Five9 Inc (FIVN) 2017 Q2 法說會逐字稿

Good day, and welcome to the Five9, Inc.

Q2 2017 Earnings Conference Call.

Today's call is being recorded.

And at this time, I would like to turn the conference over to Lisa Laukkanen with 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 Second Quarter 2017 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 affects 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 future-looking statements to be inaccurate that you should consider in evaluating Five9 and its prospects is included in the caption, Risk Factors, and elsewhere in Five9's filings with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call.

Management believes that non-GAAP financial 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 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 and is also available on the Investor Relations section of Five9's website.

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

Thank you, Lisa.

Welcome, everyone, to our second quarter 2017 earnings call.

I'm very pleased to report that our second quarter revenue exceeded our expectations, growing 23% to a record $47.7 million.

This revenue growth continues to be driven by our enterprise business, which delivered 39% growth in LTM Enterprise subscription revenue.

This is a key metric that reflects the growth in our enterprise business, which is the majority of our overall revenue mix.

Furthermore, we continued to deliver leverage in our business model with record adjusted EBITDA of $3 million in the second quarter, our 7th consecutive quarter of positive results on this metric.

The improvements to adjusted EBITDA continue to be driven by our Enterprise business, which enjoys excellent unit economics and is consistently increasing as a proportion of total revenue.

I'm also extremely pleased to report that we had our best quarter ever for enterprise bookings in Q2.

Our pipeline reached another all-time high as well.

Our exceptional bookings were driven by the massive push towards modernization of customer service and contact center technologies, the improved market landscape, the growth in our direct sales force, and leverage from our expanding ecosystem of partners.

This ecosystem of partners influenced more than 50% of our enterprise deal flow in the second quarter.

As a reminder, Five9 has deep partnerships with industry leaders in areas such as CRM with the likes of Salesforce, Oracle, Zendesk, and Microsoft.

WFO with the likes of Calabrio, Verint and CallMiner, and Unified Communications with Microsoft Skype for Business and Cisco.

Our channel program continues to grow nicely and is yielding results beyond our expectations.

For example, bookings for master agents and resellers represented more than 25% of our enterprise bookings in the second quarter.

Our rigorous channel partner onboarding program includes sales and product training, as well as implementation and Tier 1 support training.

In addition, we have several tools, including a partner portal for them to register opportunities, get valuable content, build marketing campaigns, and request our assistance.

The following metrics demonstrate our ongoing momentum in the enterprise market.

First, 39% growth in LTM Enterprise subscription revenue; second, enterprise revenue has grown to 71% of LTM revenue compared to 67% a year ago; and third, we estimate that our win rate against 2 key cloud competitors, again, averaged over 70% in the second quarter.

This ongoing success in our enterprise business continues to be driven by 6 key factors.

First, a massive market opportunity estimated at $24 billion in annual recurring revenue, and where cloud penetration is still only 10% to 15%.

Second, our end-to-end solution providing the industry's most robust omnichannel solution.

Third, our investments in growing our enterprise quota-bearing sales headcount plus strong traction in our channel expansion initiatives.

Fourth, our unique high-touch on-site implementation process performed by our professional services team, as well as our ongoing personalized Premium Support service, provided by our technical account management team.

In addition, Five9 has been consistently ranked well above our industry peers on metrics such as same day case closure percentage, NPS score, as well as skills and technical training according to benchmarks compiled by the Technology Services Industry Association.

Fifth, we continue to deliver best-in-class reliability, security, compliance, and scalability that meet the standards of large enterprises, including, for example, some of the leading financial services and health care companies.

We are extremely proud of our uptime performance, which average 99.993% over the last 12 months.

And sixth, our customer-first culture, which starts with our team of top-tier talent combined with a do-whatever-it-takes mentality and a rigorous focus on cross functional customer success KPIs.

Now I'd like to spend a few minutes talking about our latest product release.

Five9 recently announced our 2017 summer release for global enterprises providing a powerful cloud platform that enables digital transformation.

Today's global enterprise is aspired to engage with customers consistently, regardless of location or device.

However, legacy systems have hampered their transformation to today's digital world, leading to poor and inconsistent customer experience.

The Five9 summer release 2017 provides global enterprises, a complete omnichannel solution, with a holistic view of their customers' journey across all touch points.

Enterprises can easily engage with customers anywhere in the world, intelligently distributing interactions to the right agent, regardless of location.

This new release delivers on 3 key areas.

First, our new voice platform for globally distributed contact centers built on our carrier grade Class 5 softswitch, enables enterprises to extend contact center capabilities to all parts of the globe by providing in-region voice Points of Presence, also referred to as voice PoPs.

These PoPs run on the public cloud avoiding the cost of establishing data centers as we enter new countries.

We have deployed voice PoPs in Australia, Japan, China, and other locations around the world.

This allows enterprises to keep their calls in region ensuring high voice quality, low latency, and optimal cost.

This technology is designed to be fully cloud agnostic and includes support for a variety of public clouds, including Amazon AWS, Microsoft Azure, and Google.

In addition, Five9 is now fully localizable, available in languages like Japanese, Chinese, French, German, Spanish, and many others.

Second, our modern micro-services platform for large to very large enterprises, as we continue to replace legacy systems like Avaya, Cisco, and Genesys with our modern cloud technology.

This release changes the game by expanding our reach to very large global enterprises supporting many thousands of agents.

This platform is built on modular components, communicating via REST APIs.

This architecture meets today's needs of large enterprises for cloud resiliency, elasticity, scalability, and pace of innovation.

Third, this release further enhances our solution for end-to-end customer experience.

Five9 has led codevelopment initiatives with strategic CRM, UC, and WFO partners to deliver a seamlessly-integrated end-to-end cloud customer experience solution, designed for leading global enterprises.

As part of this, we have delivered 3 key game-changing integrations.

Salesforce Lightning experience with omnichannel integration.

Salesforce and Five9 share a common vision to modernize customer experience.

Both companies have a keen appreciation that superior customer care comes from having deep analytical insight and understanding of the entire customer journey across all points of engagement.

In fact, an omnichannel experience can only be delivered when CRM and contact center technologies operate together as a fully integrated solution.

Salesforce Lightning opens up a whole new set of integration possibilities, and Five9 is at the forefront of innovation on this new platform.

This means a uniquely-designed single desktop with seamless integration between Five9 and Salesforce, which empowers agents with valuable customer journey analytics, context, and history across all channels.

The next key integration is with Microsoft Skype for Business, UC.

Our latest integration with Skype allows agents to seamlessly connect to knowledge workers, that are outside the contact center directly from their CRM desktop such as Salesforce, Oracle, Zendesk, and Microsoft Dynamics.

We've also enhanced our WFO integrations with Verint and Calabrio.

In this latest release, we have jointly developed an end-to-end omnichannel WFO solution all in the cloud to facilitate operational efficiencies across all customer channels.

In addition, this latest release provides over 100 incremental features and enhancements designed to meet the day-to-day needs of our customers.

Five9 is executing on our promise envisioned to deliver an end-to-end customer engagement solution.

Our summer release 2017 allows us to serve large enterprises with distributed contact centers on a globally, scalable, multilanguage cloud platform to onboard thousands of agents worldwide with no infrastructure to deploy or manage, and the ability to scale up and down as needed.

Five9's summer release 2017 is an answer to today's enterprise that needs a path to digital transformation to engage with our customers on their terms.

I'm extremely proud of the entire Five9 team and our strategic partners for bringing it all together with 1 goal in mind, to deliver superior customer experiences on every interaction.

Now I'd like to share a few examples of key wins from the quarter.

The first example is a multibrand conglomerate with 650 concurrent contact center agents processing orders, providing shipping status, and servicing retailers as well as consumers.

They had been using a premise-based solution from Cisco, which was complex and time-consuming to perform, even basic moves, adds, and changes.

Through the RFP process, their decision was narrowed down to 2 cloud providers, and Five9 was selected.

A couple of key reasons we were selected include our user-friendly administration, as well as our robust omnichannel solution.

We estimate that this customer will generate approximately $1.2 million in annual recurring revenue to Five9.

The second example is a large gourmet food company that is using Five9 to power their inbound contact center serving their customers and prospects.

They were using a legacy Avaya premise system, which had become dated, and in particular, could not scale to handle the call volume during the peak season and which could not support remote agents using virtual desktops.

After a competitive process involving other cloud vendors, Five9 was selected for multiple reasons, including our leading-edge IVR, CRM integration, and Verint WFO.

We estimate this customer will generate approximately $900,000 in annual recurring revenue to Five9.

The next example is a Fortune 1000 apparel manufacturer.

This customer is using Five9 for its e-commerce customer service organization.

They were using a premise system that was expensive and required too many technical resources to maintain.

That premise solution was also reaching end-of-life, and the company decided, like many others, to move to the cloud.

One of the key reasons Five9 was selected was our jointly-developed omnichannel integration with Oracle CRM.

Another key reason was our Global Voice solution, as I mentioned earlier, which allows them to power their numerous contact centers around the world.

We estimate that this customer will generate approximately $600,000 in annual recurring revenue to Five9.

Now I'd like to share an example of our customer base continuing to expand their use of Five9.

After implementing Five9 for their 500 concurrent seats nearly 3 years ago, this customer is now in the process of adding our award-winning omnichannel with chat, web analytics, and visual IVR in order to provide the complete customer journey history to the agent.

This provides the agent with valuable insight to where the customer has been, whether on their website or in the IVR, and gives the agent insights into customer intentions prior to them even speaking to the customer.

This customer also added on the full workforce optimization suite powered by Calabrio.

We estimate that this customer will generate approximately $2.1 million in annual recurring revenue to Five9.

With respect to the market landscape, the Avaya bankruptcy filing continues to provide a tailwind for us.

Avaya has been the legacy solution that we replace most often, and they still have the largest market share amongst legacy players.

The increased uncertainty around Avaya's future is causing more and more enterprises to look at alternatives.

We are also encouraged by the growing pipeline from our recently added Avaya channel partners.

With respect to the 2 cloud competitors that were acquired, our win rates continue to increase against them as they are being absorbed and integrated into their new parent companies.

In closing, I am extremely pleased with our momentum in the enterprise market, which is demonstrated by our strong enterprise subscription revenue growth of 39% on an LTM basis.

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, Oracle, Zendesk, and Microsoft, 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 second quarter financials.

Thank you, Mike.

Revenue for the second quarter 2017 was $47.7 million, up 23% year-over-year.

This growth is all organic, and reflects the continued strong growth in our enterprise business, which now makes up 71% of our LTM revenue.

Our Commercial business, which represents the other 29% of LTM revenue, continued to deliver growth of around 10%.

Recurring revenue accounted for 94% of our revenue in the second quarter.

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

We enjoy a high retention rate on these recurring revenues.

The other 6% of our revenue in the second quarter was comprised of professional services fees, generated from assisting clients in implementing and optimizing the Five9 solution.

I'll now discuss gross margins and expenses.

A reconciliation from GAAP to non-GAAP results is included in the appendix of our investor presentation in the Investor Relations section of our website.

Adjusted gross margins were 62.3%, an increase of 40 basis points from the second quarter of 2016.

Given the nature of the gross margin improvement drivers that I will discuss in a moment, our year-over-year adjusted gross margin increases have not been large.

The increases though have been consistent, and have now increased year-over-year for 18 consecutive quarters.

I'll also remind you that we are making significant hires in our Professional Services team in response to our strong bookings growth.

Specifically, our U.S. Professional Services team at the end of June was 20% larger than a year ago.

This front-loaded investment positions us to have the trains down the road necessary to ensure our enterprise customers start on the Five9 platform is positive and differentiated.

In addition, we are diverting considerable PS resources to help ramp our channel partners.

We expect adjusted gross margins to be approximately flat sequentially in the third quarter, and to increase modestly in the fourth quarter.

Looking further ahead, we continue to expect to close the remaining 5.2 percentage point gap through the midpoint of our intermediate term model of 65% to 70% adjusted gross margins via 3 main drivers.

First, subscription margins continuing to increase as we continue to scale revenue on fixed and semi-fixed costs.

Second, Professional Services margins improving and turning positive as investments we are making in this area pay off.

Third, a gradual shift of 2 to 3 percentage points per year in the mix between the portion of recurring revenue, which comes from subscriptions, and the portion which comes from usage.

As we have mentioned before, this mix shift is being driven by 2 factors.

First, we are seeing more add-on subscription products being purchased as we move into larger accounts.

And second, a small percentage of new enterprise accounts decide to utilize their own carriers for usage.

Turning now to expenses, which I will again discuss in the order of remaining GAAP close to reach the intermediate-term 20% plus adjusted EBITDA model.

Non-GAAP G&A expenses in the second quarter of 2017 were $5.3 million or 11.1% of revenue, a decline of 80 basis points from the second quarter of 2016.

Non-GAAP G&A expenses as a percent of revenue have now declined year-over-year for 11 consecutive quarters.

The remaining gap to the midpoint of our intermediate-term model for non-GAAP G&A is 4.1 percentage points.

We plan to continue to close this remaining gap via operating leverage.

Non-GAAP R&D expenses in the second quarter of 2017 were $5.8 million or 12.1% of revenue, a decline of 100 basis points from the second quarter of 2016.

The remaining gap to the midpoint of our intermediate term model for non-GAAP R&D is now 2.1 percentage points.

We also plan to continue to close this remaining gap by operating leverage, although at a slower rate than G&A.

Non-GAAP sales and marketing expenses were $15.7 million or 32.8% of revenue, higher than the 31% recorded in the second quarter of 2016, driven primarily by commissions related to our all-time enterprise bookings record in the second quarter of 2017, and by the expenses associated with granting our channel program.

Looking ahead, for most quarters we plan to remain within our intermediate-term target for non-GAAP sales and marketing expenses, which remains at 28% to 32%.

We are extremely pleased with our 7th consecutive quarter of positive adjusted EBITDA.

We generated record adjusted EBITDA of $3 million in the second quarter of 2017 or 6.2% of revenue compared to an adjusted EBITDA of $2.3 million or 5.9% of revenue in the second quarter of 2016, despite the increased investments in professional services and the stepped-up enterprise go-to-market expenses.

This marks our 12th consecutive quarter of year-over-year adjusted EBITDA dollar increases, and the 15th consecutive quarter of year-over-year adjusted EBITDA margin expansions.

Looking ahead, we maintain a high conviction that we can steadily increase adjusted EBITDA margins into the 20s, with continued revenue growth and strong execution.

Non-GAAP operating income was $812,000, our 5th consecutive positive quarter on this measure.

The non-GAAP net loss was $74,000.

Finally, before turning to guidance, some balance sheet and cash flow highlights.

Capital spending in the second quarter of 2017 was $2 million, of which $1.4 million was financed via capital leases, and the remaining $600,000 was paid for in cash.

In the second quarter of 2017, we generated $84,000 in cash flow from operations, our 6th consecutive quarter of positive operating cash flow.

Note that the operating cash flow in the second quarter of 2017 was adversely impacted by the $1.7 million settlement payment recorded in the first quarter of 2017, regarding a successor liability from a 2013 acquisition.

In the second quarter of 2017, free cash outflow, defined as operating cash flow, debt capital spending paid for in cash, was $600,000 compared to an inflow of $1.9 million in the second quarter of 2016.

DSOs for the second quarter of 2017 were 28 days.

This DSO performance is an indication, not just of payment terms and their enforcement, but also the level of customer satisfaction.

Looking ahead, DSOs will increase gradually as a mix shift to enterprise from commercial continues.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the third quarter, and for the full year 2017.

For the third quarter of 2017, we expect revenue in the range of $47.5 million to $48.5 million.

GAAP net loss is expected to be in the range of $4.3 million to $5.3 million, or a loss of $0.08 to $0.10 per share.

Non-GAAP net loss is expected to be in the range of $0.2 million to $1.2 million or loss of $0.00 to $0.02 per share.

For 2017, we expect revenue to be in the range of $193.5 million to $195.5 million versus prior guidance of $190.6 million to $193.6 million.

GAAP net loss is expected to be in the range of $15.3 million to $17.3 million versus prior guidance of $16.8 million to $19.8 million or a loss of $0.28 to $0.32 per share versus prior guidance of $0.31 to $0.37 per share.

Non-GAAP net income or loss is expected to be in the range of positive $1.8 million to negative $0.2 million, versus prior guidance of positive $0.5 million to negative $2.5 million or positive $0.03 per share to $0.00 per share versus prior guidance of positive $0.01 per share to negative $0.05 per share.

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

For calculating EPS, we expect our shares to be $54.9 million for the third quarter as well as $54.7 million basic, and $59 million diluted for the full year 2017.

We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $50,000 for the third quarter and $200,000 for the year.

Our capital expenditures for the third quarter are expected to total approximately $3 million to $4 million.

For the full year, we expect capital expenditures to be between $10 million and $12 million.

In summary, we are very pleased with our second quarter performance.

We will continue to be focused on driving solid revenue growth, while progressing towards our intermediate-term and long-term adjusted EBITDA targets of 20% plus and 25% plus, respectively.

Our confidence in meeting these targets is based upon the persistence of the factors, which have driven year-over-year improvements up until now, a massive underpenetrated market, the strong unit economics of our enterprise business, which is a constantly increasing proportion of our total revenue, our high dollar-based retention rate, and the operating leverage on G&A and R&D.

Lastly, before we turn to your questions, I'd like to announce the upcoming presentations at the following conferences.

We will be presenting at the KeyBanc Global Technology Leadership Forum in Vail on August 8. The 20th Annual Oppenheimer Technology Internet and Communication Conference in Boston on August 9, and the 37th Annual Canaccord Genuity Growth Conference in Boston on August 10.

Additional details on these events will be made available via recent press release.

And now, we'd like to open the call for questions.

Operator, please go ahead.

(Operator Instructions) Our first question will come from David Hynes with Canaccord Genuity.

So Mike, you pretty regularly call out your win rate against, you core competitors, it's been strong and consistent.

It's been almost 1 year, I guess, since inContact and Interactive were acquired.

So I guess, I'm curious, can you give us your view of kind of what the acquirers have done with those assets?

I mean, does it feel like they're getting their act together at all?

I mean, their numbers will suggest that's not the case, but would love to get your take on what's happening?

Yes, good question, DJ.

Our win rates do continue to go up against both of those cloud competitors.

Mergers are difficult.

And they are in the midst of integrating and merging their organizations.

And it's almost always a distraction.

But I will tell you this.

There's been more disruption at 1 than there has at the other.

And again, but our win rates have actually gone up against both of them, which is, again, not surprising in my opinion based on what we expected to occur.

I think if you look at 1 in particular where you had a merger of very direct competitors with multiple platforms, there is a lot of internal conflict in terms of those multiple platforms, in terms of where they're going to put their investments from an R&D perspective going forward and how they're positioning those different solutions.

And I think in the other case, again, we've seen some marketing branding activity, but not much in the way of real product releases.

Okay.

And then on the partner side, where are we in the build-out of that ecosystem?

I know -- I think, you referenced Avaya's challenges and that's driven some resellers towards you guys.

I mean, are you still looking -- is the focus now to build and add partners?

Or is it really now about kind of identifying the best and enabling those folks?

I mean, what's your focus on how you think this evolves?

Yes, as I mentioned last call, last quarter, we've added a lot of Avaya VARs to our reseller channel.

We continue to add additional resellers.

But I think I said this last call as well.

Our strategy is going to go deep as opposed to continue to just go broad.

So the goal here is to work very closely with those Avaya VARs that are leaning in and are having the most success in the market with us and that's definitely the case.

I mean, our pipeline is growing very, very nicely with the Avaya VAR channel.

As I said it, we continue to add channel partners there.

But we're also going much, much deeper with the ones that we've signed over the last, say, 3 quarters.

At this time, we'll take a question from Sterling Auty with JPMorgan.

So given where the competitive dynamics have gotten, so just I'm kind of curious, what are you seeing in the market in terms of the pricing dynamics and the deals that you're winning?

Yes, Sterling, it's interesting.

We do see some of our competitors that aren't having quite the success we are, get aggressive on price.

The good news is most enterprises are not making a decision based on price.

When it comes to contact center infrastructure, this is mission-critical.

It's all about enhancing the customer experience for these enterprises.

And again, a 10% price differential is not going to be the deciding factor, but we are seeing our competitors are very direct cloud competitors, start to attempt to price a little more aggressively.

Got it.

And 1 follow-up in terms of -- it's all about going deep with the Avaya partners.

What kind of activity levels are you seeing through those partners at this point?

Are they sourcing the leads and getting deals closed?

Or is it still on the -- in the onboarding process?

Yes, we're definitely investing a lot to onboard these Avaya VARs, Sterling.

It involves everything from sales training to product training to implementation and support training, as I mentioned in my remarks.

All that said, these guys are in the market.

They've been in the market with the Avaya product set for a long time and they're definitely sourcing deals for us.

Our pipeline, as I mentioned, is increasing and is very, very sizable.

And as I also mentioned, the master agents and resellers made up more than 25% of our bookings, our enterprise bookings in the quarter and that's up from the last quarter and that was up from the prior quarter.

We'll now hear from Raimo Lenschow with Barclays capital.

This is Mohit Gogia on for Raimo.

I'm wondering if you can -- so you have talked about the operating leverage and the R&D and how that can help you reach your targets in terms of margins.

So can you discuss that against the backdrop of the product road map you have for the next few years?

And how you think about that trade-off and delivering on both fronts?

Yes, I'll start and have Barry chime in with any color you want to add, Barry.

But strategically, we are in a very good position in terms of the delivery that's coming out of our R&D organization.

And it's not about just adding bodies and expense to that R&D machine, it's about making sure the talent we have in our engineering organization is delivering new product, innovative product, rock solid product on a great cadence.

And they're doing that.

And this last summer release is great evidence for that.

We definitely see an opportunity to grow our R&D investment over in the future, but not as fast as revenue.

Therefore, providing some leverage.

Barry?

I think that covered it, Mike, I mean, we've had excellent leverage up until now when we went public.

R&D was 20% of revenue, it's down to 12%, steady progression.

But we have ample resources to continue the cadence of product deliveries that we've just been enjoying.

Okay.

And the second question I had was, so you have been talking about 10% growth in your SMB business over the last few quarters.

And I'm just wondering is that -- so if you think about that business long term and growing the enterprise mix, is there a sense of the growth rate in that segment that you have?

Or do you think that there is some tweaking that still can be done in terms of investments or more investments of scaling back investments versus the growth rate?

Yes, very good question.

So again, Commercial is now 29% of our LTM revenue.

We've seen about a 4% shift in favor of enterprise and away from commercial in terms of our revenue mix.

As we stated, growth is around 10%.

We think that's a pretty good number.

But at the same time, it is going to become less and less significant to the overall mix over time.

We'll now hear from Meta Marshall with Morgan Stanley.

Quick question.

I know you guys have talked about scaling your professional services organization, but have clearly invested a lot in it over the last year.

I just wanted to get a sense of are, we getting to the point where Professional Services kind of growth will be more in line with revenue growth?

Or is there still future scaling there?

And then the second question is just if we could get kind of an update on -- now that a significant portion of the revenue is enterprise, like, are you seeing sales cycles shorten or where are you kind of seeing the typical enterprise sales cycle?

Yes.

Sure, Meta.

So from a -- let me take the last 1 first.

From an enterprise sales cycle perspective, we continue to do deals that are much larger than we were doing, say, 3 years ago.

And our sales cycles, at our IPO were around 120 days plus or minus.

And now we're kind of in the 150 days plus or minus.

So again, the larger the deal the longer the sales cycle.

But again, we're still -- I think, we are not looking at protracted, elephant-hunting type of enterprise deals, which is great.

And I would say for the other question around PS expense growth relative to PS revenue growth, we do see PS margins as a good lever in the long run at the gross margin line in total.

But again, we're going to have, I think, quarters where we might invest more, and other quarters where we seem to get that leverage, but we expect to get leverage over the coming quarters from a PS perspective.

And if I could just add a few things to that, we are going to be working on both (inaudible).

In terms of the revenue, we have demonstrated success.

In terms of increasing rates hour, we're charging for more hours, increasing the proportion of ACD that comes from PS, from the implementation pushing on an open door to some extent.

To that in the upcoming quarters, many quarters, we'll also have additional revenue from training and optimization, things that we are particularly well positioned to deliver and which our customers very much appreciate, and even demand.

On the cost side, it's a matter of continuing the excellent leadership that we have in that area.

These things don't come overnight.

It's a matter of a number of singles and a number of home runs and those just have to take the time to work through.

One last comment, this business can be lumpy.

If you look at our Q2 of last year, with which we are comparing year-over-year, we had a 69% year-over-year increase in revenue making it a particularly tough compare this year.

So -- but normally, we will be expecting an upward trend in terms of growth rate of revenue, which was smaller this year for PS.

(Operator Instructions) We will now move to Michael Latimore with Northland Capital Markets.

On the -- just sort of the, you touched on sales, like, what about the deployment timelines kind of on average and then maybe for similar-sized deals of your deployment timelines stabilize, has been stable or shrunk with similar-sized deals?

Yes, Mike.

I'd say that, our deployment cycles remain about the same over the last 12 months to 18 months.

They're a little bit longer than what they were at the IPO very much like the sales cycle.

But again, we've moved up market and we're doing larger deals.

And again, those deployment cycles are going to be a little bit longer.

But we're still talking about, maybe a 30-day difference in terms of deployment cycle compared to where we were at the IPO.

And then it sounds like deal sizes continue to increase, I guess, that is occurring?

Mike, we do talk about deal size at the end of every year and we look forward to giving you guys the update at the end of the year.

Okay.

All right.

And then, you mentioned an upsell where the customer is buying omnichannel and I wanted the broader analytics around just kind of customer journey notion.

With regard to that sort of analytic customer journey context, are you seeing kind of -- sort of significantly increasing demand for that kind of feature?

Absolutely, Mike.

It's, as you know, a completely different world out there in terms of the digital and mobile consumer.

And our enterprise customers are really strategically focused on delivering a comprehensive omnichannel service offering.

And again, they've got -- our enterprise customers have to be able to interact with their clients, their customers on whatever channel that customer wants to interact on.

Again, whether it's chat, where it's e-mail, whether it's social media, whether it's messaging, whether it's web self-service, we have to be able to handle all those transactions, and we are, and we're helping our enterprise customers really make that digital transformation and it's pretty powerful stuff.

At this time, we'll take a question from Nikolay Beliov with Bank of America.

You guys talked about favorable market environment in terms of the M&A that has happened and also the struggle that Avaya is going through.

And LTM enterprise revenues have a pretty strong, have come down to 39% from 43%.

In light of the what's happening in the marketplace, why aren't you guys seeing acceleration in your enterprise business?

Yes, good question, Nikolay.

I think, the most important element of this is, we talk about bookings.

And I know we're not quantifying bookings, but we have set record bookings, all-time record for bookings.

And the way we look at the favorable market conditions are really how that translates into bookings.

And it is very much as expected.

Our win rates are going up.

Our bookings are reaching records just about every quarter over the past several quarters.

And if you look at that 43% in enterprise subscription LTM revenue a few quarters ago, we did have -- again, we've turned up 3 very, very large -- very large enterprise customers in Q3 of '16.

And that drove that 43% number on an LTM basis.

If you look at the long-haul here, the long-term from a modeling perspective here, we've said this for a long time, we're going to continue to grow our enterprise sales capacity, our quota-bearing sales capacity at 30% to 40% year-over-year.

That ought to drive bookings growth in and around that same 30% to 40% range assuming consistent sales productivity per rep, and that's what you should expect to see from enterprise subscription revenue growth in the long run.

So that 43% was a bit of an aberration to some extent, because we've been investing in 30% to 40% growth in sales capacity.

We just turned up a few very large enterprises all at the same time.

Got it.

And my second was around the 2017 summer release.

It sounds like some major enhancements there.

I guess, the first question here is, does the summer release significantly expand your total addressable market that you talked about with global enterprises?

And #2, do you need something -- do you need to do something incremental different to address this incremental market?

Yes, very good question, Nikolay, because as you did note, one of the big themes in this summer release is our global offering.

And this really is centered around the voice PoPs that we've now scattered around the world and we'll continue to add as we go into new countries.

And it's a huge huge advantage, and it does expand our addressable market.

As you know, most -- very, very large majority of our revenue today comes from North American clients.

And this allows us to go international at a faster pace, not only with our U.S.-based multinational clients, which are very important to us and this offering is really meant to help them, but also as we go into local markets doing business with local enterprises in those markets, it will also help that.

So yes, it expands our addressable market.

And the question -- second question about, there's something else incremental that we have to continue to add.

I will just say this, we have -- we believe the most complete end-to-end solution today in our space for both North American-based enterprises as well as international clients.

But at the same time, we're going to continue to invest aggressively in R&D and extend our lead.

We'll now move to Jeff Van Rhee with Craig-Hallum.

Just 2 quick ones from me.

If you could just circle back a second to the sales capacity, I know you've targeted the 30% to 40%.

From time-to-time, you've commented if you're running a little hot or cooler relative to that range, just thoughts on the hiring success thus far, any updates on the year?

And then secondly, if you could just expand a bit on usage growth both enterprise and SMB?

And any notable trends that vary at all from what you've seen over the last 6, 12 months, whether it be usage as well as gross margin on that usage?

Yes, happy to do that, Jeff.

So on the sales capacity, as I said, we continue to expand that quota-bearing sales capacity for enterprise at 30% to 40%.

We have had a lot of success this year.

I mean, part of the disruption that we see at a couple of the competitors that have been acquired is there are resumes on The Street that continue to be a good flow of resumes from those companies.

And we've been very selective in picking off kind of the cream of the crop.

So again, we've had very, very good success in hiring from the industry this year.

But we've been doing that for years and years, because this is a pretty mature industry with other players that we can also recruit from.

In terms of usage growth, Barry, you want to take that one?

Yes, sure.

So first of all, on the usage growth, Jeff, the business as we've said, quite often is growing meaningfully slower than the subscription business.

We quantified that by saying there is a mix shift of 2 to 3 percentage points per year away from usage to subscription.

And you can easily do the math to see what the numbers are approximately.

In terms of the gross margins, they remain very firm.

We've got an absolutely crack team on doing this.

And we provide a very valuable service to our subscribers in terms of the things like redundancies and voice quality, and so on.

So that is a bright spot.

And at this time, we have no further questions in the queue.

I'll turn it back over to management for any additional or closing remarks.

Well, thank you.

I just want to thank everyone for joining us on the call today.

I am just thrilled with the continuing momentum in our enterprise business.

This latest release that we've been talking about is a great differentiator for us and puts us even further ahead in this market.

As you guys know, we're going after a massive market opportunity.

So we're very, very well positioned to continue to gain share in this market.

Thanks, again, for joining us today.

And again, that does conclude today's conference call.

Thank you all for your participation.