Five9 Inc (FIVN) 2018 Q3 法說會逐字稿

Good day, and welcome to the Five9 Inc.

Third Quarter 2018 Earnings Conference Call.

Today's conference is being recorded.

At this time, would like to turn the conference over to Mr. Lisa Laukkanen.

Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone, thank you for joining us on today's conference call to discuss Five9's Third Quarter 2018 Results.

Today's call is being hosted by Rowan Trollope, CEO; Dan Burkland, President; 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 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 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 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 from the non-GAAP 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, Rowan Trollope.

Thanks, Lisa.

Q3 was another outstanding quarter, which our results significantly exceeded our expectations on both the top and bottom lines.

I was blown away by the execution from the entire team, as we not only executed well but accelerated our growth rate.

The performance this quarter continues to reinforce Five9's position as a leader in our market.

In addition, we stepped up investment in our strategic priorities and core technology while advancing our AI initiatives and building our talent bench.

Before diving into some of our activities in the third quarter, let me provide some financial highlights.

Revenue was a record $65.3 million, and the year-over-year growth rate accelerated to 30%, driven primarily by our Enterprise business.

Enterprise subscription revenue, which is the fastest-growing and most profitable part of our business, continued its multiyear performance of growing in the 30s, posting growth of 37% on an LTM basis under 606 but 39% on a more comparable basis from the 605.

Adjusted EBITDA was a record $12.8 million, representing a 19.6% margin, up 3.8 percentage points sequentially, demonstrating the considerable leverage in our business model.

So given this ongoing momentum, we're raising 2018 guidance for both the top and bottom lines.

Now I'll move on to some of our accomplishments and activities since the last time we reported.

As many of you know, Five9 is a born-in-the-cloud SaaS company.

We have always been obsessed with helping businesses deliver a phenomenal customer experience through the contact center.

And today, we're doing that by creating the world's best self-learning intelligent contact center delivered through the cloud and powered by artificial intelligence.

Today, our platform serves customers of all shapes and sizes, so no 2 customers are the same.

We've achieved that by continuously and iteratively honing and refining those capabilities guided by our customers' needs.

And that is only possible because we deliver a true multitenant cloud platform.

In the last quarter alone, we delivered over 50 new features and capabilities, and we did all of that without the need for customers to reinstall or upgrade, and importantly, without any impact to service levels, maintaining Five9's industry-leading reliability.

So for example, in September, at Dreamforce 2018, we announced a new set of capabilities going live on our platform that were targeted at deepening and strengthening our partnership with Salesforce.

It was awesome to visit our overflowing booth where our team, frankly, did an amazing job and generated a record number of leads.

At the conference, we were also recognized by Salesforce as one of the only trusted fast start CTI partners, enabling frictionless adoption of lightning for the contact center.

Now after Dreamforce, we attended Google's Next Conference in London where we presented to a packed house, showing how Five9 and Google will bring artificial intelligence to our customers.

Now the biggest investments for contact centers today are their people.

And we believe AI will play a critical role in making those people more productive, more engaged and more efficient by automating the routine tasks that they do every single day.

And we've been working together with Google on pilots with our key customers, and we're already starting to see very, very encouraging initial results.

So underscoring and validating all of this progress, I am pleased to announce that we were named a leader in the first ever Forrester wave for the Cloud Contact Center and acknowledged as having one of the largest market presences in the industry.

Also, for the fourth consecutive year, we were recognized as a leader in the Gartner Magic Quadrant for Contact Center as a Service.

Both of these recognitions are external validation that Five9 is a trusted partner to enterprises, delivering a secure, reliable, scalable and innovative platform with a compelling vision for the future.

Now also this quarter, I'm pleased to report that we have added new leadership in a number of areas, including our new CMO, Ryan Cam, a longtime salesforce and app dynamics creative and digital marketing leader.

I am confident that Ryan is going to help us accelerate to refine our message to the market, while further enhancing our demand gen initiatives.

On the product front, I'm pleased by the quality of candidates we're seeing to lead our engineering organization.

While the search continues, I continue to lead the product team directly.

And that is providing me with invaluable firsthand insight on the product, on our customers and also the marketplace.

So overall, we made great strides in the third quarter, further solidifying our industry leadership position, building on our customer-first culture and advancing product innovation to capitalize on the huge opportunity that's in front of us.

And I continue to be amazed by the talent and the drive of the entire Five9 team since joining as CEO 6 months ago.

So with that, I'll turn the call over to our President, Dan Burkland, to dive deeper into why enterprise customers are trusting our platform to handle their most critical customer interactions.

Dan?

Thank you, Rowan.

Just to touch again on the points Rowan mentioned, having spent 30 years in this industry and about to enter my 10th year here at Five9, it gives me a unique perspective throughout the years to observe enterprises with vast complexity, diversity and challenges of many kinds.

As a result, quarter-end, quarter-out, year-end, year-out, we here at Five9 have continued to build-in the necessary functionality, security, scalability and reliability while creating an open configurable and customizable platform to help enterprises modernize and innovate and ultimately exceed their customer experience goals.

While building the platform and product are critically important, I've also found that product alone does not translate to success.

Equally important to product is, well, enterprises are choosing a partner.

One that they trust will bring them the knowledge, know-how and expertise to customize, optimize and continuously fine-tune the solutions to meet the ever-changing nature of the customer environment, especially as we've seen consumer expectations evolve over the recent years like never before.

That's why customers choose Five9 and build long-standing partnerships with us.

I'm often asked, what helps us to sell most effectively?

And I always answer, it's our customers.

They love what we do for them, and they are the best sales advocates we have, sharing their experience with other prospective Five9 clients.

With that, I'm pleased to report that Q3 Enterprise bookings hit an all-time record, and our pipeline reached another all-time high.

I'd like to share several new customers who signed on with Five9 during the quarter.

The first example is a biopharmaceutical company who had been using an outdated on-premises system for their global operations.

The customer was unable to efficiently manage their operations across multiple sites, could not adequately integrate to Salesforce CRM and had limited visibility and control over its data, which prevented it from delivering an optimal customer experience.

With Five9, this customer is implementing a full omnichannel solution with voice, chat, e-mail, SMS, visual IVR, performance dashboards in addition to the Five9 WFO suite powered by Verint.

We expect this initial order to result in approximately $2.2 million in annual recurring revenue to Five9.

The second example I'd like to share with you is a major public utility providing power and water to its customers.

The customer had been using an on-premises legacy system that had become outdated and required expensive maintenance and upgrade costs.

Five9 was able to show them a complete end-to-end solution, including MPLS Agent Connect, omnichannel for voice and e-mail, along with Five9 WFO, powered by Verint and integration to their existing PBS.

We anticipate this initial order will result in approximately $1.6 million in annual recurring revenue to Five9.

The third example was a market-leading producer of medicines and vaccinations.

They had been using a combination of an on-premises system and another cloud offering, neither of which had deep integration to Salesforce and also, created silos between the 2 disparate systems.

They began their search for a modernized all-in-one contact center solution about a year ago and included many vendors in their evaluation.

Five9 was selected for its flexibility, rich WFO solution powered by CSI, deep integration with Salesforce CRM for omnichannel, ability to connect to the customers' existing global MPLS network and Five9 Genius for artificial intelligence agent assist in the future.

We anticipate this initial order will result in approximately $1.6 million in annual recurring revenue to Five9.

Now I'd like to share with you an example of an existing customer who's continuing to expand its business with the assistance of Five9.

One of the fastest-growing insurance brokers in the U.S. began as a Five9 customer in 2016 for 400 of their seats and continued to grow over the next few years to nearly 1,500 concurrent seats, adding over 300 in the most recent quarter.

The reason for this continued expansion is the trust that they have in Five9 to provide them with critical resiliency and security.

More importantly, they are looking for a partner to deliver a holistic enterprise solution across all of their departments.

As you can see, our industry-leading solutions enable enterprises to achieve their digital transformation objectives by leveraging critical customer data to enhance the customer experience.

I'm very pleased with our momentum in the enterprise market, which continues to be driven by our proven track record, validation from third-party trusted sources like Forrester and Gartner and our strong referenceable customer base.

In addition, our expanding go-to-market team and ecosystem of partners, which, once again, influenced more than 55% of our enterprise deal flow in the third quarter.

We believe we are extremely well positioned in this growing large market.

Now I'd like to turn the call over to Barry to provide more color on the third quarter financials.

Thank you, Dan.

This was another excellent quarter with revenue growing 30% and adjusted EBITDA margin increasing year-over-year for the 20th consecutive quarter, reaching 19.6%.

Before going into the specifics, some reminders.

Unless otherwise indicated, all financial figures discussed below are non-GAAP and under 606.

Additionally, all growth rates are compared to the prior year period unless stated otherwise.

Finally, note that the reconciliations from GAAP to non-GAAP results and from 606 to 605 are included in the appendix of our Investor Relations presentation available on our website.

Third quarter revenue was a record $65.3 million, up 30% year-over-year.

A fastest growth rate since we went public in 2014.

The strong year-over-year growth was driven by the continued growth in our Enterprise business, which makes up 76% of our LTM revenue.

Additionally, for our commercial business, which represents the other 24%, the strength we saw last quarter continued this quarter with growth now over 10% year-over-year.

Recurring revenue, again, accounted for 93% of our revenue.

The other 7% of our revenue was comprised of Professional Services.

Our annual dollar rate retention rate under recurring revenue in the third quarter was 101%, up from the 99% we recorded last quarter.

Third quarter adjusted gross margins were 64.3%, an increase of nearly 130 basis points year-over-year.

Adjusted gross margins have now increased each quarter for the last 23 quarters.

Turning now to expenses.

Third quarter non-GAAP, sales and marketing, R&D and G&A were, respectively, 24.8%, 10.6% and 9.4% of revenue.

These were, respectively, 6 percentage points lower year-over-year for sales and marketing, of which, 2.8 percentage points were due to the 605/606 transition, 0.8 percentage points lower for R&D and 1.2 percentage points lower for G&A.

Third quarter adjusted EBITDA was $12.8 million, representing a record 19.6% margin.

This was an increase of 9.2 percentage points year-over-year, of which, 2.8 percentage points was due to the accounting transition.

The adjusted EBITDA improvement continued to be driven by the strong growth in our Enterprise business, which enjoyed excellent unit economics and by the ongoing operating leverage.

Looking forward, we expect to continue to drive solid revenue growth and progress towards our second half 2019 and long-term EBITDA margin model of 22% plus and 27% plus, respectively.

Our confidence in meeting these targets is based upon the persistence of the factors which had driven year-over-year improvements during the last few years.

Third quarter GAAP net loss was $1.3 million, while non-GAAP net income was $11.1 million.

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

DSO for the third quarter was 29 days.

As I have remarked before, we believe that excellent DSO performance is an indication, not just of payment terms and the mission criticality of our solution, but also of the level of customer satisfaction.

Looking ahead, we expect DSOs to increase gradually as the mix shift to Enterprise from Commercial continues.

Our LTM operating cash flow as of September 30, 2018, was $26 million, a year-over-year improvement of $15 million.

We are optimistic about our potential for long-term cash generation given our adjusted EBITDA model, our substantial NOLs and our low DSOs.

Capital spending in the third quarter was $3.4 million, essentially all of which was paid for in cash.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the fourth quarter and the full year 2018.

Note that our guidance reflects no material difference in revenue between 606 and 605 and that the bottom line benefit from capitalizing and amortizing a significant portion of commissions will be in the range of $6 million to $7 million for the year.

For the fourth quarter of 2018, we expect revenue in the range of $65.8 million to $66.8 million.

GAAP net loss is expected to be in the range of $2.7 million to $1.7 million or $0.05 to $0.03 per basic share.

Non-GAAP net income is expected to be in the range of $8 million to $9 million or $0.13 to $0.14 per diluted share.

This guidance for the current quarter reflects higher anticipated R&D expense.

For 2018, we expect revenue to be in the range of $251.1 million to $252.2 million.

GAAP net loss is expected to be in the range of $6.7 million to $5.7 million or $0.12 to $0.10 per basic share.

Non-GAAP net income is expected to be in the range of $30.4 million to $31.4 million or $0.49 to $0.51 per diluted share.

I would also like to provide insights into our current thinking for 2019.

While we are not providing formal guidance at this stage, we can provide some high-level commentary.

First, with respect to revenue, we are comfortable with the current street projections for the full year of 2019.

We expect revenue to follow our typical seasonal pattern with the sequential growth being stronger in Q3 and Q4 and Q2 being relatively flat.

Second, with respect to non-GAAP net income, we are also comfortable with the current street projections for the full year 2019.

However, we would like to remind you that there is meaningful increase in cost and expenses in the first half due to the FICA reset and importantly, the increased investment in R&D that we have been talking about.

Please note that these increased first half expenses are expected to occur during the seasonally weaker part of the year.

For modeling purposes, we'd like to provide the following additional information: for calculating EPS, we expect our diluted shares to be 63.5 million and basic shares to be 59.5 million for the fourth quarter and 62 million and 58 million, respectively, for the full year 2018.

We expect our taxes, which relates mainly to foreign subsidiaries, to be approximately $60,000 for the fourth quarter and $211,000 for the full year of 2018.

Our capital expenditures for the fourth quarter are expected to total approximately $4 million to $5 million.

For the full year 2018, we expect capital expenditures to be between $14 million and $15 million.

In summary, we are very pleased with our third quarter results, which demonstrate our consistent execution.

Going forward, we will continue to strive for solid revenue growth while progressing towards our second half 2019 and long-term financial targets.

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

Operator, please go ahead.

(Operator Instructions) We'll hear first from Sterling Auty with JPMorgan.

This is Sahil Sharma on for Sterling.

So my question is that the SMB segment grew again by double digits this quarter.

So how is the focus going to be going forward?

Well, this is Rowan.

Thanks a lot for the comments.

We are -- we did see the commercial segment continue to grow, as you mentioned.

And we're going to keep putting focus there.

I'll throw it over to Dan who, I think, can give some more of the commentary about what specific things we've done that's driving some of that performance.

Yes.

Great, Rowan.

And thank you, for the question.

And as you saw in the last couple of quarters, we've seen execution and just closer focus on making sure that we maintain our basic customers, continue to grow with them and expand them as well as capture new clients in that space.

So while it had been growing in the small single digits previously, it's picked back up into the 10-plus percent range.

Our next question will come from Scott Berg with Needham.

I have 2 quick ones.

We'll start with, Rowan, wanted to see if you can talk some of the consolidation in this space.

Over the last 3 or 4 months, you've seen companies like Vonage buy or acquire New World Voice Media (sic) [NewVoiceMedia] and obviously, Ring got involved and (inaudible) Haskins has announced some fundraising in general.

But just wanted to see if you had some thoughts on what that means to maybe your opportunity or what you're seeing competitively.

Well, I think the folks are picking on something that we've known for over 10 years here at Five9, and that's the Cloud Contact Center is a massive opportunity.

And so it's no surprise that these folks are coming to the party.

Obviously, each of those companies is taking a different approach.

Ring, obviously, has a partnership with NICE and bought Dimelo, which is a piece of the contact center.

So I wouldn't say they've achieved a contact center offer of their own yet.

NewVoiceMedia being acquired by Vonage is clearly -- they seem to be on the path through their string of pearls of acquisitions to attempt to build a complete, sort of, collaboration stack offer to the market.

New Voice has really kind of fallen off the map for the last few years, primarily, obviously, based in Europe and historically, only really available as part of Salesforce.

And then Twilio just, kind of, dipping their toe in the water with flex and so I think that once's too soon to tell.

But the bottom line is, all of these folks are seeing the opportunity to disrupt the legacy vendors, right?

The premises and even hosted, so-called, cloud offers just aren't what customers want.

They want real cloud offers.

And that's what these new disruptors are following Five9 on.

Got it.

Helpful.

And then my follow-up is probably for Dan.

Dan, your sales and marketing efficiencies, at least how we calculate them, have been improving significantly the last year, 18 months and given the growth rate that I would consider to be off the charts this quarter for you guys, any thoughts on investing some of your capacity may be a little more aggressively going forward because whether it's deal size is getting bigger, maybe more deals in the funnel, you're doing something right there just to know if you have opportunities to invest even faster today.

Yes.

Well, I appreciate it Scott, and thank you for the comment.

And yes, we're seeing an increase on several fronts.

And I think several factors are contributing.

You mentioned an increase in productivity is one, an increase in our customer base and growing with Five9 is a second and increasing our reach through our different channel and ecosystem partners and just our brand as a whole, and like we said in the earlier comments, being recognized as a leader by Gartner for 4 years in a row now and certainly by Forrester in their first wave.

So it's giving us momentum in several different areas.

So we continue to kind of hit on all cylinders.

And I think you're seeing that in the results.

And we have no reason to slow that down or change our strategy.

It's working very, very well.

And we just look forward to continuing to expand.

The market continues to bring us further up into larger and larger deal sizes.

And we also see expansion outwardly into new markets and new geographies.

So I think it's a great, great situation to be in.

And like we've said many times before, we're at the early stages or early innings of a ball game, if you want to state that.

But there's a whole lot of market left, and we're at the point where if you look at the penetration rate of folks that have made that transition over to cloud, it's still, by most accounts, in that 10% to 20% range.

And so there's a whole lot more to go.

Our next question will come from Meta Marshall with Morgan Stanley.

I just wanted to kind of get some insight on the Professional Services group because I know, in some ways, it had been a gain item to growth, and now it no longer kind of seems to.

So just getting a sense of are implementation times shrinking, is that group just becoming more experienced?

Just something that, like, seems as if you're getting better leverage out of that group.

And then maybe a second question -- I'm sorry, go ahead.

No, that's fine.

Go ahead, second question.

So the second question is just on the usage element to Q3.

I know, obviously, elections even, kind of, annual enrollment.

Just, was there any excess contribution of usage, kind of, in Q3 that you think is, kind of, above normal seasonality?

Yes.

So Meta, this is Dan.

I'll handle the first question on PS.

Yes, we're just seeing greater efficiencies out of that team.

We've actually brought in some new leadership to head up Professional Services with folks that have had experience in working both in building and scaling and applying tools and methodologies that allow us to do things better.

We continue to gain more and more experience, I think, I have been doing this ourselves for many, many years and starting to leverage some third parties in that effort as well.

So I think when you look at all 3 of those vectors, you're going to see some continued improvement.

We have no reason to believe that we won't achieve our goals of moving that Professional Services into a positive margin as opposed to negative.

So we're on track to do that and look forward to continuing to show improvement there.

And Meta, with respect to the usage, and nothing special there.

It tracks pretty closely with seat growth, which was strong.

And yes, with the elections, we didn't see very much change.

In fact, we didn't even track it this time.

Much of that is despite the phone ringing and saying something at home, it's coming through digital.

So -- and open enrollment only just started this quarter.

We move to Michael Latimore with Northland Capital Markets.

This is [Vijay Dewar] for Michael Latimore.

I know that you talked briefly about your thoughts for the new CTO.

Could you just give me more updates on how the process is going forward?

And do you have any different timeline for getting the new leadership in place?

Yes.

Thanks, [Vijay].

This is Rowan.

We are seeing -- now first of all, I'd say, we're seeing very strong interest.

We've had lots of candidates from across the Silicon Valley and elsewhere applying and interested in the role.

I think the profile of the company is to credit for that and the huge market opportunity.

When people see and especially when people hear about the data that we're sitting on.

The idea that we have 4.5 billion minutes of recorded phone calls per year that we could start to leverage from an AI perspective.

That brings out the best.

That's the kind of things that top talent in the valley are looking for.

And so it is one of my highest priorities.

It's been going really well.

I am also taking the time to get it right.

This is a key hire for us.

And I do expect to have it wrapped up shortly.

In the meantime, given me -- just to finish off the thought, I guess, in the meantime while I've been doing this search, I have been leading the team directly, and that has been invaluable to me as the CEO to dig in with our customers, with our engineering teams to understand the product and the marketplace that much more deeply.

And frankly, I've been very, very impressed with our engineering teams who have just done a phenomenal job at delivering the kinds of innovation that we have had up until now.

And you should see what's in the pipeline.

It's very exciting.

Great.

And I think you haven't spoken much about channel bookings.

So do you have any number over there, and how are the channel sales going on?

Well, I'll let Barry comment on numbers.

But I'll just say that the channel is important to us.

We've shared before in our deck as we've been out with investors that the channel contributes to a big amount of the referrals that we get.

And they touch a good number of our deals.

That's only going up, we believe.

I recently came back from Europe where the channel interest in Five9 was off the charts.

They're sort of seeking us out by every channel they can possibly find to sort of get a hold of us, and they just are hearing it from customers.

So I think the demand for Five9, the increasing awareness of the brand, is really translating into some very, very strong interest from the channel.

And so it remains a priority, and it's increasing in priority for us.

Dan, Barry, you want to add color to that?

Yes.

Sure, we continue to get increased leverage from the channel across the board.

And when you look at -- when we say the channel generically, you're talking about different categories, right?

So we have the master agent community which still gets written directly.

Those deals that they bring to us, they consult for and really have great influence over the enterprises, they bring those opportunities to us, and then we work them and close them and contract directly with the end-user customers.

But those are still channel-sourced deals, if you will, or channel-sourced businesses.

And that's been great.

And those are on a referral business.

And that just continues to grow and now represents over 30% of our business in enterprise that comes from the variety of channels.

Big part of that is the master agents, as I mentioned and their subagents.

But also, you've got referral partners and just the consulting community that refers business to us.

And then you've got your true resellers, mostly VARs that want to take the product in the old traditional methodology, put it on their paper and service that customer as their own.

And that's a lesser piece of the business because as a cloud provider, end customers know that it's our platform.

It's in our data centers.

It's monitored and managed 24/7.

And all the upgrading and capabilities that we deliver to them are pushed directly from Five9 to the end-user customer.

So they tend to want to contract more often with Five9 than traditionally going through a VAR and contracting with them.

But that does not mean that we're not getting huge leverage from those channels.

We'll go next to Matt Van Vliet with Stifel.

I guess, looking out towards the end of the year and into 2019, as you talked about, really strong pipeline.

What's sort of the broader mix of deals that are rip and replace a legacy solution, or build on top of, or up and around a legacy solution, versus companies out there now sort of embracing the whole customer service element and standing up net new contact centers, and how much of that is driving the business?

Yes, this is Dan.

Great question.

It's very rare that you find somebody just standing up a 500-seat contact center from scratch, because you've got to have a business and have volume of customers that are wanting to contact you daily.

And that's typically something that grows from the ground up.

So those typically smart -- start rather small.

It's also a critical reason why we continue to stay focused on our commercial business, because a lot of businesses that do come about, start in a small sense and then grow to become very large enterprises.

So we capture quite a lot of those.

But the vast majority, really, the lion's share of the business that we're working with clients on, is taking their entire operations and their old legacy environments, where they've built silos of technologies that require expensive upgrades, difficulty integrating site-to-site, routing calls across sites, it's very difficult to manage that.

And you end up with a big staff and a lot of inefficiency that gets created.

And that's really been something we've been living off of from day 1. As a cloud provider, we create one Virtual Contact Center, as you know.

So it is primarily helping companies take that digital transformation strategy and move and use the contact center as one of those areas that they want to migrate and get technology footprint out of their own data centers and leave it up to experts like us to take that over.

So to answer your question in a long-winded way, we're transforming the legacy on-premises systems over to the cloud.

In fact, when we show them the future-proof and the investment protection that they can gain by working with a cloud provider like Five9, oftentimes, because they love the fact that we can continue to innovate and help them achieve their ultimate goals.

But what they want is, they say, "Great.

The first step is, take all my legacy stuff out, off my premises, give me a like-for-like solution, and then we'll innovate and expand from there." And that's one thing that we've become very, very good at.

In fact, the comment earlier about Professional Services, because we're doing a lot of the work to replace what they have, we know what is involved there, and then we continue to enhance and add capabilities.

But again, the lion's share is primarily taking old legacy systems and moving them to the cloud.

If I can add -- I'll just add one thing, and that's a great color behind it.

And this is anecdotal, but I was with the CEO of a Fortune 500 company last week.

And he was quite animated about his contact center.

And really, it was about -- it was this sort of story about digital transmission.

What he was on about was, "Look, my customers are leaving me because they are getting a better experience from someone else." And he was really concerned about this.

And he sort of -- so you could say that digital transformation, at least in the case of this CEO, was the spark that lit the fire.

And that fire eventually sort of turns into, as it rolls downhill in the organization, until the contact center people, when it hits them, it's like their hair really is on fire.

And that's what's a big driver of our business.

And I can hear it when I talk to these CEOs.

I mean, it is a massive priority for them.

It's a life-and-death issue in many cases.

It's either they transform their customer experience, or they realize they're not going to be in business for long.

And then when you look at some of those situations where we're talking about big digital transformations, how many customers are you seeing that the actual, sort of, voice telephony element of the contact center is becoming much less important and maybe less of a strategic driver of a business decision versus your ability to engage with the customers digitally across multiple channels, across social media, if need be?

Because we're seeing a lot of investment, you touched on a couple of them before, from some of your competitors that haven't gone to building out the full solution, but are attacking it from just the digital element.

Are they -- are they sort of fringe getting involved in some of these RFPs for customers, ultimately, maybe win with a broader solution, but they can offer that at maybe a lower ticket price?

How are you, I guess, fighting off that competition, as companies feel like the digital element is maybe the most important?

Yes, well, first of all, we have a complete offer.

So they turn to us for not only voice, but for messaging and e-mail and all of the channels.

And we work better than anyone else with the CRM vendors, including, most notably, Salesforce, where you can run in a blended mode.

So if you've chosen, for example, Salesforce for your messaging, your e-mail, you can work really well with Five9, providing voice or other capabilities.

And that's something that we announced at Dreamforce 2018.

So but back to the sort of the broader question around what drives this.

It's less and less a technology upgrade conversation around telephony.

In fact, we just went through a list of all of the possible integration points between unified communications and CRM.

And we're talking probably 5x more integration points between a call center and a CRM system than between a call center and a UC system.

And so what people are seeing here is that transformation of the overall digital experience touches on lots of the parts of their business, and the call center sits at the center of a lot of those things, and needs to integrate really, really tightly into those.

And CRM and all of the associated capabilities that come along with CRM are a big driver of that.

So that's really where you're seeing these things get connected.

And we do a tremendous job at integrating with those guys so that you can get a very seamless solution, crossing from voice and messaging and e-mail and so on.

You want to add anything, Dan?

Yes, if I can just add to that.

Over the last several years, you may have thought, oh, the digital channels are coming into play.

Are they cutting into the importance of voice, as you've mentioned?

Is voice becoming more of a commodity piece?

And what's happening is just the opposite.

I mean, right now, just in the last year or so, with the advent and really, artificial intelligence coming about, we're finding that customers are more and more interested in figuring out how do I mine the data that is in all of my voice conversations?

If I have 500 agents in my contact center, I've probably got 300 of them talking to customers all day long.

And there's a lot of valuable data that's there.

And what CRM solutions have relied on is those agents to disposition calls with a couple of categories about what the call was about.

But we're finding that now with the AI capabilities that Rowan mentioned earlier about with Google being able to transcribe those voice conversations and extract the data from the conversation and then perhaps put it into the CRM and have it stored indefinitely as key elements of that interaction, is so, so important.

And that doesn't even touch on the agent assistance and virtual agents that ultimately could become available to us.

So when you look at voice, voice is actually making a resurgence and really becoming so, so important to enterprises.

They're finding out, how do I capture my calls?

How do I record them?

How do I keep them indefinitely?

And then how do I transcribe them so that I can data mine them and pull that important data out of those conversations?

Because historically, it's been very difficult to get to that data.

And they just -- you have to have people sit and transcribe, and they can only listen to 2% of the calls if they want to pull data out of them.

So very, very much a new trend.

Our next question will come from Raimo Lenschow with Barclays.

Can I stay on that subject around AI?

If you think about -- Rowan and Dan, what you just talked about, like the -- is that going to be you as the guy that has to help with that AI?

Or is that going to be the stuff that comes from CRM vendor?

That was my first question.

So in other words, like how much more intelligent does your system need to be versus where the CRM system -- CRM vendors need to go?

Yes, this is Rowan.

Thanks, Raimo.

It's a combination.

But what Dan was just referring to, and what we've been talking about, really is exclusive to the contact center.

We're sitting on probably the biggest source of dark data in the enterprise today.

And that is customer voice conversations.

You're talking about -- again, I mentioned that earlier, 4.5 billion minutes a year that flow through our pipes, that we can use to train artificial intelligence systems.

And it turns out, that's, all of that is data.

When you think of it, it's data.

But what is it really?

It's what your customers are telling you they want from you, and what problems they're having with your product or service.

And so it's incredibly valuable.

And absolutely, I think the vast majority of the value that needs to be extracted from that, or a huge amount of that value is going to come directly from us.

So we are working with several pilot customers right now.

Google is our technology partner, but we actually are partnered with other vendors as well on the back end.

So it's not exclusively Google.

We can bring to bear any AI technology that we so choose.

And we have sort of 3 ideas and 3 initial legs to the stool around the pilots that we're doing with our customers and we're learning at this point.

So again, you're not going to see the returns here measured in quarters, but probably in years.

But the longer-term opportunity to automate the really boring drudgery that most call centers do day in and day out is really the opportunity that AI presents.

And that is a 10x larger TAM opportunity than just selling the existing technology that we do today.

So think about our current TAM is sitting at about $24 billion per year, but there's $250 billion spent a year in contact center labor.

And the only way to automate that labor is to get access to massive amounts of data and train artificial intelligence systems to start to augment and replace, ultimately, the routine and repetitive calls and scenarios that are coming into those agents.

So that's the opportunity.

Okay, perfect.

That makes total sense.

And then can you double-click a little bit on the partner competitive landscape as it is evolving?

Like, you've been working for a few quarters now with Verint.

NICE, obviously, has an acquisition that they need to work on, and how they are in the market, and Genesys.

Can you just double-click a little bit what you're seeing out there?

Yes, so NICE is both a partner and a competitor, obviously.

Verint is a partner.

They're our lead partner from a WFO perspective.

And a lot of -- they have tremendous market share in that category.

We deliver that as part of our service.

So when customers choose to go with WFO, especially at the higher end of the solution, we bring in and host and deliver NICE as a part of our service -- sorry, Verint as a part of our service.

We also have other vendors that we use for the lower end of the market.

And so that's how we partner in the WFO, WFM space.

We have a number of those partnerships, and they're working really, really well.

In terms of competitively, obviously, we see NICE inContact.

If you see the latest Magic Quadrant, both NICE and I -- and Five9, we remained in the top upper-left, upper right-hand side of the quadrant, with our -- the third competitor sort of dropping down on the ability to execute.

And I think that's just a reflection of market presence.

The fact is, NICE and Five9 are the clear breakaway leaders in the Cloud Contact Center space.

We'll go next to Zack Turcotte with Dougherty.

It's Zack on for Catharine Trebnick.

I just wanted to jump back to sort of the multi-channel contact center approach again.

So first, how do you see your average deal size changing, say in the past 12 months, with the constant addition of features and capabilities and expanding across more channels?

And secondly, do you think that companies like Vonage and Twilio might have somewhat of a competitive advantage in this sense, since they have the inherent CPaaS capabilities and can build APIs and have the API toolkits to build more customized solutions as these customer demands widen?

Do you want to take the first part, Dan?

Yes, sure, Zack.

So this is Dan.

Regarding multi-channel, yes, that continues to be one of the vectors that helps us get larger deal sizes.

But the primary one, when we add chat or e-mail or SMS or one of the other channels to the contact center, it's still just a small addition to the bundled capabilities that, that agent has with us.

So that doesn't contribute a ton to the uplift in size.

The main uplift in our deal size is from the size of the customers.

The Cloud Contact Centers, cloud has been adopted over the years further and further upmarket as people see others trusting the cloud.

You've got to build in the security, the scalability, the reliability and show them that you're improving in each of those areas, but then also giving them an ability to innovate and customize the solution more effectively than they can today with their premises solution.

So I would argue that most of those customers that do want multi-channel from us, they want a finished product.

They don't want an API where they have to go build an e-mail solution and figure out how to build all of the feature sets that go into that.

They want something that's already built-in and that's been built specifically for contact center, but yet has the openness and flexibility for them to come in and make it tailored to their own needs and requirements.

It's interesting, because it's kind of a misnomer, when people have -- there's a perception sometimes misplaced that, gee, if it's in the cloud, I'm going to have less flexibility or less openness.

And it couldn't be further from the truth.

Building the platform with the proper APIs and SDKs gives that customization capability to all of our customers.

And they enjoy the ability to do that, as we said in the earlier remarks.

So Rowan?

Yes, and I would just add that our products have over 300 APIs that developers can and do use to customize it and tune it for their specific environment.

I said earlier, no 2 contact centers are the same.

And what we've been doing for the last decade is iteratively honing and refining our feature set with our customers in each new segment that we enter.

And we've gotten really, really good at delivering that value quickly.

The deal -- the length of time to take our product from the first time you talk to us until you've deployed it is still very, very short when compared to what you would need to do if you attempted to sort of do it yourself, hiring developers and working through that process.

Now I think that the CPaaS, to answer your -- or to speak specifically to your question about CPaaS, many our customers -- CPaaS has, its origination in the sort of a different space than ours, right?

It came up originally for developers to be able to embed communications into their applications.

And I think that that's a hugely positive development.

Obviously, Twilio has done very well with that, as has Nexmo and Plivo.

Both, I think as well as Tropo.

So there are, the host of CPaaS providers that you can use or even going directly to Amazon, in some cases.

And I see, the customers that I've talked to, they do use those technologies.

They're typically used by a different -- often used by a different team than the call center team.

They are used by the product team, where they're looking to do integrations into the product and they're often orthogonal use cases to the classic contact center use case.

Sometimes they're similar, but they're often orthogonal.

And so I think that it's an adjunct, and it's a, sort of, a, it's an interesting new take on how to build more and more communications with your customer.

But ultimately, it is a reflection of the same trend that we said earlier, which is, look, you need to communicate with your customer more.

And the more places you can embed those communications and that you can transform those communications with your customer, the better.

In our case, it's really all about the contact center and the classic contact center.

In the case of CPaaS, it's about building that into your mobile app or building in capabilities into your -- doing authentication through SMS and so on.

And so I think it's an interesting adjunct than a new step here for this market.

And we'll see how it plays out.

We'll take our next question from Jeff Van Rhee with Craig-Hallum.

Several questions from me.

First, just, I guess, starting at a high level.

If I look at the guide, roughly 16% if I have the math right on '19, just essentially saying you're comfortable at this early point with the consensus.

Last several quarters, obviously, showing you accelerating growth, and it's just been -- particularly, the 2 quarters, really standout growth.

When you look at that forward number, I get it.

I followed you a long time.

You guys are really cautious and conservative and then just deliver the outperformance as you go.

But it demands asking, do you see anything that suggests...

Well, we're...

Yes, exactly.

Anything that suggests that level of deceleration or incremental caution than what you might have thought 90 days ago?

Jeff, the short answer is no.

We are just at this stage, as we traditionally have been prudent.

There is a seasonality aspect to our business.

And we want to be able to wait and see exactly how that turns out, emerges before we commit to it.

The business remains robust.

There's, across both now the enterprise and commercial, we'll see what happens as we get closer to giving formal 2019 guidance.

But you should not read anything beyond what I just said into that 16%.

Okay.

And Dan, maybe on the sales side, just, can you talk a little bit about sales recruiting, the pace of adds thus far in the year?

Sort of your preliminary thinking about '19, to the extent that you're willing to share it with me?

Sort of just open-ended, talk to me about what's changing.

Because you've certainly added a lot of capacity.

I know you've gone for people that are known entities historically and been remarkably consistent at bringing them on and scaling.

But just talk about how that's trending and what you're thinking about in '19?

Yes, yes.

Great question.

And it continues to get better and better.

I mean, when you look at the opportunity, for the reasons I mentioned on an earlier question, with our success and our growth and our accelerated growth, our brand, our reach, it continues to get through to more ecosystem partners, more channel partners.

There's a lot of things happening that make Five9 a great, great place to work, not to mention our culture and just, I think, the integrity in how we do business.

And that's a testament that's validated by our customers every day that we work with them.

So I think we have a very, very attractive and envious place to be.

And we continue to get our door knocked on more and more, quarter in, quarter out.

It's gotten better and better, and it allows us to be more and more selective as we go through that recruiting process.

So I couldn't be more pleased with the team that we have and be more proud of the leadership team that we have in the field, selling as well as on the commercial team.

And again, it just allows us to attract better and better people all the time.

And one thing that is different.

When we go out into the market, and we're recruiting folks that are even at the individual contributor level, there's a criteria that we look for, knowing our future and knowing how we're going to grow this business and continue to expand and be a leader and take this company to whole new levels.

It's important for us when we do recruit folks, and we've been doing this for the last several years, is to make sure that they not only have the experience and success in their DNA of selling, but also that they have aspirations and that either through experience of their own or aspirations to grow and that they are management material.

It's been very easy for us to promote from within and promote successful people and have them either turn into great leaders or have that experience already under their belt when they come in as an individual contributor and then jump into a leadership role once they've learned the Five9 way.

So I think we're in great shape there, and we're hitting on all cylinders when it comes to sales.

Got it.

And last one then, I guess.

Obviously, with the top line acceleration, to what extent is the market itself accelerated in the last 12 months?

Asked differently, how does it feel this quarter say, compared to 12 months ago, in terms of the spend environment and the rate of growth in the overall market?

Yes, I think the spending is certainly there.

I mean, it was a little different way back in the CapEx days when we were selling premise solutions, and you needed those CapEx dollars.

But I think we're pretty much immune to some of the macroeconomic conditions we've seen way back over the years.

We've done well even when times were tough.

But having said that, in today's market, we're seeing the momentum continue.

And really, aside from that spending, I think it's more about what Rowan had mentioned earlier.

It's about companies realizing that they need to change the way that they deliver a customer experience, or they're going to get left behind and be out of business.

More and more, I mean, you see it even in the media.

You turn on the television today, and you see a commercial, and they all talk about the competition to deliver a better experience.

It's -- that's more -- that's said more often today than, "I'm building a better product.

And I'm giving you a better product." It's more about, "I'm going to deliver you something that you're going to enjoy, and you're going to want to work with my company." And so that difference in messaging translates to companies realizing, "I've got to go through this transformation and get to where I can deliver the optimal customer experience." And to do that, the first step is, get off the old legacy technology to where I have a solution that gives me the visibility and control over my data so I can inspect it and get insights to what my customers are thinking.

I've got to know the customer journey and which ones are working and which ones are not working, so that I can make the changes in how I deliver an experience to a customer.

Big, big part of that's in the contact center.

It's not just in the contact center, but that's a big, big part of it.

And so I've got to get on the foundation and on the platforms that allow me to then navigate and be able to change as I recognize my customer wants change, or I recognize that my customer needs a change, because I'm not succeeding with them.

And this is Rowan.

I'll just add to specifically around market growth.

We don't have good data around that.

What we do have good data around is our win rates, which continue to remain strong, about 3/4 of every -- of the deals on the cloud side that we win.

And so that remains strong.

So what, I think, you need to pay attention to is as customers look to transition to public -- to cloud vendors, are we getting our fair share?

And the answer is, not only are we getting our fair share, we're getting more than our fair share, which is great.

And then second, look at our dollar-based retention rates.

And those are up again this quarter, over 100%.

Barry, correct me if I'm wrong.

101%.

101% dollar-based retention rate.

And what that should tell you is not only are customers moving onto our platform, but once they move onto our platform, they buy more.

And that's really important to keep in mind.

So 101% dollar-based retention rate and win rates remaining strong, and it feels, while we don't have data, it certainly feels like the market is robust as people continue to accelerate the shift to the cloud.

We'll move now to Terry Tillman with SunTrust.

Rowan, Barry and Dan, I'll try to go through these really fast, because I know we're past an hour, but the commercial business -- and also, congrats -- on the commercial business, any reason why this higher growth that you've seen over the last couple of quarters can't be sustained into the fourth quarter and into next year?

Well, remember that we had some weak compares from the previous year.

So that's certainly one factor.

We have made changes to the team from an execution perspective.

But I'll repeat what we said last quarter: 2 quarters don't make a trend, so we're just being prudent with regards to forecasting that part of the market.

Obviously, when you see our CAC-to-LTV ratios, and you look at enterprise being a 6:1 -- or 1:6, I guess, you should say, CAC-to-LTV, versus consume -- the commercial market being 2:1, we want to continue to invest in that Enterprise business, which is also growing faster.

So I think we're confident in what we've changed in the commercial team that's now -- that is working.

And the market is, obviously, strong, and the overall economy is strong.

Our brand presence and awareness of our brand continues to be strong.

So we've got our new CMO as well joining us, so we think that that's going to continue to accelerate.

So we feel good about the commercial business, but there's a variety of factors here.

Okay.

And just lastly, the pilot work related to some of the AI initiatives, Rowan, I appreciate the idea that it could potentially significantly expand the TAM, more of those conversational automated interactions.

Will that change kind of the makeup of how you charge for your software?

And could some of these AI-driven deals start to become meaningful in the revenue stream in '19?

Yes, so I'll take those questions one at a time.

Yes, the way that we charge, there are 3 different offers that we've been piloting with customers.

And it depends which of them sort of gets traction first.

One of them is a business IQ or business insights capability, where we translate all the calls to text and then we extrapolate, based on those, what the call dispositions were.

So we pull out the insights, like what did the customer say, and we can do that at scale in an automated way, not previously possible.

That one is a new business, or it would be a new way of charging customers, a new offer that we might have to customers.

Second is that virtual agent and agent assist.

On the virtual agent, I think that's an interesting one we may look to charge on a per minute or a per hour basis.

There could be different ways of modeling that.

It's similar to today, we sell a seat for an agent and then we sell an LD charge for usage.

So I think that would be similar, but instead of having it attached to a human, it would be attached to a virtual agent.

So we would no longer be linked to the number of agents in the call center.

You might, for example, buy 1,000 human agent licenses from us, but buy -- but scale up and get 2,000 additional virtual agent licenses from us.

So that's speculation at this point, and I think that's reflective of the second question, which is I don't see this materially affecting our revenue in 2019.

We're taking our time to get this right.

It's a long-term transition for the market.

There's been a lot of false promises in the AI world in general, including the recent bot hype that sort of went up and down.

And we're in this for the long haul.

We want to make sure that we work with customers, get a solution in place that really works and is practical.

And I think that we just should be careful about assuming any revenue coming in on that anytime soon.

We'll keep you posted.

Our final question today will come from David Hynes of Canaccord.

Nice set of numbers.

So 2 competitive questions from me.

So it's been like 8 months since Avaya closed Spoken.

Any sign now that they at least have some cloud migration talking points that they can leverage?

I don't know if that's slowing down decision-making among potential defectors.

I mean, you guys clearly have strong win rates when the decision is made to go to the cloud, but are they having any traction, at least improving retention at all, now that they have a cloud product they can speak to?

Well, you could ask them about their retention, because we don't know that.

But the answer to your question is no and no.

We're not seeing it slow down our business.

And certainly, on the surface, what we have visibility to, Spoken is not a cloud SaaS contact center.

So it doesn't seem to be impacting our business one iota.

Dan?

Yes, not at all.

They continue to be the biggest donor of install base legacy solutions that we replace, each and every day.

And then one more on the competitive front.

So you guys called out the Gartner Magic Quadrant and obviously, there are a lot of influences that play in these things.

And we don't put a whole lot of credence in them, but we know buyers pay attention, so I need to ask.

So NICE inContact leapt ahead of Five9 in ability to execute this year.

Any comments there, or thoughts on what's driving that perception in the field?

Well, I wouldn't say they leapt ahead of us.

These are measured in millimeters, let's be clear.

And certainly, we wouldn't necessarily agree with that judgment.

We think we're executing terrifically well, but we don't have visibility into what NICE is doing in the marketplace.

We do have visibility into our win rate, which remains at about 3 out of every 4 deals.

So we're pretty confident of that.

And after Cisco and Avaya, our third-biggest takeout still remains NICE inContact, which is extremely strange, because you wouldn't assume that after a customer has moved to a cloud platform, they would move again.

But they are.

So that's an interesting data point.

And that's what we have visibility to.

With regards to our -- some of the factors that drive that Gartner Magic Quadrant, they lay those out pretty clearly.

One of them where NICE gets credit is their international traction and also their traction with the channel.

And I said earlier, I just came back from Europe, and there is a huge wave of interest for Five9.

And they're hearing, I guess, the channel partners are hearing it from customers.

So we've been thoughtful about how we're going to leverage the channel.

Like AI, we're in this for the long haul.

We want to make sure we get it right.

It's easy to go too quickly with the channel.

And we wanted to make sure that our product and integrations and capabilities were really ready for the channel.

And so it's a key area of investment for us.

It's going to be a key growth driver for us going forward.

That will conclude our question-and-answer session for today.

I'd like to turn the call back over to management for any additional or closing remarks.

Thanks, operator, and thank you to everybody for joining our call today.

Thanks for all the great questions.

And most of all, I'd like to give a special thank you to our customers and our employees for delivering yet another stellar quarter.

So to wrap up our call today, let me summarize where we are.

First, we see an enduring growth opportunity in the market.

That's reflected in our financial results and in our industry recognition.

Next, we're confident in our ability to continue to execute as a leader in our space, by delivering on the world's best intelligent self-learning contact center, delivered through the cloud and powered by AI.

And finally, I believe that the contact center is going to change more in the next 5 years than it has in the last 25 years combined.

Thanks for joining our call today.

Thanks to the Five9 team.

And thanks to all of our customers.

Good afternoon.

That will conclude today's conference.

Thank you all, once again, for your participation.

And you may now disconnect.