile, context and cross-channel history, providing agents with an interaction cockpit environment for delivering an excellent customer experience.

Second, our Omnichannel solution -- given the digital transformation, consumer power is on the rise. Mobile devices put all channels in the pocket of the consumer in an always-on and connected manner, with the ability to both engage and move between channels with the swipe of a finger.

Five9 Omnichannel enables consumers to seamlessly engage with all modern channels on a fully integrated basis -- voice, video, website, mobile, chat, email, click-to-call, callback, social and messaging. This not only enriches the experience with modern channels of engagement, like website video and WebRTC-based click-to-call, but also ensures that as consumers move from channel to channel, their context and history move with them.

Third, our deep CRM integrations with Salesforce, Oracle, Zendesk and Microsoft help our joint customers modernize their contact centers. The seamless combination of customer relationship data and detailed visibility and control of the interaction journey is critical for enterprises to relate to modern consumers.

Fourth, our web engagement and predictive proactive analytics -- today's consumers expect both reactive resolution as well as proactive care. Five9 web engagement enables businesses to see what visitors are doing live on their website, in a mobile application, or in interactions with their agent. It provides customer journey analytics and lifetime journey mapping with full insight across all channels and enables enterprises to treat online presence just as importantly as any other channel for both buying as well as consumer care use case.

Combined with our robust natural language processing, which can determine sentiment and reasons for contact, along with our next-best actions engine for real-time recommendations, enterprises are able to transform their customers' experience from reactive interactions to proactive engagements.

Fifth, our Freedom platform -- consumers are often left asking if businesses really know them. This is a result of many enterprises struggling to provide an integrated end-to-end customer view across siloed systems and applications. This leads to a lack of seamless context flow from system to system, primarily between CRM, UC PBX, WFO and contact center. The Five9 Freedom platform provides a modern microservices-based open enterprise architecture with over 300 rest APIs and powerful SDKs, enabling customers, partners and developers to deliver powerful solutions that bridge the context gap between their unique systems.

This same platform has enabled Five9 to provide deep out-of-the-box integration, with leading CRM, WFO, UC PBX and ISV partners, leveraging customer data across all systems and delivering to the modern-day consumer exactly what they expect -- a personalized experience delivered seamlessly across systems and channels.

Sixth, we offer guaranteed voice quality with our Agent Connect service and our call-by-call carrier optimization routing, all as a managed service from Five9.

Seventh, we offer industry-leading best-of-breed cloud WFO through integration with solutions from Calabrio, CallMiner and Verint.

Eighth, our mobile solution delivers customer engagement, integrating voice and digital channels with self-service capabilities, providing a personalized omnichannel experience.

And ninth, we continue to deliver best-in-class reliability, security, compliance and scalability that meet the needs of large enterprises, including some of the leading financial services and healthcare companies. We're extremely proud of our uptime performance, which averaged 99.99% over the last 12 months.

To summarize -- we provide robust enterprise contact center functionality, deeply integrated with the ecosystem; and game-changing innovation, all delivered on an open born-in-the-cloud platform, with best-in-class reliability that is driving more and more enterprises to select Five9 for their contact center needs.

I'm also pleased to announce that Five9 was once again named a leader in this year's Gartner Magic Quadrant for Contact Center as a Service North America, published on October 24th, in which we were once again positioned highest on ability to execute. In addition, we made the largest move to the right on completeness of vision.

Now, I'd like to share with you some highlights from some of our key third quarter enterprise wins and expansion. The first is a global manufacturer of wearable exercise and wellness devices that markets, sells and services its devices directly to consumers through retail distribution and to corporations.

Prior to using Five9, they were outsourcing customer support through BPOs using Avaya. And as they grew, they found themselves losing visibility, control and efficiency. They required a cloud solution with a flexibility and global reach that Five9 gives them for their customers across America, EMEA, and Asia Pacific region.

In addition to integrating to Salesforce CRM and Verint WFM, we are providing them with IVR, visual IVR, ACD with skills-based routing, and management of their global carrier network. We estimate that this customer will generate approximately $2 million in annual recurring revenue to Five9.

The next example I'd like to share with you is a well-known online television media content delivery company. They use a geographically distributed workforce to take inbound calls for all services including support, troubleshooting, ordering of new services, billing, and collections for their subscribers. This customer required a contact center solution that would provide integrated IVR for their billing system, but customers could make automatic payments without having to speak with an agent.

The customer was also replacing all of their agents' Windows PC with Google Chromebooks, requiring WebRTC for voice. They also required a contact center solution with a rich set of APIs to integrate to their homegrown CRM. We demonstrated our ability to meet all of these specific integration and compatibility requirements, proving that Five9 was the best solution to fulfill their list of requirements. We estimate this customer will generate approximately $700,000 in annual recurring revenue to Five9.

The next example is a state government, which has an initiative to standardize and modernize its contact center technologies for its agencies and department. After reviewing the leaders in the Gartner Magic Quadrant, the state identified Five9 as the optimal solution to modernize, simplify, and give it the needed flexibility to easily add agencies and departments as they continue on this path.

This customer is starting their rollout with full-service IVR for taxes and child support, ACD with skills-based routing for several departments, and outbound calling for collections purposes. We anticipate this customer will generate approximately $500,000 in annual recurring revenue and is expected to grow as we add more agencies and departments.

Now, I'd like to share an example of our customer base continuing to expand their use of Five9. In 2012, this loan servicing company that started using Five9 with one department has since expanded their use of Five9 for not only loan servicing but also loan origination and expanded into all three contact centers in North America. They're using our IVR to collect valuable information from the caller in order to most effectively route those calls to the optimal agent. All calls are recorded through our integration with CallMiner, and they're able to track calls, analyze them via speech analytics, ensuring agents are complying with loan servicing guidelines.

In addition to these wins and expansions, we've had a number of exciting announcements and initiatives with several key partners within our vibrant ecosystem.

For example, first, we took the stage with Salesforce and Dreamforce to show Five9 is the only CTI partner integrated to service Cloud Lightning. Second, also at Dreamforce, Deloitte launched its Patient Connect solution, which is a bundled offering of Salesforce plus Five9 for the healthcare market. Third, we announced our enhanced integration with Oracle Engagement Cloud, extending our close collaboration with Oracle. Fourth, we expanded our WFO portfolio, which now includes industry-leading solutions from Calabrio, CallMiner and Verint. Fifth, we delivered encouraged integrations with Microsoft Skype for Business, Microsoft Dynamics, and Zendesk.

In closing -- I'm extremely pleased with our continued execution, which is demonstrated by the acceleration of our enterprise subscription revenue and continued high marginal profitability. We believe that our powerful differentiated cloud contact center software, combined with our continuing execution, puts Five9 in a great position in a customer service market that is still in the early days of a massive shift to the cloud. This includes a shift to the cloud for both CRM solutions, like Salesforce and Oracle, as well as contact center solutions, like Five9. Our cloud contact center software is tightly integrated with these leading CRM solutions, and we are going to market together to help our joint customers modernize their contact centers.

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

Thank you, Mike.

Revenue for the third quarter of 2016 was $41 million, up 27% year over year. This growth is all organic and reflects a continued strong growth in our enterprise business, which now makes up 68% of our LTM revenue. Our commercial business, which represents the other 32% of LTM revenue, continued to deliver steady and consistent growth of around 10%.

Recurring revenue accounted for 96% of revenues in the third quarter of 2016. Recurring revenue is made up of monthly software subscriptions, which are based on the number of agent [fees] plus usage, which is based upon minutes. We enjoy a high retention rate on these recurring revenues. Our annual dollar-based retention rate in the third quarter of 2016 was 100%, up from 95% in the third quarter of 2015. The other 4% of our third quarter revenue was comprised of professional services fees generated from assisting clients in implementing and optimizing the Five9 solutions. A decline from the 6% in the second quarter of 2016 reflects the variability of this part of our revenue stream.

I will now discuss gross margins and expenses. A reconciliation from GAAP and n-GAAP results is included in the appendix of our investor presentation in the Investor Relations section of our website.

GAAP gross margins in the third quarter of 2016 were 56.6%, and adjusted gross margins were 61.5%. GAAP gross margins increased by 2.5 percentage points, and adjusted gross margins increased by 2.1 percentage points from the third quarter of 2015. On a sequential basis, gross margins declined marginally from the second quarter to the third quarter of 2016, mainly because of expedited hiring in professional services to support the accelerating growth of our enterprise business. We expect gross margins to remain at approximately this level in the fourth quarter.

Looking ahead -- we continue to expect to close the remaining six percentage-point gap to the midpoint of our intermediate-term model of 65% to 70% non-GAAP gross margins via two main drivers -- first, subscription margins continuing to increase as we continue to scale revenue on fixed and semi-fixed costs; and second, professional services margins continuing to improve and turning positive as investments we are making in this area pay off.

Before turning to expenses, I would like to again stress that while usage revenue generates gross margins below our subscription margins, usage gross margins have considerable bottom-line leverage, as this revenue comes as very minor incremental operating expenses.

Turning now to expenses, which I will discuss in the order of the remaining [GAAP to close], to reach the intermediate-term 20%-plus adjusted EBITDA model -- GAAP G&A expenses in the third quarter of 2016 were $6.1 million or 15% of revenue, and non-GAAP G&A expenses were $4.9 million or 12.1% of revenue. Both GAAP and non-GAAP G&A expenses declined by approximately four percentage points from the third quarter of 2015. The remaining GAAP to a midpoint of our intermediate-term model for non-GAAP G&A is now 5.1 percentage points.

GAAP R&D expenses in the third quarter of 2016 were $6 million or 14.7% of revenue, and non-GAAP R&D expenses were $5.3 million or 12.9% of revenue. Both GAAP and non-GAAP R&D expenses declined by a little over two percentage points from the third quarter of 2015. The remaining GAAP to the midpoint of our intermediate term model for non-GAAP R&D is now 2.9 percentage points.

GAAP sales and marketing expenses in the third quarter of 2016 were $12.9 million or 31.5% of revenue, and non-GAAP sales and marketing expenses were $12.2 million or 29.9% of revenue. As a reminder, we continue to invest in our enterprise go-to-market efforts, including sales capacity growth of 30% to 40% and investments in new channels, which together are driving our impressive growth in enterprise subscription revenue. In fact, there will be a propensity in the near term to reach the high end of our hiring range, as we believe industry consolidation has created opportunities for such higher rates.

Looking ahead -- we plan to remain within our intermediate-term targets for non-GAAP sales and marketing expenses, which remains at 28% to 32%. We expect our operating expenses as a percent of revenue continue to decline with our intermediate-term targets as we continue to grow and experience increased operating leverage.

We're extremely pleased with our fourth consecutive quarter of positive adjusted EBITDA. We generated positive adjusted EBITDA of $2.7 million in the third quarter of 2016, or 6.7% of revenue; compared to an adjusted EBITDA loss of $1.1 million or 3.4% of revenue in the third quarter of 2015.

As Mike mentioned, the improvement continues to be driven by strong enterprise gains, which deliver high marginal profitability. Specifically, in the third quarter of 2016, LTM marginal profitability was 54%; measured by the percentage of revenue growth, had dropped to the adjusted EBITDA line. GAAP operating loss in the third quarter of 2016 was $1.9 million, while non-GAAP operating income was $0.7 million, a second consecutive positive quarter on this measure.

These are significant improvements from the $4.9 million GAAP operating loss and the $2.8 million non-GAAP operating loss in the third quarter of 2015. GAAP net loss for the third quarter of 2016 was $3.9 million or $0.07 per share, compared to a GAAP net loss of $6 million or $0.12 per share for the third quarter of 2015.

Our non-GAAP net loss for the third quarter of 2016 was $173,000, which rounds to $0.00 per share; compared to a non-GAAP net loss of $3.9 million or $0.08 per share for the third quarter of 2015.

Finally, before turning to guidance, some balance sheet and cash flow highlights -- our DSO performance remains strong, and DSOs for the third quarter of 2016 were 27 days, compared to 24 days in the third quarter of 2015.

In the third quarter of 2016, which generated $1.7 million in cash flow from operations, markedly improved from the $3.2 million operating cash outflow in the third quarter of 2015. This is our third consecutive quarter of operating cash flow, reflecting our strong marginal profitability and a working capital efficiency driven by our relatively low DSOs. Year to date, operating cash flow was $4 million, an improvement of $16.9 million over the same period last year.

Capital spending in the third quarter of 2016 was $2.5 million, of which $2.2 million was financed by capital leases, and the remaining $317,000 was paid for in cash. Free cash flow, defined as operating cash flow in the capital spending paid for in cash, was $1.3 million for the third quarter of 2016, compared to an outflow of $3.4 million in the third quarter of 2015. Year to date, free cash flow was $3 million, an improvement of $16.6 million from the same period last year.

Turning now to guidance -- for the fourth quarter of 2016, we expect revenue in the range of $41.3 million to $42.3 million. GAAP net loss is expected to be in the range of $3.5 million to $4.5 million, or a loss of $0.07 to $0.09 per share. Non-GAAP net loss is expected to be in the range of $0.8 million to $1.8 million, or a loss of $0.02 to $0.03 per share.

For 2016, we expect revenue to be in the range of $159.2 million to $160.2 million, versus prior guidance of $155.8 million to $157.8 million. GAAP net loss is expected to be in the range of $15.8 million to $16.8 million, including the $1 million write-off of unamortized fees and discounts as well as a prepayment penalty from the termination of our prior-term debt facility; versus prior guidance of $17.8 million and $19.8 million, or a loss of $0.30 to $0.32 per share; versus our prior guidance, $0.34 to $0.38 per share. Non-GAAP net loss is expected to be in the range of $4.5 million to $5.5 million, versus prior guidance of $6.5 million $8.5 million or a loss of $0.09 to $0.11 per share; versus prior guidance of $0.12 to $0.16 per share.

For modeling purposes, we'd like to provide the following additional information. For calculating EPS -- we expect our shares to be $53 million for the fourth quarter and $52.3 million for the full year. We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $35,000 for the fourth quarter and $103,000 for the year.

Our capital expenditures for the fourth quarter are expected to total approximately $2.2 million to $3.2 million. For the full year, we expect capital expenditures to total $8.5 million to $9.5 million, versus prior guidance of $9 million to $10 million.

In summary -- we are very pleased with our third quarter. We will continue to be focused on driving solid revenue growth and driving towards our intermediate-term model of 20%-plus adjusted EBITDA.

Lastly, before turning to your questions, I would like to remind you of our first Analyst Day in New York on Tuesday, November 15th. I would also like to remind you of our upcoming conference participation. We will be attending the second annual ROTH Technology Corporate Access Day in New York on November 16th, the sixth annual Needham SaaS Conference in San Francisco on November 17th, and presenting at the Barclays Global Technology Media and Telecommunications Conference in San Francisco in December.

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

(Operator Instructions) David Hynes, Canaccord.

Mike, wanted to ask you about the partner ecosystem. Clearly, the CRM guys have always been good partners of yours. But the effort with resellers, master agents that size, I guess, is a newer development. Maybe just talk about kind of where you're seeing the best traction with those folks, maybe any way to kind of quantify how they're contributing in the mix or the pipeline build? Just any additional color with those efforts would be helpful.

Yes, happy to, DJ.

As you said, the CRM partners continue to do more and more for us in the marketplace, which is great. We've talked about a little bit on the prepared remarks, happy to touch on that later.

But in terms of the reseller and master agent channel, we continue to expand that. I'm really, really pleased with what I'm seeing there. Wendell and his team continue to sign more partners, and the pipeline is growing at a very, very healthy clip. So we're just extremely pleased with the traction there.

And I'll remind everybody that the true reseller business portion of that is kind of in addition to what we're doing with our direct sales capacity growth, which is about 30% to 40% year over year for the past several quarters. And we expect that to continue.

Yes. Okay.

And then, maybe one for Barry. Barry, just round numbers here -- we got two-thirds of the business growing 40%, you got a third of the business growing 10%. I'm not a math guy, but that's a lot faster than kind of what Q4 guidance implies, at 17% growth. So help us reconcile that.

And then, I guess, would you care to give kind of a preliminary view on 2017 just to help kind of assuage any fears that there may be a deceleration on the horizon, as the guidance implies?

Yes, fair enough.

With respect first to the fourth quarter -- this is our seasonally strong quarter, DJ, as you know. And we take a conservative, prudent stance with respect to that. I'd just remind you that last year, we in each of the quarters slowly increased our guidance for the quarter. And by the fourth quarter, we were up, reporting higher by two percentage points. And we ended up -- versus the prior year. And we ended up projecting 22%, and we ended up at 25% for the year. So it's just a reflection of our consistent, prudent approach.

With respect to 2017, of course, we've looked at the analyst consensus out there. And while we're not giving formal guidance for 2017 until we report the fourth quarter, we can provide some high-level commentary.

First, revenue -- we're comfortable with the current street projections. And with respect to the seasonality pattern, I need to remind you that typically, as we've just been talking about, the sequential growth is stronger in the second half, and fourth quarter in particular. And Q2 typically tends to be relatively flat.

And second, with respect to the non-GAAP net income -- we're comfortable with where the street is in terms of the fourth quarter of next year, which shows us reaching positive non-GAAP net income in that quarter. However, we currently believe, for the first three quarters consensus is slightly aggressive. Because we expect our costs and expenses to increase progressively during the year, and with some frontend loading, due to the FICA reset that we always have and opportunistic hiring continuing that is taking place while the industry consolidates. And just again, as a reminder, our philosophy around guidance and future performance is to be conservative.

Got it. Okay. That's great color. Thanks, guys, I'll pass the line.

Scott Berg, Needham & Company.

This is actually Peter Levine in for Scott.

I know in prior calls you've highlighted ARPU or, I guess, revenue per seat. Can you provide any updates on where that number is today, how it's been trending -- I guess, your expectations for the next 12 to 18 months? Only ask because I'm trying to better quantify the dynamic surrounding revenue per seat [long return] as you sell more modules upmarket in relation to how you price on the enterprise level.

Happy to comment on that.

As we've said in the past, revenue per seat in total across our entire customer base has been around $200 per seat, if slightly above that now, and continues to take a slow rise, especially in our enterprise business, which is becoming, as you know, the bulk of our business at 68% of our LTM revenue.

So we're very, very pleased. Again, it reflects competitive advantage and our ability to hold the line and not discount in the market, as well as our ability to sell more products to those enterprise customers. And that trend is definitely a nice tailwind for us.

And what's the balance between growth and investments? When the time comes, when you cross that threshold, what do you spend those incremental dollars on? Or do you let it flow to the bottom line (inaudible) margins?

Yes. We're fortunate in some respects, Peter, because unlike some companies that truly have to trade off growth for profitability, or visa-versa, we've been able to have our cake and eat it to. And part of this is we've got an enterprise business which has an extremely attractive marginal ROI. We talk about customer value to cost to acquire LTV at cap ratios. And for our enterprise, it's about a six-to-one over an assumed five-year period. And that is -- if we ran that to the true life of an enterprise customer, which, in theory, is in perpetuity, this is a very, very high ROI business.

So we're continuing to invest in sales capacity and channel expansion for our enterprise business. That's driving -- what you've seen is an acceleration on the top line of our business overall from 20% to about 27% over the past several quarters in total. But our enterprise subscription revenue has also accelerated from 35% growth -- again on an LTM basis, 35% -- all the way to 43%. So we've been able to invest to drive that accelerating growth. But it's also driving our improved profitability. And you've seen our EBITDA margins since IPO go up 34 percentage points from approximately negative 28% to where we are today, at 6.7%.

Great, I appreciate it. Thank you.

Sterling Auty, JPMorgan.

Let's start with -- so with the acquisitions in your space, lot of times you'll seek disruption and actually opportunities to step in and win incremental business as integration and uncertainty is happening. Are you seeing any of that opportunity given the two deals in your space?

Yes, Sterling. The short answer is yes.

We've seen two of our very, very direct cloud competitors get acquired in the last couple of quarters. It is safe to say that that creates a very good situation for us. There is an uncertainty that goes with those combinations or mergers of those competitors, excuse me. And that helps us competitively against those competitors.

I'll also add that we continue to see a nice inflow of resumes from the industry. It's not atypical, when companies merge, that they typically will lose people, lose some partners, and potentially lose some customers. And we feel like we're seeing the beginnings of the benefits in all those areas.

Great.

And then, now that we're at this point in the evolution in the enterprise business, can you give us even just a qualitative sense of -- okay, with bigger mix of enterprise, which probably has higher seat counts, but perhaps volume pricing, so maybe lower revenue per seat -- but yet, you've got increased number of products that you can sell per seat -- how have these dynamics impacted your kind of average revenue per seat versus, let's say, a year ago? And how should we think about that trend moving forward?

Yes. So Sterling, first of all, let me just say that you would imagine that as seat counts go up into these larger deals that volume discounts would kick in. It's actually not the case in our market. We are able to get an increasing amount of subscription revenue, if you will, per seat from enterprise customers. Again, part of it's due to additional products. But even our base product is holding very, very steady in terms of pricing.

So again, the mix shift is playing in our favor in that regard. And again, revenue per seat isn't that different in SMB and enterprise. So it's not a major shift that we'll see from a mix shift standpoint occurring over time. But we have seen a nice, gradual increase in revenue per seat across our customer base.

And then, last question is you talked about the investments especially frontloaded for next year, and thank you for the insight. But maybe can you help us with the framework that you use in terms of the pace and the timing of when you're layering on sales capacity? Are you looking for your existing sales or go-to-market force to hit a certain capacity -- or, I'm sorry, productivity level? Like 70% on quota, and then you're adding on top of it? Or what is that framework that you use, so we have a better sense of what we might expect moving forward?

Yes. The insight that I can give you is the following, Sterling. We're pretty consistent on a quarter-in and quarter-out basis to expand that enterprise sales capacity at 30% to 40% year over year. Now, again, it does depend on when in the quarter we hire folks.

We also tend to hire in batches. And sometimes those batches come in at the beginning of the quarter, sometimes they come in at the end of the quarter. It's just a lot easier from a training perspective. That's one of the rationales. But, quite frankly, it's not being triggered by sales productivity metrics. We've had very, very consistent sales productivity metrics over time, as I've mentioned in the past. And it's really just more of a timing framework than anything else. And we have continually kept the pedal to the metal in growing that team at 30% to 40% year over year, in terms of enterprise quota-bearing reps. And we'll continue to do so, again as long as sales productivity continues to be healthy.

Got it, thank you.

(Operator Instructions) Nikolay Beliov, Bank of America.

Wanted to ask you about the international strategy. You mentioned a nice win with a global account. What does that entail from infrastructure point of view and sales presence internationally?

As I've said in the past, we have started the initial rollout of quota-bearing sales teams in both Europe and Latin America. Those investments are starting to pay off extremely well in terms of our bookings, this quarter's in particular.

In terms of infrastructure, we have datacenters abroad. We actually -- in Europe, we have a primary and backup facility in Europe, as well as what we do here in North America. And as we expand our global footprint in the future, we will be rolling out regionalized and global voice capabilities that allow us to keep calls within region. And that's a really exciting technical development for us.

And Barry, a question for you -- when you look at your new bookings, what's roughly the split between upsell versus new business, and how that has trended over time?

In terms of -- so essentially, what you're talking about is the split between new bookings from the direct sales and installed base bookings. And frankly, we're doing pretty well. I'm looking here at the numbers, and we're doing pretty well on both counts. In fact, installed base this last quarter was exceptionally good. But in general, the trend is that the growth is somewhat faster on the -- well, no, it's not just generally, it's typically always is faster on the net new, on the direct field sales.

Got it.

And, Mike, last question from me on -- Dreamforce is all about artificial intelligence; Salesforce putting AI in all their products. How is it affecting your product plans and how you've synched up with Salesforce there?

Yes. You're right on, Nikolay. Salesforce, Dreamforce was -- one of the major themes was Einstein, their artificial intelligence offering. And it's so, so complementary to what we're doing. We took the stage a few times with Salesforce Service Cloud folks. We also -- as I mentioned, Deloitte took the stage and talked about their Patient Connect, which is our product plus Salesforce running together.

When it comes to artificial intelligence, you may recall we have a natural language processing engine, an artificial intelligence element of what we do. And we're actually very, very tightly integrated with Salesforce Service Cloud. In fact, we believe we're the only CTI partner that is integrated to Service Cloud Lightning, which is their newest platform. And we're actually leveraging our natural language processing in that integration to complement what they're doing with Einstein.

So our visions are very, very aligned. Our product teams are working with the Salesforce product teams, not to mention other key partners' product teams. And I'm just really thrilled. The fact is we're way out ahead of the competition in this regard, and what's why we took the stage with Salesforce and Dreamforce.

Got it, thank you.

Mike Latimore, Northland Capital Markets.

Congratulations on the quarter there.

In terms of the -- just talk a little bit about the sales cycle, obviously getting into bigger deals? How is the sales cycle playing out maybe across the business? And then, what kind of influence does the channel have on that as well?

Yes, Mike, happy to comment on that.

So the sales cycle -- it has expanded by about 30 days on average. So this is over the last couple of years. So a couple of years ago, when we went public, we talked about sales cycles that were 90 to 120 days, and now we're talking about 120 to 150 days. We're still not in a situation where we're doing what I call elephant hunting from a sales perspective.

While these are very large enterprise wins that we're having, they're also fragmented decisions. So we're not locking into these large Fortune 500 enterprises and trying to win an enterprise-wide decision at first. This is a land-and-expand strategy. We'll go into a very, very large organization, like US Bank or McKesson or others. And we'll do business first with one business unit, with one contact center; prove ourselves, and then expand within that enterprise. And I've mentioned this in the past.

Our land-and-expand has been very successful. We actually take our top 10 customers, and this is self-selecting. But we've looked at the compound annual growth rate in monthly recurring revenue for those top 10 accounts. Some of them have been with us for five or six years, and we look at a CAGR on that. Some of them have joined us more recently. And our average across those top 10 customers in terms of CAGR in revenue growth is somewhere around 150% compound annual growth rate.

And that just gives you a sense for the opportunity within these large enterprises. But it also, hopefully, helps people understand that the sales cycles -- that's why they're only 120 to 150 days. And it gives us a nice, diversified sales pipeline and deal flow every single quarter.

Great. And the channel? Does that help or expand the sales cycle, or no different?

It's probably too early to tell at this point. I would say the channel is bringing us into similar-size deals, if not maybe a little bit larger deals, than what we're doing with our direct team. But it's really not that different. It's not like they're going after the bigger deals and we're going after medium-size deals. They're pretty similar in size. And in some respects, that channel is walking us in as the preferred vendor.

So we've seen some sales cycles that are very, very short, with the leverage and the trust that that channel partner has within these enterprises.

Got it.

And just on the professional services side of things -- as you get more enterprise business, and that sort of builds over time, what percent of revenue do you think that's doing more of a maybe normalized [pace]?

Yes. So the PS revenue is on an upward trend, we believe strongly. But it's going to take a period measured in many quarters, or even years, to reach a sort of plateau, which will be probably in the high single digits -- maybe in the low double digits, but not more than that.

Great. Thanks a lot.

(Operator Instructions) Jeff Van Rhee, Craig-Hallum.

Congrats, guys. Real nice quarter.

Couple questions -- maybe just start with the guide. I guess, not so much the guide as much as just a commentary on 2017. Specifically on the non-GAAP net income for Qs 1 to 3, you talked about costs going up and frontend loading of the expenses beyond FICA and some other things. How much of that -- you talked about a little more aggression on the sales hiring front -- how much of the EPS variance in those Qs 1 to 3, the street versus where you think you're going to end up, is related to that frontend loading of sales? Or would you point strongly in some other direction? Just trying to get a sense of the aggression on the cost side earlier in the year.

Yes, Jeff, I'll start and let Barry kind of fill in the blanks.

I think these were meant to be very high-level comments on 2017. As you know, we're not giving guidance for 2017, so I want to be careful what I say. These were much more philosophical in nature.

And again, part of this is we do have a seasonal pattern to our revenue, as you know. Right? We tend to have lower sequential growth in Q1 and very flat sequential top line in Q2. And then, we typically have nice, healthy sequential growth in Q3 and Q4.

But our expenses tend to grow in a straight line. We are going to also -- in addition to that straight line, there is going to be some front loading, which is really just us opportunistically hiring not just salespeople but some other talent from the two competitors of ours that just got acquired.

Okay, that's great.

And then, just, if you would, on the bookings -- just to clarify, I think you said a new record on the bookings front. Was that overall, or was that for any Q3?

That was the strongest Q3, record bookings for Q3. And we're just, again, extremely pleased with the year-over-year results that we're showing in terms of bookings. And again, we continued to see the payoff in that growth in sales capacity plus the channel investments that we've been making. So extremely pleased with the Q3 bookings.

Got it.

And then, just two other brief ones for me -- the pipeline coverage -- as you look at the forward 12, is pipeline coverage at record levels? And then, just last one, and I'll let somebody else jump on -- you commented on perceptible increase in cloud momentum. And, just maybe a few more data points, what really drove that home for you to include that in the script? Thanks.

Yes. Happy to.

Yes, the pipeline is at an all-time record, as it has been for the past several quarters. But again, it keeps increasing and keeps reaching new records.

In terms of cloud adoption and momentum, we've got a number of vectors that are influencing cloud adoption in our space. We've got legacy players that continue to struggle, like Avaya; and other legacy competitors that really aren't paying attention to their competitive product in our space. And you couple that with all the momentum from the CRM partners of ours, like Salesforce and Oracle and their service cloud offerings -- as they go in and refresh, if you will, legacy CRM for service -- whether it's Siebel or Vantive or Clarify -- the CRM component is being modernized. And they're bringing us in, and we're modernizing the contact center infrastructure piece by replacing legacy Avaya, Genesys and Cisco.

So there's a few vectors that are driving this cloud adoption and creating a nice tailwind for us. And again, this is a multiyear cycle. We're only 10% cloud. Today, by our estimation in the enterprise portion of this market, it is 15.8 million agents strong worldwide. And we just feel like we're in the very, very early stages of this massive shift to the cloud.

Okay. Sounds good. Thanks for taking my questions.

You got it, thanks.

And at this time, we have no further questions. I'd like to turn the conference back over to management for any additional or closing remarks.

Okay.

Well, thanks, everyone, for joining the call today. We look forward to seeing many of you at our upcoming Analyst Day in New York on November 15th, where we'll be able to give you guys a chance to hear from additional key members of our team, our management team, and get further insight into what's driving our success.

So thanks again for joining us.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.