Five9 Inc (FIVN) 2019 Q2 法說會逐字稿

Good day and welcome to Five9's Second Quarter 2019 Earnings Conference Call.

Today's conference is being recorded.

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

Please go ahead, ma'am.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Five9's second quarter 2019 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're cautioned that such statements are simply predictions, should not be unduly relied upon by investors and actual events or results may differ materially and the company undertakes no obligation to update the information in such statements.

These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate.

A more detailed discussion of certain risk factors that could cause these forward-looking statements to be inaccurate, 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 the 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 financial information provided by other companies in our industry.

The full reconciliation of 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.

And now I'd like to turn the call over to Five9's CEO, Rowan Trollope.

Thank you, Lisa, and thanks to all of you for joining our call this afternoon.

We delivered strong second quarter results with $77.4 million in revenue, up 27% year-over-year.

Our adjusted EBITDA margin was 18.6%, an increase of 2.7 percentage points year-over-year.

Terrific results for the company demonstrating the strength of our business model.

Now our Enterprise business is driving the top line with subscriptions growing at 36% LTM.

This enterprise growth is most pronounced with our largest customers paying more than $1 million in annually recurring revenue, that now make up over 1/4 quarter of our LTM revenue and are the fastest-growing part of our business, with a CAGR in the 50s over the last 3 years.

I'll now turn the call over to our President, Dan Burkland to talk about the great bookings quarter we just completed.

Dan?

Thank you, Rowan.

Our Q2 enterprise bookings grew strongly year-over-year and reached an all-time record by far for any quarter.

Our pipeline also reached another all-time high.

This quarter, we continue to see larger and larger deals coming in and more than 60% of deals were influenced by our ecosystem of partners.

And now I'd like to share some key enterprise wins for the quarter.

The first example is a pharmaceutical company that serves patients during clinical trials for life-saving treatments.

They were unable to deliver an optimal customer experience due to several limiting factors and reliability concerns of their then cloud-based solution.

They were having service interruptions, had limited integration with their custom CRM and had a very basic workforce management solution with no intra-day reporting, which made staff forecasting very difficult.

They also couldn't support the call peaks, which were over 1,500 concurrent calls.

Five9 delivered the best solution to each of these pain points with the end-to-end solution offering, including Five9 WFO powered by Verint for workforce management, quality management and performance management.

This initial order is anticipated to result in nearly $1.5 million in annual recurring revenue to Five9.

The second example I'd like to share with you is a financial services company in the automotive sector which takes calls and inquiries from dealerships and consumers.

They were using a premises-based Aspect system, which had become unreliable and had limited integration to Salesforce.

They were experiencing excessive downtime, which was directly impacting their revenue.

Aspect attempted to migrate the customer to their own cloud solution but discovered that it could not scale beyond 1,000 agents.

With Five9's uptime reliability, scalability and simplicity of administrating the system, we're implementing a complete end-to-end solution to deliver exceptional customer experience.

This initial order is anticipated to result in over $2.5 million in annual recurring revenue to Five9.

The third example is a dentistry company, providing orthodontic solutions direct to consumers globally.

Their existing solution did not have an elegant way of doing true blending for inbound and outbound calling, nor an easy way to accomplish omnichannel routing with Salesforce.

They also experienced difficulties with international dialing, identifying country of origin for digital channels and a manual process for resetting skills.

Solving these challenges along with finding a partner who would provide them with the consultation and ongoing high-touch optimization led them directly to Five9.

The finished order is anticipated to result in over $2.7 million in annual recurring revenue to Five9.

And now as we usually do, I'll share a significant expansion of an installed-based enterprise customer.

This is one of the fastest-growing insurance brokers offering quotes for medical, auto, home and life insurance who had been a sizable customer of Five9 since 2016.

Since their initial Five9 deployment, the customer has added 3 additional business units, with the most recent department bringing their contact center seat total to nearly 2,000.

With this add-on order of over $1.2 million, it now brings their anticipated annual recurring revenue to $3.4 million to Five9 across multiple U.S. locations.

As you can see, we continue to execute upmarket with larger customers while also helping expand our footprint and offerings within our growing customer base.

With that I'll turn it back to you, Rowan.

Thanks, Dan.

Terrific examples.

So now I would like to turn to some comments on our business and share with you why I believe that Five9 is set to enjoy many years of 30s level enterprises growth.

And I'd like to share with you the 3 key pillars that I see driving that growth.

The first pillar is the market, which with a TAM of over $24 billion is massive.

So start with the fact that the transition to the cloud of this big market is in its early innings at under 15% penetration.

Next, we're through the evangelical phase of the cloud, notably demonstrated by Gartner's decision recently to discontinue the Magic Quadrant for on-premises contact center vendors.

And finally, the priority of the contact center is on the rise, as company leaders all over the world recognize that transforming their customer service experience is a necessity.

This transformation has fundamentally repositioned the contact center from a cost center into a business differentiator that is worthy of investment.

So that's the market.

The second pillar is our product.

The first, Five9 and our product has consistently been included by Gartner in their Magic Quadrant as an industry leader, and that's a result of over a decade of experience and investments, working with increasingly larger customers, building out a hardened and versatile platform with a very, very large surface area of capabilities.

This iterative scaling of the product is not something that can be easily replicated by aspiring new market entrants.

Next, to further strengthen our product, we have meaningfully expanded our engineering leadership and are increasing our investment in R&D.

Our new leaders are Jonathan Rosenberg, our CTO and Head of AI; and Dave Pickering, our Head of Engineering.

And on July 15, we announced Anand Chandrasekaran, formally from Facebook, as our EVP of Product Management.

So beyond leadership, we've been hiring and training more engineers and scaling our team faster than ever before, resulting in a substantial increase in throughput and innovation.

So that team has been hard at work and over the last quarter, we've been building out a new software delivery engine, leveraging a blend of our own robust cloud infrastructure and increasingly public cloud from both Amazon and Google.

This new engine that we're building is built on the latest PaaS technologies, that stands for Platform-as-a-Service, some of these only recently available, which enables us to continue to press our advantage and stay ahead of other Cloud Contact Center vendors, who rely on architectures built before this latest wave of technology advancements was available.

Next, our team has been demonstrating industry technology leadership, most recently, leading a collaboration with Google, Cisco, Comcast and FreeSWITCH on a standards-body submission to drive the industry forward.

With this new patent pending technology, we're aiming to make it dramatically easier for consumers to reach an agent by bringing voice calls right from the web browser all the way to the contact center without a phone in the middle, accelerating WebRTC adoption and improving customer experience.

Finally, on the AI front, we've shared the treasure trove of data we have access to, with 5 billion minutes of customer conversations going through our platform annually.

Our AI roadmap has now been validated by our largest and most advanced customers and we have begun implementation, hiring, coding and performing AI model evaluation and performance tuning.

So now while it's early days in this market, we are certainly leading the way.

And as we mentioned in last quarter, we were featured on stage at Google Next as part of their partnership with Salesforce, a demo that was only possible due to the new delivery engine that I mentioned earlier.

So that's product.

The third pillar is our go-to-market engine, and our results here convincingly demonstrate that our team led by Dan Burkland, is one of the best in the industry.

And we're making progress in this team on multiple fronts.

First, the sales team continues to grow in scale.

The average tenure of our leadership team continues to increase and is now nearly 6 years.

And we're rapidly adding capacity to our field sales people, which we call sales directors.

Next, we announced this quarter the strategic decision to meaningfully and rapidly step up our channel development, opening up a new avenue of long-term domestic and international growth.

We announced new leadership and we have new partnerships.

On the leadership front, we hired a Vice President and General Manager of International Sales based in London.

Second, a Vice President of Global Channels and third, a new Vice President of Professional Services.

So each of these new hires formally held leadership positions at large contact center technology companies and will be reporting to Andy Dignan, our SVP of Global Channels and Services, who most recently led go-to-market globally with the collaboration business at Cisco.

On the partnership front, we continue to gain traction with system integrators like Deloitte, Accenture, E&Y, Slalom and IBM, adding people dedicated to the SI channel.

And these SIs are becoming a meaningful portion of our revenue as they are often brought in to help enterprises with their digital transformation strategy.

Now earlier this quarter, at Microsoft Inspire event, we announced a brand-new partnership with Microsoft Teams UC.

And we met with their partners and global sales organization to develop a joint go-to-market strategy.

So we're building a tightly integrated contact center solution with Microsoft, which gives their partners a huge opportunity to make further progress in UC and enter into the Cloud Contact Center market.

On the CRM front, we continue to have an excellent partnership with Microsoft Dynamics CRM.

Finally, the anchor of our go-to-market machine is our customer success and Professional Services organization.

The contact center is at the heart of the customer service technology landscape and it's tied into many, many business systems.

The customers need help managing that complexity and to help them on that journey, we built one of the largest and most highly rated customer success and Professional Services organizations in the industry.

Now these teams deliver rapid differentiated and on-site enterprise implementation with the high-touch experience that customers really need.

These engagements along with our rock-solid platform build trust with our customers, which in turn is what drives our DBRR, which on a blended basis, was again 107% in Q2.

So this large experienced, long-tenured team of seasoned customer-facing experts is a key ingredient in the secret sauce that makes Five9 so successful.

We believe no one else in the industry has anywhere near this level of customer-facing expertise, and we believe it will take years to begin to replicate.

In conclusion, the stars have clearly aligned for Five9.

All 3 pillars for success are in place.

The market is heating up, we have the right product at the right time and a leading go-to-market machine.

And most importantly, a fantastic team of employees, who, by the way, voted Five9 as one of the top 25 cloud companies to work for.

So to expand on our financial performance and guidance, I'll now turn the call over to our CFO, Barry Zwarenstein, but before I do so, I want to take a moment to acknowledge Barry, who was recently honored as the 2019 Bay Area CFO of the Year for small and medium public companies.

Take it away, Barry.

Thank you, Rowan.

Before going into specifics, a reminder that unless otherwise indicated, all financial figures I will discuss are non-GAAP.

Reconciliations of GAAP to non-GAAP results are included in the appendix to our investor presentation on our website.

We are very pleased with our performance, with both top and bottom line results exceeding our expectations.

Revenue grew 27% year-over-year and 4% sequentially, driven primarily by our Enterprise business, which now makes up 79% of LTM revenue.

Enterprise subscription revenue continued its multiyear performance of growing in the 30s, posting growth of 36% on an LTM basis.

And this Enterprise business is highly profitable, generating a 6:1 LTV-to-CAC ratio on a truncated 5-year basis.

Our commercial business, which represents the other 21% of LTM revenue grew in the single digits.

We expect continued single-digit commercial revenue growth now that we have lapped the easier 2017 compare.

Recurring revenue accounted for 92% of our revenue, the other 8% of our revenue was comprised of Professional Services.

Second quarter adjusted gross margins were 65%, an increase of approximately 120 basis points year-over-year.

Second quarter adjusted EBITDA was $14.4 million, representing an 18.6% margin, an increase of approximately 270 basis points year-over-year, demonstrating the profitability of our business model.

Second quarter non-GAAP net income was $12.3 million, a year-over-year increase of $5.4 million.

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

DSO for the second quarter was 30 days.

Our operating cash flow for the second quarter was $6.8 million, a year-over-year improvement of $1.1 million.

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

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the full year and the third quarter of 2019.

For 2019, we expect revenue to be in the range of $312.5 million to $314.5 million.

GAAP net loss is expected to be in the range of $12 million to $10 million, or $0.20 to $0.16 per basic share.

Non-GAAP net income is expected to be in the range of $44.7 million to $46.7 million, or $0.70 to $0.73 per diluted share.

Consistent with our previous discussions, this bottom line guidance reflects expected increases in various growth initiatives, particularly in R&D and in go-to-market to go after this massive market opportunity that is coming towards us.

For the third quarter of 2019, we expect revenue in the range of $78 million to $79 million.

GAAP net loss is expected to be in the range of $6.3 million to $5.3 million, or $0.10 to $0.09 per basic share.

Non-GAAP net income is expected to be in the range of $8.8 million to $9.8 million, or $0.14 to $0.15 per diluted share.

Note that a number of new hires were back end-loaded in the second quarter, and therefore, we expect meaningful uptick in R&D and in sales and marketing expense in the third quarter of 2019.

Nonetheless, in the fourth quarter, we expect to, again, be reporting 20%-plus adjusted EBITDA margin.

For modeling purposes, we would like to provide the following additional information: for calculating EPS, we expect our diluted shares to be 64.5 million and basic shares to be 61.5 million for the third quarter of 2019, and 64.2 million and 61.1 million, respectively, for the full year 2019.

We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $75,000 for the third quarter of 2019, and $130,000 for the full year 2019.

Our capital expenditures for the third quarter of 2019 are expected to total approximately $6.5 million to $7.5 million.

For the full year 2019, we expect to continue capital expenditures to be between $20 million and $24 million.

In summary, we are pleased with our second quarter performance, driven by the strong revenue growth and excellent unit economics.

The importance of customer engagement continues to be a key driver, and the Five9 team continues to execute extremely well against this massive opportunity.

Operator, please go ahead.

(Operator Instructions) We'll take our first question from Terry Tillman with SunTrust Robinson Humphrey.

Can you hear me okay?

Yes, Terry, we can, thanks.

Good to know.

And Rowen, I really like that statement or the announcement you made about the 30%-plus growth in Enterprise over a long-term basis.

And I wanted to focus on that in terms of -- as you could see obviously a lot more than we can see.

Maybe you could just give us some of the confidence kind of foundational elements on that statement of 30%-plus growth on the Enterprise side as it relates to maybe the quality of the hires, as it relates to the sales reps?

Or how much you have expanded it in terms of that gives you great sales coverage.

Or just some more on what we really can't see on the outside, which is just the sales team and the go-to-market overall.

Where is this confidence coming from?

Thanks, Terry.

It starts with the market really and the sense -- the idea -- the fact is that this market is huge, right?

And customer interactions are absolutely exploding.

If you look at Gartner's data that shows that over the 5-year period that we're in, ending by 2022, the interactions in the contact centers are going up by 3.5x.

And you have that that's sort of underpinning the fact that, that contact center is emerging as a strategic priority for businesses all over the world.

And that was reflected most recently in Morgan Stanley's analysis where they looked at cloud buying patterns and the fact that customer experience was the top priority for CIOs and other C-levels.

And then you have the fact that we've essentially gotten through the evangelism phase on the cloud.

So in other words, customers need to upgrade, it's becoming an increasing strategic priority for their business and they're convinced that the cloud is the way to go.

Gartner, I think, I pointed out in the call, that Gartner doesn't even have a Magic Quadrant for on-premises contact centers.

So that's the first thing.

$24 billion market, cloud penetration is beginning.

The second thing is really about execution and scale, right?

We have proven that we can execute on the sales front.

We've proven we can execute on the product front, we've got the product that's winning in the market today and scale, so the growth you're seeing driven today by our -- in the top line is really coming from that Enterprise business.

We're signing larger and larger deals.

We're now highlighting those million dollar deals for you guys.

And so we're seeing that traction, we're seeing the proven execution and frankly, in this market right now from a competition perspective, it's really a duopoly.

I mean, us and inContact are at the head of this market and that's of course, in the Gartner report, but we see it in our win rate -- in our win-loss and we see them in the market.

And while there is noise in the market with new entrants and so on, none of them have a beachhead, and we're definitely not seeing them in the market.

So therefore, my conclusion is that this 30s level of growth in the subscription of Enterprise business is going to be durable over a long period of time.

Okay.

I guess my follow-up though kind of focusing again on kind of go-to-market is also, as you look at kind of what you've assembled so far kind of year-to-date, how do you and Dan feel about like the sales capacity you have, executing against [your] targets this year and really even going into next year, and how much do these emerging global SI relationships play in that as well?

I'll turn it to Dan, but just the intro is, look, we are super happy with the hires we've made.

We've had a very stable team with very low attrition rates, the leadership team has been on average around for 6 years, and if you look at the new hires that we just announced running channel and international, Dan and I and the team met with them.

These are extremely high-quality candidates.

We're attracting the top talent in the industry into these leadership roles and frankly, getting into channel and international is going to be a big growth opportunity for the company.

And so attracting people who have done that before and have those relationships is absolutely huge.

Dan?

Yes.

Just to add to that, and well said, Rowan.

When you look at us bolstering the leadership team with those additional adds, we're preparing ourselves to now go from 300 million to 1 billion.

And in order to do so, we're going to rely on global channels, the prominent partnerships, but also continuing to really go-to-market with the best talent.

And so bringing in expertise, we've got a great management team that as Rowan said, has been here for 6 years plus, but we're adding to that in the areas of international channels working with SIs and being able to leverage those relationships that they've had in their past.

And so folks that come in with the experience of having been there and done that from the 300 million on up is very important to continue our scale.

We'll take our next question from Meta Marshall with Morgan Stanley.

I wanted to see -- congratulations on the quarter.

Just if you can kind of speak a little bit more about kind of the SI channel.

And you had mentioned that being an important kind of relationship to ramp.

But just how long do you think it will take for those partners to kind of get those businesses running?

What type of investment it will take from your part just to maximize that channel?

And then second, just any update on some of the trials that are taking place on the AI front would be helpful.

That's it for me.

Sure.

Thanks, Meta.

Great question.

Along the SI front, let me be clear, that has -- it's not how long will it take to get traction and get that going.

We've had partnerships for several years.

The one large one, the global one, is Deloitte that we've had a partnership for about 4 years now.

And we saw what occurred there and how much they were able to generate for us.

They get hired along with the other SIs that we mentioned earlier, the Slaloms, IBM, EY, and Accenture and others that are being brought into these larger enterprises to help them with their digital transformation strategy and how they should go about moving to the cloud in particular.

And so we get access with them as part of that larger project and get brought in by them.

I think we mentioned on the last quarter call that Deloitte has been generating and is now generating well into the double-digit millions of dollars of revenue for us, and we're now replicating that same model across those other partners that I just mentioned.

And we've applied resources and dedicated resources to working with them.

So it's just another way for us to expand our footprint, expand our reach and get access upmarket.

So that's been working extremely well for us and it's very strategic.

You asked -- the second part of your question was with regards to AI.

I'll turn it to Rowan to let him answer that piece.

Yes.

So Meta, that's going well.

We've gotten a lot of great input from our customers who have helped us really clarify exactly where they want us to focus.

And that's around Agent Assist.

So that's the concept of the real-time AI recommendations and predictions that are sharing with a live agent on an actual call or messaging thread.

And so we've actually now narrowed in on the definition of the product and a road map.

We've also recently signed up 4 of our largest customers to become beta customers on this.

So it's currently in development.

And it will be included in one of our upcoming releases, probably in 2020.

We'll take our next question from Raimo Lenschow with Barclays.

Congrats from me as well.

That's amazing.

The first question is as you think about the $300 million going to $1 billion, a big part of like a typical company build-out there would be international.

And you touched on it a little bit, but I just wanted to find out more.

Like are there kind of fundamental differences to this market?

I know you're building it out, but like is there -- because you've seen a lot of adoption in the U.S. but slightly less internationally, and so I'm just trying to understand that.

And then congrats on that win.

On that note, can you talk a little bit on the gross margins?

Because Q2, 65%, I think, is the biggest -- the highest number I've seen ever in my model.

Just a couple of comments on the strength there.

Yes, thanks, Raimo.

I'll talk about the International.

The traction we're seeing there is not a function of the market insomuch as it is just our investment.

And the fact that we've talked about in the past that it's a huge market in the U.S. and we've really been focused there, but as we've started to expand internationally, we see tremendous opportunity.

That's why we just hired a new general manager for that business.

Structurally, there are some differences in Europe.

The service providers -- obviously, it's a much more fragmented market.

The U.S. is much more consolidated.

The service providers are much more important in Europe.

And so we'll have a different approach there.

But fundamentally, it's a massive opportunity in Europe for us to get started on.

The person that we hired has actually built the contact center business for another -- for the market leader.

And so we have brought in someone who has that expertise, has the relationships.

And it is a really important dynamic there that we have the relationships and that you're on the ground in the country.

And so it's a big move for us.

It will require ongoing investment, and that's something that we'll be making over time.

But we think we can make the investment as the business scales.

And Raimo, with respect to the gross margin, yes, 65% was one of our highest.

Actually, in Q4 of 2018, we were at 65.1%.

But we're actually prouder or happier with this quarter simply because it's very revenue dependent.

Q4 is a strong revenue quarter.

Q2 is our toughest revenue quarter.

And yet we managed to come within spitting distance of the all-time record.

The biggest driver for that is our subscription business, which should not surprise you.

That is after all of our recurring revenue, 92% of the total -- 73% of the total.

And this is what we've been talking about, Raimo, for quite some time.

It's the simple mechanics of the subscription revenue driven by the enterprise with the LTM 36% growth rate, growing faster than our cost of subscription revenue.

And that was taken -- those margins from the 60s, years ago, solidly now into the 70s and a steady way with that durable growth that we -- that Rowan talked about, into the 80s over time.

Well done; congrats.

We'll take our next question from Sterling Auty with JPMorgan.

This is Sahil on for Sterling.

Congratulations on the quarter.

So a couple of questions.

How would you say the contribution of new versus existing customers was in the quarter?

And we saw a couple of changes in management ranks.

So are all the positions filled now?

Or are there any other changes that we might expect soon?

So overall on the management ranks, no, no other changes.

We have -- we hired our last executive level reporting to me, and that was Anand Chandrasekaran from Facebook who worked on the Messenger Platform there.

And now Dan has hired the key set of leaders to drive channels in international.

Dan?

And to answer your question about new business versus existing, yes, when I mentioned the bookings, net new bookings for Enterprise was an all-time high by far.

We don't disclose bookings, as you know, but that was clearly the case.

And we continue to get expansions -- land and expand opportunities from our base.

That's most well reflected in our dollar-based retention rates, which again, we're at 107% on an LTM basis.

So very healthy business from both new and existing.

And yes, the leadership team on the go-to-market has just gotten larger and more robust and with better experience.

So I've never been as optimistic about the management team that we've assembled here on the go-to-market side to be able to take us to the next level.

Our next question will come from Scott Berg with Needham & Company.

Congrats on a good quarter.

I guess 2 brief ones for me.

First of all, Dan, on the contribution from partners, you mentioned it was 60-plus percent in the quarter.

I think that's better than the historical trend, better than 55%.

But what's the right mix of that going forward with kind of these new partnership initiatives?

Yes.

I mean we have such a plethora of partners that cross over many different industries.

And some are directly tied and complementary integrations to ours like Salesforce and Oracle and the other CRM providers.

Some are go-to-market partners that are more on the -- bringing us into opportunities and expanding our reach.

So they're so different.

Some are technology.

Some are ISV partners that do an add-on to the solution.

Some are true resellers of the solutions.

So it kind of runs the gamut.

What we do is we look at those and say where is there a partner involved?

And that percentage is, I think, at a very ideal and very healthy mark.

Sure, we have our own marketing efforts and our own ability to go reach and find new customers and find prospects.

But we also rely on that partner ecosystem to find them for us.

And that brings our cost of acquisition down, especially as we continue to not only build trust within those partners but also build referenceability within the customers that they've referred us to.

And once we get those references speaking highly, those partners want more and more to recommend Five9 because they trust we're going to deliver for them.

It's oftentimes their reputation that's on the line.

It's their word that's on the line, and they want to know that who they recommend is somebody they can trust.

Got it.

Helpful.

And then my follow-up is for Barry.

The percentage of revenues coming from nonrecurring was 8% in the quarter.

I think that's a little bit higher than the historical trend that I believe is closer to 5%.

I'm not looking at my model at the moment.

But with the even larger movement upmarket with some of these really large million dollar plus contracts, are you just finding that you need some more services work there to maybe shift that mix slightly?

Or should that maybe trend back towards the 5% I'm thinking about?

Yes.

Scott, the trend has been upwards.

When we went public 5 years ago, it was 3%.

Most recently, it was 7%.

Now it's 8%.

The trend is definitely going to continue.

I see Dan sitting next to me, we're not on video, but he is nodding his head vigorously.

And he has been successful in bringing value to those implementations.

We're talking about something that's mission-critical.

And people want to be sure that the 6-step implementation process that the team has that go on-site for every enterprise implementation is properly appreciated and remunerated.

Dan, you want to add anything?

Sure.

If you look at our ability to directly go in and provide these implementations with a very high touch model, Gartner recognizes that as one of our key strengths and differentiators.

Enterprise customers require and expect that you're going to come in and very, very acutely do your research to figure out and design, do discovery, do your design, your testing, your training and turning them up and then optimizing the system, all those services are so key to getting the customer off on the right foot and having them be able to truly take advantage and accomplish the business needs with a solution.

There's nothing more important than that to a services business, and we're seeing that more and more as we move further upmarket.

And I just want to add one last thing, Scott, and this is really going back to the earlier question on gross margin.

I didn't mention it at the time because it was not as material.

But it's a general tell -- reason that many years ago, we used to have triple-digit negative margin.

And as a result of the improved pricing from Dan and the percentage of the [ACV] that goes with the onetime, those have now steadily improved.

And now for the first time, it was negative in the teens.

And I believe we can confidently talk about that eventually getting to breakeven and positive with the resulting overall corporate benefit.

Super helpful; congrats on the nice quarter.

Our next question will come from Matt VanVliet with Stifel.

I guess as you look at some of the discussions around the partners and how they can really sort of broaden your reach within customers by offering a better solution and help with that digital transformation, curious how you're thinking about maybe the total wallet share that you currently have with your existing customers and what that long-term opportunity might look like over the next 3 to 5 years.

Yes.

So we've been seeing a fairly steady rise in our average revenue per user over time, over the time that we've been public.

And that's something that we see continuing.

We've been very successful at selling more -- as we move upmarket, the appetite to buy more in this space is higher.

So we end up in a really good place as we get these larger and larger customers.

And so specifically, our partnership with Verint has been going very well.

We sell Five9 WFO powered by Verint.

We also increasingly see -- and this is where I think the channel comes in and notably the SIs, but the desire of our larger enterprise customers to spend more time integrating the contact center deeply in with their CRM platform is there.

And so that drives services revenue.

It drives technology revenue.

I mean things like MuleSoft and so on are certainly part of that story.

Workflow automation and so on.

So there's just a tremendous amount of touch points, and we see -- I can't probably directly answer your question around wallet share.

But I can say that the overall wallet and pie is growing, and it's growing fairly rapidly.

And our access to it, and frankly, our buyer's influence over it is also growing.

And then, Barry, as a follow-up, there was a mention earlier about using more of the public cloud resources out there.

Obviously, it seems like it's probably for some incremental services.

But overall, just curious on how that might impact gross margins in the long run if that doesn't continue to be a larger mix of the infrastructure used overall.

Yes.

So Matt, frankly, our motivation on the public cloud underway is not done for margin improvement.

We understand that other companies have benefited from it.

We're doing it much more for the nimbleness and the access to the various Platform-as-a-Service advances that we can bring to bear.

So we haven't been assuming anything material, but it's certainly something that could be positive.

Our next question will come from Jeff Van Rhee with Craig-Hallum Capital Group.

This is Rudy on for Jeff.

So a couple for me.

So a lot of color on partners.

I like it.

With the partners, with respect to the actual deployments and implementations, what percent of total deals -- what percent of the overall implementations are being done by the partners?

And then secondly, a lot of people have some concerns with attrition in sales force right now.

I think you answered this earlier, but I might have missed it.

Can you just comment on any changes you've seen in the pace of attrition in the sales force as well?

Sure.

Thanks, Rudy.

This is Dan.

Happy to take that.

First, looking at implementations by partners.

I've been very cautious, while we're signing up some large global companies that are willing to make the investments necessary to be able to put in the quality implementation and have it result in success on the customer side, is something that we're very cautious about.

We've seen folks in the cloud in our space that have had cloud offerings that have pushed out that responsibility to the channels prematurely, and the channel wasn't prepared or ready to be able to go as deep and as thorough as we can ourselves.

So as we are signing up and enabling and going deeper with some of these larger partners, we are very cautious and requiring them to allow them to do OJT, over-the-shoulder shadowing of our people to ensure that they, a, take the time to invest the right resources and the time and energy to be able to do the same quality that we can deliver ourselves and then for us to monitor and -- over the shoulder on their first implementation.

And only then will we actually relinquish and allow them to go the full route.

There's very few doing that.

We have some that are committed to doing that, and we'll get them trained up over the next several quarters.

But again, I'm going to be very cautious because I want to make sure our quality does not degrade whatsoever.

That's been a key, key part of our success.

As far as attrition on the sales front, we have extremely low attrition in the industry.

I would put it up against anybody and especially the case for voluntary attrition.

So like any organization our size that's growing, you're going to have some folks leave from time to time.

But typically, it's either a mutual decision or it's one where we've kind of pushed them out the door to move on.

So been extremely low across the board, and that goes for the last 4, 5 years.

Great.

Got it.

And then just one last quick one, if I could.

Competitive landscape, have you guys been seeing inside communication players -- any increase in the frequency that you guys are seeing them in deals?

I mentioned earlier this market is really a duopoly at this point.

We share our win rates, and it's really inContact and Five9 tend to be in all of these big deals.

So we really haven't seen any significant -- we haven't seen any real material shift in the competitive landscape on that front.

We'll take our next question from David Hynes with Canaccord.

Nice quarter.

So the question earlier was asked on public cloud as it relates to the financials.

Maybe, Rowan, you can talk on -- you hit on a new software delivery engine in your prepared remarks.

Just curious, how does that leverage public cloud?

I mean should we think of it as more for international opportunities?

What does it do for the product?

Any additional color there would be helpful.

Yes.

No, it's actually -- so our engine and technology architecture for future development is going to be public cloud based -- or is public cloud based.

And it's not exclusively for international expansion, although that's certainly one benefit.

It's more about acceleration and leveraging the massive amount of services that are available in the public cloud today.

5 years ago, if you were to build a SaaS service, you would have to deploy a bunch of -- it was not necessarily a clean-cut case to go public cloud because you could leverage open source in your own data center and potentially get better economics.

Now that's really increasingly not the case as Google and Amazon and Microsoft have fleshed out their PaaS layers.

And so that's providing us with leverage on our R&D.

It's a big -- it's all about leverage really.

We talked about increasing the spend in R&D.

But all of the new capabilities that we are driving, we're really driving towards public cloud.

So our AI offer we talked about earlier will be launched on public cloud.

And many of the new offers that we are bringing to market will be public cloud sort of hosted.

Now we continue to leverage the on-prem -- sorry, our own cloud infrastructure that we host in our own data centers and colos around the world.

And there is some benefit there around leveraging the investment we've made as well as the network that we've built up and so on.

But our future development and platform is really public cloud oriented.

Yes.

Okay.

And then a follow-up.

As you get further into these pilots with AI and the Agent Assist technologies, how are you thinking about price exploration?

Have you figured out what customers may be willing to pay?

And any color you could share with us there?

Too soon to tell.

We'll keep you posted on our pricing.

Thanks, guys; nice quarter.

We'll take our next question from Brent Bracelin with KeyBanc Capital Markets.

With no response, we'll move to our next caller, Jonathan Kees with Summit Insights Group.

I want to congratulate -- add my kudos to the congratulations for the quarter and to Barry.

I have a couple of topics I would like to ask about.

This should go pretty quickly.

One, regarding the press release and also the commentary during the call about the partnership with Microsoft in go-to-market and product collaboration.

Just curious, does this mean that they're going to be selling your product to their customers?

Or is it still going to be mainly Five9?

And how much -- taking a step back, how much of a needle mover is that, first off?

Yes.

So great question, Jonathan.

This is Dan.

It's a little premature to know the impact of the needle, if you will, if it's going to move the needle, and how much.

But it is a 2-way partnership.

They will be partnering very closely with us and helping introduce us into their partner and their go-to-market channels to be able to provide Five9 as a contact center solution to go on top of the Teams products that those channels already sell.

So one of the dilemmas is their channels are out selling Microsoft Teams.

It's without contact center.

It doesn't have contact center.

That hinders your ability to get into certain enterprises that do want to do a full reset as well as going into their existing customer base that uses Teams and being able to provide contact center.

So we see them bringing us more incremental than the other way around.

And then your other question...

The other topic.

Yes.

It sounds like a lot of great potential there.

The other thing I want to ask about is regarding the new hire from Facebook.

I guess, Rowan, you have been fairly predictable in most of our hiring executive -- seasoned executives with specific expertise to come over to Five9 and work on that -- continue that expertise work.

Just curious, this senior hire that you've brought in has replaced an existing exec you have in product management -- excuse me, product management and development in contact center.

This person who's coming in has messaging and e-commerce background.

Rowan, just curious if you can share some light in terms of your product development road map beyond AI and AWS and bringing some of these features.

You've talked about technology.

So just any news out there.

I hope you're not tired of it because I'm going to keep going.

So Anand worked at Facebook on the Messenger for Business platform.

And the Messenger for Business platform was really targeted at businesses that wanted to engage with their customers through the Facebook Messenger Platform.

And that's obviously a huge draw for businesses.

And so many of the -- many, many large businesses in the U.S. were engaging with Facebook on that front.

Anand was at the front end of that.

So I will speak for Anand here, but the idea here is that customer interactions are exploding across all of the new channels.

That's what's driving the CX really up to the top of the priority stack, as Morgan Stanley reported recently, that customer interactions are on the rise.

So Gartner says they're going to go up 3.5x in the next 4 years over a 5-year period that ends in 2022.

And customers want to incorporate those new channels into their contact centers, and we felt that bringing Anand in gave us an incredible perspective because he was at the vanguard of Messaging for Business at Facebook.

And so he's got a powerful vision of the contact center given his time at Facebook, and he had a chance to interact with a lot of enterprise contact centers and ISVs who were building technology in that space.

And so when Anand and I first met, he really explained his vision around the enterprise contact center business as a huge area of future growth and technology innovation.

That's what he was seeing from his lens over there.

And from our perspective, we got to have someone who reflected the next generation of preferences of users in terms of how they want to call in, how they want to connect or get help through messaging and so forth.

And so that really helps us paint a vision -- I think Anand is going to help us paint a vision for the future and take us into the future of the contact center.

So very, very excited about him joining.

And there are no further questions at this time.

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

Thanks, operator.

So in closing, I'm pleased with our strong first half performance.

We are making excellent progress on our strategic priorities led by our increased investments in product innovation and go-to-market.

And we have a fantastic team in place.

So there's tremendous opportunity here for Five9, and we look forward to sharing our ongoing progress at our upcoming Analyst Day in New York on November 12.

So please join us there.

With that, we'd like to thank everyone and wish you a good day.

Thank you, operator.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.