Five9 Inc (FIVN) 2019 Q3 法說會逐字稿

Good day, and welcome to the Five9 Third Quarter 2019 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the cover story to Lisa Laukkanen.

Please, go ahead.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Five9's third quarter 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 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 we should consider in evaluating Five9 and its prospects, is included under 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 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 non-GAAP financial information provided by other companies in our industry.

The full reconciliation of the GAAP to non-GAAP financial data can be found in the company's press release issued earlier this afternoon and is also available in the Investor Relations section on Five9's website.

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 very strong third quarter results with $83.8 million in revenue, up 28% year-over-year.

Increasingly, larger enterprises are demanding Cloud Contact Center's, driving our Enterprise subscription revenue to grow 36% on an LTM basis.

Our adjusted EBITDA margin was 18%, a decrease of 160 basis points year-over-year, reflecting the significant incremental go-to-market and R&D investments we mentioned at the start of the year.

I'll now turn the call over to our President, Dan Burkland, to share another great bookings quarter.

Dan?

Thank you, Rowan.

Hello, everyone.

Our Q3 Enterprise bookings grew strongly year-over-year and once again reached an all-time record for any quarter.

And our pipeline also reached another all-time high.

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

And now I'd like to share some key enterprise wins for the quarter, including one which demonstrates our international momentum.

The first example is a publicly held online higher education company.

They had been using several outdated Avaya premises-based system requiring expensive maintenance and did not provide the scalability, flexibility, ease and depth of integration to Salesforce Lightning, nor the ability to innovate and infuse AI into their Contact Center customer experience.

Once they evaluated several cloud solutions, they concluded that Five9 would solve these challenges as well as give them a platform to optimize intelligent, performance-based routing for every interaction.

They also plan to leverage AI to improve agent efficiency and reduce handle times by automatically inserting selective transcribed information from calls directly into their Salesforce CRM.

We anticipate this initial 3-year order will result in approximately $3.1 million in annual recurring revenue to Five9.

A second example is a healthcare company, providing a wide range of services throughout the U.S. They were using several premises-based systems, which were outdated, created silos in each of the locations and experienced frequent outages.

They researched and evaluated the leaders in Gartner's Magic Quadrant report for Contact Center as a Service, including Five9.

They chose Five9 after understanding our industry-leading solution, including omnichannel, Five9 WFO powered by Verint, performance dashboards as well as our unparalleled implementation and ongoing continuous optimization services.

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

The next example is a national auto parts distributor who had been using an inferior cloud solution with limited capabilities, which lacked the reliability and scalability they required of their business group.

They hired a consultant to help them find a next generation cloud platform to meet these needs as well as give them the flexibility and innovation required for their additional anticipated growth.

With the Five9 open APIs, we were able to deeply integrate Five9 to their proprietary CRM, bringing a comprehensive WFO solution from Five9, powered by CSI and evaluate and measure important KPIs around agent performance.

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

Now as we normally do, I'd like to share an example of an existing Enterprise customer who has significantly expanded their business with Five9.

This global company provides wireless services and devices in over 57 countries.

Five9 had been serving their U.S. contact centers with great success over the past 2 years.

They now are expanding with us to serve their European operations from our U.K. and Amsterdam data centers, and we're also providing services in their Asia-Pac contact centers in Singapore, Japan and China through our Five9 Global Voice solution, leveraging our Tokyo voice PoP, which keeps voice calls local in region, cutting costs, reducing latency and improving voice quality.

This customer increased its annual spend with Five9 by more than 30% and is now anticipated to generate over $1.4 million in annual recurring revenue.

We are seeing increased demand from Enterprise customers and we're executing well there.

Multinational customers are truly leveraging our Global Voice architecture, and we are expanding our footprint and offerings within our growing customer base.

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

Thanks, Dan.

Those are awesome examples.

Now the market and our products and our go-to-market strategy are the 3 key pillars driving Five9's growth.

I'll now share some of our progress in these areas, and I'm going to start with the market.

As I've described previously, the market has a TAM of over $24 billion, and it is massive.

And cloud penetration is under 15%.

Now we believe the pace of migration is likely to accelerate.

Enterprises have learned to trust the cloud with digital transformations underway.

Company leaders recognize that transforming their customer service experience is a necessity.

And we believe that recent changes to the UC landscape has the potential to accelerate decisions to upgrade to Contact Center.

The second pillar of our growth strategy is our product.

So this year, for the fifth consecutive year, Five9 was recognized as a leader in the Gartner Magic Quadrant for Contact Center as a Service, underscoring that Five9 is viewed as a trusted partner to enterprises that can deliver a secure, reliable, scalable and innovative platform with a very compelling vision for the future.

Our leadership position is a result of over a decade of experience and investment, working with these increasingly larger customers, building out a resilient platform with a very significant surface area of capabilities.

Now for the past several quarters under our new leadership, we've been hiring more engineers and scaling our team at a rapid rate, resulting in a substantial increase in throughput and innovation.

And that team is focused on further scaling our platform for these global enterprises, deepening our CRM and partner integration and making the platform increasingly open via enhanced APIs and SDKs.

So closing out on the second pillar, the product, we continue to make progress, building out our new software delivery engine, which leverages the blend of our own robust cloud infrastructure and public cloud from both Amazon and Google.

And we're making strides with our AI strategy under Jonathan Rosenberg, our CTO.

As we shared before, our AI roadmap has been validated by our largest and most advanced customers, and we've begun implementation, hiring, coding and performing AI model evaluation and performance tuning.

We look forward to sharing more of our AI progress with you at our Analyst Day on Tuesday of next week.

The third pillar of our growth strategy is our go-to-market engine.

Our results continue to demonstrate that our team led by Dan is one of the best in the industry, and we're making progress on multiple fronts here.

First, the leadership of our channel team that we introduced in our last earnings call is really making excellent progress.

Our channel influence and pipeline continue to show impressive growth.

We're also seeing significant engagement and pipeline growth coming from key global distribution channels.

These channels are now recognizing the need for proven, scalable Cloud Contact Center solutions, and our new channel leadership team is able to leverage long-term trusted relationships to help accelerate our go-to-market process.

So stay tuned for more details in the coming months.

Second, we continue to build momentum with systems integrators like Deloitte, Accenture, EY, Slalom and IBM, and we're adding people dedicated to the SI channel in Dan's organization.

These SIs are driving a meaningful portion of our bookings as they are often tapped to help enterprises with their digital transformation strategies.

Third, we continue to increase our focus internationally with our key leadership appointment in our U.K. office as well as doubling our International go-to-market personnel.

Our channels in the EMEA region, Latin America and Canada continue to be successful with Five9 and several of them are increasing their investment to lead with the Five9 solution as it's now proven in these markets.

Meanwhile, our Professional Services and customer success teams remain pivotal in driving our revenue growth.

Together, they make up one of the largest such organizations in our industry, staffed with customer-facing Contact Center experts instilling confidence, trust and loyalty in our customer base as they demonstrated by our blended LTM dollar-based retention rate, which was 107% in the third quarter.

Our recent global CX Summit in Las Vegas had more than doubled the number of attendees from last year, which was not only reflective of their excitement in our platform and services but also a testament to the momentum we're seeing in our business.

The voice of our customers is what drives our vision, and continued innovation, and it was clear that our product roadmap is resonating well with customers, prospects and partners alike.

In fact, several participants have already joined Five9 as new customers, one of whom is the largest example of the customer wins we've previously mentioned, and we expect more in the upcoming months.

In closing, as this huge market continues to evolve, we believe our product and go-to-market engine positions Five9 for continued gains.

Our balanced approach to growth is succeeding.

And we believe the investments we've made in the product and our channel sets us up for ongoing success including many years of 30s level growth in LTM Enterprise subscriptions revenue.

To expand upon our financial performance and guidance, I'll turn the call over now to our CFO, Barry Zwarenstein.

Take it away, Barry.

Thank you, Rowan.

Before going into specifics, you're reminded that unless otherwise indicated, all financial figures I will discuss are non-GAAP.

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

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

Revenue grew 28% year-over-year and 8% sequentially, our largest Q2 to Q3 growth rate as a public company.

These growth rates continue to be driven by our Enterprise business.

Enterprise now makes up 80% 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 to 1 LTV to CAC ratio on a truncated 5 year basis.

Our commercial business, which represents the other 20% of LTM revenue, grew again in the single digits.

We expect continued single-digit commercial revenue growth.

Recurring revenue accounted for 91% of our revenue.

The other 9% of our revenue was comprised of Professional Services.

Third quarter adjusted gross margins were 64%, a slight decrease of approximately 30 basis points year-over-year, mainly due to strong Professional Services revenue growth, driven by the continued bookings growth that we have been enjoying.

Adjusted EBITDA was $15 million, representing an 18% margin.

While this is a decrease of 160 basis points year-over-year, we are very pleased with the decision we made to ramp go-to-market and R&D investments.

We continue to guide to 20% adjusted EBITDA for the fourth quarter.

Non-GAAP net income was $12.8 million, a year-over-year increase of $1.7 million.

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

DSO was 31 days.

Operating cash flow was a record $17.7 million, a year-over-year improvement of $8.2 million.

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

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the fourth quarter and full year 2019 as well as some initial comments on 2020, in particular about the quarterly profile of the bottom line.

In 2019, we expect revenue to be in the range of $321.7 million to $322.7 million.

GAAP net loss is expected to be in the range of $6.8 million to $5.8 million or $0.11 to $0.10 per basic share.

Non-GAAP net income is expected to be in the range of $48.8 million to $49.8 million with $0.77 to $0.78 per diluted share.

For the fourth quarter, therefore, we expect revenue in the range of $86 million to $87 million.

GAAP net loss is expected to be in the range of $1.4 million to $0.4 million or $0.02 to $0.01 per basic share.

Non-GAAP net income is expected to be in the range of $13.7 million to $14.7 million or $0.21 to $0.23 per diluted share.

I would now like to provide insights into our current thinking for 2020.

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 pre-consensus of $368 million for the full year 2020.

We expect revenue to follow our typical pattern with slightly more than 50% of our revenue in the seasonally stronger second half.

Second, with respect to non-GAAP net income, we are also comfortable with the $57 million current pre-consensus for the full year 2020.

However, the consensus by quarter does not take into account the strong sequential decline we anticipate from Q4 '19 to Q1 '20.

Note that non-GAAP net income decreased by $4.5 million sequentially from Q4 '18 to Q1 '19, and we expect at least the same sequential dollar decline in the first quarter of 2020.

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

For calculating EPS, we expect our diluted shares to be 64.8 million and basic shares to be 62 million for the fourth quarter of 2019, and 63.5 million and 60.6 million, respectively, for the full year 2019.

We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $85,000 in the fourth quarter of 2019 and $115,000 for the full year 2019.

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

For the full year 2019, we expect capital expenditures to be between $19 million and $20 million.

In summary, we are very pleased with our third quarter performance, driven by 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) Our first question will come from Scott Berg with Needham.

Congrats on the fantastic quarter.

Rowan, let's start off with one of the statements you made about the UC environment.

I think it's pretty well known there's a couple of large vendors out there that made some changes in the competitive dynamic there.

But your comments about maybe pulling ahead or forcing some Contact Center decisions.

Do you have any anecdotal information to kind of support that view from what you're hearing from existing customers?

Or is that more of an expectation of changes is probably good for everyone in the ecosystem?

Well, no, I don't have any specific anecdotal.

That's just more my prediction that I think with some companies sort of throwing in the towel on different parts of their portfolio, it feels to me like there is an admission of, hey, you need to make a change and the cloud is where it's at.

And as a result, I think those customers that have to make a decision are going to evaluate and look at the market, perhaps sooner than they might otherwise have done so.

So that was what my comment was targeted at, Scott.

Got it.

That's helpful.

Dan, and then from a follow-up perspective, you guys are spending a little bit more in sales and marketing.

I think the top line numbers speak for themselves in terms of productivity.

But outside of some of the partner investments, is there any way to think about some of the other incremental investments?

Is it kind of broader-based across all your go-to-market channels?

Or is there maybe an area of emphasis right now that might be working a little bit better to note?

Sure.

Thanks, Scott.

Yes, we had said throughout the year that we really got 4 areas of key investments that we're making not only to continue to scale and drive our direct sales organization and bring in leadership that really has experienced of having been there done that for much larger organizations, which will help prepare us to go to the next level.

But we're also investing in the channel and our SI partnerships as well as our International expanded footprint.

The productivity isn't quite as large in some of those international markets, but it's very important for us to establish ourselves and get a brand and get market share in those markets.

And next, we will hear from Sterling Auty with JPMorgan.

Can you give us a little bit more color in terms of how much of the booking strength that you're seeing in the quarter that's actually coming from expansion deals from existing customers?

And what is the structure?

Are you just seeing more seats within current divisions?

Or is there any type of pattern that you're kind of seeing that's making the kind of breakout that you're seeing possible?

Yes.

Thanks, Sterling.

This is Dan.

Yes, you kind of hit on all 3. We're seeing it really exist from booking more new logos and larger logos at record levels.

As we indicated, the net new bookings for Enterprise was an all-time high for any quarter, as we said in the prepared remarks.

And then we also are seeing expansion within the base.

Lots of the customers -- as you go into larger and larger enterprises, you tend not to go in and replace all several thousand seats at once.

They tend to find the departments that are most in need of innovation and most in need of an upgrade.

They move to the cloud, and then they see the performance that we provide to them and then they upgrade the rest of the enterprise.

So we see a lot of that as well.

And then you mentioned the third item, which is also selling more applications and more solutions as we broaden our offering, and be able to do so.

It means they buy more from us.

So it's kind of all 3 of what you mentioned.

They are all 3 hitting at once.

All right.

Great.

And then one follow-up question.

It's that time of the year where I think you guys are usually talking about the hiring that you are doing, especially in sales and marketing, to drive next year's growth.

Can you give us some insight as to where you are in that process?

Sure.

As we've done in previous years, this tends to be the season where we load up and do more hiring in the latter half of the year to prepare for the following year.

We have a annual sales kickoff meeting that take place in January.

So we bring everybody in, and it's a great way to get folks on, get them partially ramped up and ready to go for a very successful next year.

And we're doing the same this year.

The next question will come from Raimo Lenschow with Barclays.

Congrats from me as well.

Two questions.

On International, can you talk a little bit about the scale of the organization and kind of what's needed to drive ongoing growth there in terms of more other countries, other data centers, et cetera, given like the more sensitive nature out over there?

And then a question for Barry.

Obviously, you said you're comfortable with the current consensus, but that obviously, that's kind of assuming quite a big deceleration of growth.

Is there anything in the number that we should know?

Or is that just [Barry] guidance?

I'll take the first part, Raimo, on what investments are needed on International.

So we've actually already have a team with go-to-market perspective, and Dan's just hired a new leader, very excited about that.

It's the same gentleman who built out the Cisco Contact Center business over 10 years ago.

So I think we've got the leadership in the team there that we need.

From a data center perspective, we actually already have data centers and footprint.

And at our financial Analyst Day conference next week on November 12, we'll be covering more details about that.

But we have the data centers we need across Europe.

We are making incremental investments there.

And as we mentioned previously, the focus that we have with regards to data center footprint is on leveraging public cloud, who have made those investments to have the availability zones that we need so that we can have data centers in country without us needing to make the investment to, say, stand up colo agreements and rack and stack hardware.

So we're looking to public cloud availability zones to leverage the data centers footprints that we need as we expand into additional countries.

And the second question was for Barry, I think.

Yes.

And so Raimo, with respect to the soft guidance that we've given for 2020.

The question is around the strength of our business, let me assure you that our business is strong, and we are confident in our competitive position.

You've heard Dan earlier on talk about the investment he's making in sales and marketing.

We have one of the leading products under our new leadership and the increased funding they're getting.

So it's not about the strength of the business.

What it is about is our guidance philosophy, which you alluded to, tends to be prudent.

And in the fullness of time, we will see how it actually does turn out.

And we will now hear from Meta Marshall with Morgan Stanley.

Congrats on the quarter.

With the $3 million ARR deal you announced, some of the AI use cases seem to be coming on a little bit earlier than expected.

So have all the trials concluded at this point?

Or just kind of give us a status of where some of those trials are?

And then I know that there was kind of an announcement of Microsoft Teams being a partner last quarter or kind of in the summertime, just any update on there?

Or where are you seeing kind of traction with your partners?

Sure, Meta.

With AI, no, the trials are not completed.

We're actively in trials with 5 of our large customers, and we could be doing many more than that.

But that's what we need right now is to get the big use cases into production essentially.

And so again, we'll be giving an update on that next week at our Financial Analyst Day and even a demo I think.

So you get to see that live in action and even hear from a customer.

So very excited about sharing the progress we've made there.

It's been very encouraging.

And your second question was about -- what was your second question, can you repeat the second question?

Yes.

Just Microsoft Teams as a partner or just kind of Microsoft as a partner.

Yes.

We continue to be excited about that.

They've been making good traction with Teams as they integrated Skype for Business and their calling offers into Teams.

And I think the news has been full of reports about the success of Teams in the market.

And so that's a great partner.

We are intending to launch our support with them, and they've been having us out to their events, and they're introducing us to their partner channel and so on.

But no new news on that specifically yet, it's just in progress.

And your next question will come from David Hynes with Canaccord.

Congrats on the strong numbers.

I want to ask about -- on the services side, right?

With all the bigger deals we've seen over the last few quarters, where are we in terms of services capacity?

Can you keep up?

Are you thinking about pushing more of the services work to your SI partners sooner?

And then maybe a corollary to that for Barry would be just can you update us on services margins?

How that picture is looking?

Yes.

So this is Dan.

As you know, we've historically done our implementation and services directly to the end user customers, and that's primarily to ensure quality.

We want to make sure that, that doesn't get sacrificed one bit.

It's been a big reason for our success rate and our retention rates.

We have every intention of leveraging partners to do some of those services for us.

And as we're bringing them on, literally as we speak, several are investing their resources in getting trained and certified to be able to do those services.

So we haven't seen it move the needle yet on the financial front, but we're definitely seeing it from an interest level.

We have some folks, in fact, this very week that are in our training center, getting certified, handful of folks from our key partners.

So stay tuned for that, but we will eventually see leverage and have it impact the financials as they come on board.

And DJ, with respect to the PS margins, you know the course we've been on.

Years ago it was triple digit negative and double-digit -- single digits just recently -- or actually low teens in Q2 and now in single digits.

So we're on a very good trajectory there, as we've been predicting.

Before we are a whole lot older, we'll get into positive territory and the leadership that Rowan and Dan have brought in to manage that business.

It brought a whole new degree of professionalism.

And for these Enterprise customers, as Dan was alluding to, the Professional Services is really important and one of our key differentiators.

Perfect.

And then maybe one for Rowan, if I can.

You talked about AI model tuning your prepared remarks and these 5 large trials that are ongoing.

Can you just remind me, when you talk about leveraging or accessing the data, are you actually seeing that like cross tenant?

In other words, can you use the data from all 5 of the large customers in aggregate to train your algorithms?

Or does that customer data remain siloed, right?

I think one of the key advantages of the cloud with the AI push is that you have this enormous swath of data to use to train the algorithm.

Just remind me kind of how that works and can evolve over time?

It's the former, it's multitenant.

So we're able to pull in data from across all of our customer base.

We have to be very careful about not using it in any way that would be any violation of privacy.

So we -- it's all anonymous usage of that data.

So the data is truly anonymized.

But no, absolutely, that's part of the benefit I've been talking about, I think, for 1.5 years, which is, we have over 5 billion minutes of traffic going across our wires through our systems.

And because we're multitenant cloud, that does give us the capability to leverage all of that data.

And that puts us, I would say, in a leadership position vis-à-vis any of the competition in terms of our ability to have more data, access to more data for these customers.

And so that's really, really exciting.

And I think a part of what makes our customers so excited about what we can potentially do here because in many cases, there is no single customer that has enough data actually.

We find that it's only in the aggregate of the fact that we have so many customers and so many billions of minutes of data going across the wires that we can actually get the kind of insight that is needed to make AI work in the best possible way.

You've seen that corollary in things like the consumer world where Amazon, Google and Apple have made very good strides on voice because they've got access to all of the consumers.

It's not done on an individual basis, it's done across the base.

And we will now move to Nandan Amladi with Guggenheim Securities.

So as you signed up some of these largest customers, what are some of the factors that Enterprise has taken into account for very large contact centers?

I guess are there sort of natural boundaries to the size of the contact center that they might be willing to migrate over?

Yes.

Great question, Nandan.

This is Dan.

I'll take that.

As we move up market and really as the market accepts us and trusts us to deliver in the enterprise, there is some prerequisites that you've got to overcome or accomplish before you can even approach enterprises with this type of solution.

And you've got to be able to demonstrate scale way beyond what they've got today because they may have growth or M&A acquisitions that require multiple x of growth beyond what they have.

You've got to demonstrate security and data protection and making sure that you can secure and encrypt and protect their data as well if not better than they can.

You've got to have an always-on fault-tolerant platform that has the resiliency and redundancies built into it that it's very hard for an individual entity to achieve on their own.

But with a knock and a 24/7 monitoring, we can give them a lot greater assurance there.

The fourth area is really the ability to make sure that we've been able to duplicate and allow them to move to the cloud without compromising or sacrificing anything that they have today.

So enterprises get caught up on wanting to use certain capabilities.

So you've got to be able to emulate and deliver precisely what they have today.

And then the fifth and final is really being able to give them a platform for innovation.

How can you allow them to then go improve what they deliver from a customer experience standpoint and give them the opportunity to infuse things like AI into their workflows and be able to build in enhancements that they couldn't otherwise do with the legacy

So as they recognize and see that being proven, this industry is rather conservative in their decision making.

So they always want to see others that have made the same decision, and basically, it usually comes down to, well, if you can show me that you're doing it for them, I'm sure you could do it for us.

And we do a lot of that in kind of what we sell.

The earlier question that came up about AI, those folks are moving forward with Five9.

And one of the primary reasons was they went and talked to the folks that are doing the pilots with us on AI.

And that helped him recognize that, aha, we want to do the same.

So it's a lot of customer reference selling and proving out those factors that I just mentioned.

Great.

And a quick follow-up on the bot press release you made in the Salesforce AppExchange.

How does the functionality differ from your sort of, like, call it your native bot in your Five9 environment versus bots that maybe run in other environments like AppExchange?

Yes.

We don't have a native bot on our platform.

And so we partnered with Salesforce and really this is a connector that we announced as the connector.

It's on the Salesforce AppExchange as that allows essentially customers to build a bot, using these -- the Einstein bot framework.

And so we just basically made that really easy and really flexible so that -- a lot of the challenge with bots is that very often customers want to escalate into a live conversation very quickly with context.

You kind of -- you ask a couple of simple questions and determine that the bot isn't going to give you the answers.

And so this is really all about deeply integrating with CRM so that the experience can be totally seamless.

So if the bot doesn't have the answer you want, you click once to say, escalate to a call.

You speak to an agent.

They've got all the context or even bring a live agent into the bot conversation.

So it's all about that flexibility and deepening of our integrations with the CRM platforms.

And your next question will come from Terry Tillman with SunTrust.

Congrats on the quarter.

I guess first, I wanted to ask about ISV engagement.

It seems like there's just going to be a natural interest for them to even want to more collaborate with you than they had in the past as you have your own Enterprise traction.

So anything you quantify or qualify in terms of just ongoing increased engagement with ISVs, particularly in the CRM side?

Yes.

Just to clarify, are you talking about ISPs or ISVs?

ISVs.

Yes, ISVs.

Partners, correct.

So yes, we're seeing a great deal of interest.

As we open up our platform and make it more easy to integrate and publish our APIs, that's the enabler that allows them to integrate with us, but just the sheer interest, as you mentioned, as we're up market within Enterprises.

They have so many back-office systems and so many adjacent platforms that they obviously don't want to replace, but they want to leverage and integrate to us.

And we made that easier and easier.

And so more of the companies are coming toward us and saying, great, we want to integrate with you.

We have a whole process and a whole certification that takes place by them bringing their solutions.

They do the integration in most cases, and then we certify it and validate it and jointly bring it to market.

Some of those, we resell.

Some of those, we just refer to the ISV partners.

And we're in the process of being able to build that out and build that program out and so look for some announcement in the near future about a full marketplace for that.

And just a follow-up question is on International.

Seems like it's really exciting opportunity.

Expectation-wise, as we look into '20 versus '21, how big can this ramp in '20 as opposed to thinking more about '21.

And again, congrats.

Thanks.

As far as the International footprint, yes, we're putting the pedal down and really expanding our footprint.

As Rowan mentioned earlier, we've got the infrastructure in most geographies.

So when you look at the voice PoPs as well as the full data center pairs and leveraging public cloud, it gives us the ability to expand more rapidly.

We're focusing our efforts on certainly on Canada as well as European markets and Latin America.

And we've got customers that are spanning the globe from global customers that are large in nature as we move up market.

And most of them have global operations that require us to be present in most countries.

So that's just part of our natural growth and evolution as a company.

(Operator Instructions) We will now go to Matt Van Vliet with Stifel.

I guess, first, you referenced that the new head of Channel is really driving some impressive growth and has brought a new level of professionalism.

I wonder if you can just dig in a little bit in there and talk about how much focus is this going to be on the global SIs where you had some traction and talked about some good growth there versus reaching out into the more traditional channel, at least in the communications market, where you are seeing more in the maybe midmarket section?

Yes.

So great question.

And yes, understand the leadership we've brought in incremental addition.

We've been in the market with channels.

Those historically have been primarily VARs and the traditional folks that bring Contact Center Solutions and Communication Solutions to market.

We are seeing that evolve and expand much more in the SI, the global SIs, if you look at the large folks there.

They're oftentimes being brought in by these large enterprises to help them with their digital transformation strategies.

And they're being told, hey, go find cloud -- cloud everything, including Contact Center.

And so the SIs have really started to build true practices around Cloud Contact Center.

And they've leaned in heavily.

If you travel around to the Deloittes or EYs, and you look at their experience centers and you say contact center, they're going to peel back and show you Five9 and Sales force fully integrated together as their recommended offering.

So that's given us great traction.

They've also walked us into some of the largest enterprises that we talk about on these calls.

Sometimes those are brought to us by those enterprises.

We're also seeing additional traction because, as Rowan mentioned, the background of the folks that we brought in from a leadership perspective have, in some cases, decades long relationships with very prominent global distribution.

Some of those global distributors are hard to crack.

If you knock on their door, which we've done for several years as a smaller company, if I go back 4, 5 years, you're knocking on their door, they might listen, they might say, yes, we'll sign up, and, gee, we'll keep you in our back pocket where we might need you on an opportunity.

But we're now seeing them lean forward and say, wow, you guys are over at Five9.

We've trusted you for 10 years with the platform that you used to sell us, and there is an immediate trust level and an interest to want to bring Five9 into their portfolio.

So stay tuned on that as we're solidifying some of those partnerships.

And then looking at the open platform and a lot more of the API development you've had.

As you move more and more to the high end of the Enterprise market and seeing larger deals, how do you focus the development of different integrations with major platforms between going as deep and as broad within maybe Sales force as you can versus trying to cover 10, 15, 20 different CRM tools where they tend to sit maybe more on the lower end?

So just sort of thinking about the balance between getting as deep as possible on the big platforms versus expanding into others?

Yes.

We actually take an SDK approach to those.

So to start out with, we have created a CRM integration SDK, which makes it very, very easy for us or others to integrate any CRM platform into our product.

And frankly, what we see is that many customers, particularly in the B2C space, have their own sort of home-grown built CRM product.

So this isn't really -- we weren't able to -- we're not -- we don't have a strategy where it's a pairwise integration with every single one of those.

So the SDK approach really helps us to accelerate that where we've got our APIs, but then we build on top of those APIs.

It's a really easy sort of fast start for doing a CRM integration.

We also have the same thing for UC.

So you can integrate with any UC back end as well.

And so we're taking that approach to help our customers do that.

And I would say, stay tuned for more on that.

We've got -- we'll sharing more detail about the platform and the -- at our November 12 Financial Analyst Day.

That'll be next week.

And we will now go to Jeff Van Rhee with Craig-Hallum.

Congratulations.

Just a few quick ones for me.

I just want to spend just a minute on competitive landscapes, specifically on the UC side.

If you look at the final stages of bake-offs at this point, what percent of the time do you see UC guys in there, one.

And two, when it was you and just really trying to use the comment on win rates versus the core or cloud guys inContact NICE, Genesys Interactive.

Maybe can you give us some sense of how that's trended versus the UC guys when they do get to that finalist position?

Yes.

Great question, and we really don't see the UC guys playing in the head to head, except on occasion with RingCentral when they'll bring in inContact.

It's usually because they've already been talking to inContact and then Ring is at the table.

But if you look at the other combos, they typically are playing in the midmarket to commercial space.

As you get up market, and we've validated with this our customers and other prospects out there.

The buying cycles and the buying motions are different, right?

You move up market, and you have a line of business buyer that typically is making the decision for Contact Center.

And you have IT, who's making a decision for UC.

And those are -- certainly, we need to run the gauntlet with going through the security audits and check all those boxes with IT, but it's not the driving force of the decision.

It's the business.

So we see those decisions as often separated.

I know the UC guys will try to say, it's better bundled, and it's better together.

That's fine and convenient for the small market, but typically, not the case at the high end.

Got it.

That's helpful.

And what about against the core cloud competitors?

Any changes in win rates, say, even versus a year ago?

No, we're still exceeding the 75% plus win rates against them, and we don't see that changing.

So...

Yes.

Fair enough.

Good.

And that last one.

And then just with respect to acquisitions, maybe just some color, what you're seeing out there, areas of potential interest, likelihood of maybe more aggression on the acquisition front?

Just your thinking maybe an update there on the acquisition front?

Yes.

This is Rowan, I'll cover that.

We don't have anything to announce or give you.

We are -- you need to look at adjacencies.

So we've been really flushing out our, I would say, our horizons, looking at all the ways in which these larger enterprises want to buy, and what they're interested in buying in and around the Contact Center.

And what we've been, I guess, guided by is our largest enterprises who's essentially been coming up to us saying, hey, could you -- would you offer this kind of technology or that kind of technology.

So we've been getting a lot more disciplined about looking at the adjacencies.

We obviously do sell today, by the way, a variety of other technologies as adjacencies to ours.

So right now, in that process, we're looking at and having conversations with our bigger Enterprise customers and saying, well, are there things we can do organically or potentially inorganically that would help them to accelerate the move to the cloud.

So that would be the focus for us.

It's about moving up our market faster, helping larger and larger enterprises get onto the cloud faster.

And then also once they get onto the cloud, what are the new things that they can do because that's the focus and priorities that we've heard from our largest enterprises as once they're on the cloud, they really have an appetite to do more, and they have an appetite to do more with Five9.

So it's a great opportunity for us.

And we will now move to Catharine Trebnick with Dougherty.

Excellent quarter.

You mentioned in the overview that 60% of the sales came through your ecosystem of partners.

It seems like you have 4 or 5 different bucket -- partners, segments, I would say.

And can you elaborate a little bit more on the advisory firms, I think, because that's where you're seeing this big digital transformation take place?

And where are you in working with them?

And how long does -- could you give us some background on how long it takes to actually move a sale through there?

And then what would be obviously a larger Enterprise but average seat size?

And what you go through to actually land one through an advisory firm?

Sure.

Thanks, Catherine.

This is Dan.

Yes, you are right.

We do characterize our ecosystem and partners into kind of 5 buckets.

The CRMs that we've talked about when we work with the Salesforce or Oracle or Microsoft ServiceNow and others.

There are a great source because every contact center has the combination of a contact -- of a CRM and a contact center infrastructure.

We also have a set of technology partners whether it's the Googles and IBMs and Verints and CSIs and others we work with that are fully integrated products.

Some of which we even OEM and resell.

Those are great sources as well for access.

Our ISV partners that we alluded to earlier, tend to bring us into a lot of opportunity, both within our base as well as incremental new opportunities.

And we have our master agents and resellers and referral partners.

And then the category that you mentioned, which is really the advisories or systems integrators.

We've had partnerships there that stemmed back from about 4 years ago when we started working with Deloitte.

And we really just did that to get started to see if they had an appetite and traction for cloud, and the momentum has absolutely picked up.

And so not only this year did we double down on what we're doing with Deloitte and make sure that they're in well over $10 million in revenue with us and growing.

But we've got -- we're duplicating that same model that we saw work.

You got to navigate and move through the cycle with a company like that and figure out what works, what doesn't work, what they're interested in, and so moving sales with them.

If you think about it, the Deloittes and EYs and Accentures, typically don't put the contract on their paper.

They're in there advising and guiding and helping the customer with their strategy and getting the recommendation is so important because they want to move forward with project managing a big portion of that rollout, and so we work hand-in-hand with them.

As far as the types of customers, they shoot the moon.

They bring us up market and take us into larger and larger enterprises because they work with some of the Global 2000 companies.

And typically, it's the largest of the large.

And our next question will come from Jonathan Kees with Summit Insights Group.

I'll add my kudos to the results of the quarter and also say thank you for the granularity on the soft guide for 2020.

A lot of my peers have -- a lot of your peers -- excuse me, have punted that into Q4 in terms of providing some of the details that you have, Barry.

So what I wanted to ask is a little bit more granularity on the results.

Even what could have driven the upside, obviously, enterprise was really strong.

And you also mentioned the International and the new logos as well as expansion.

Were there any particular verticals, any particular entities that stood out?

And out of the partner ecosystem, it sounds like SIs were strong performers during the quarter better than expected.

Just more color like that.

And I have one other question in terms of your ecosystem.

Yes.

So great questions.

First, I'll -- looking at the industries you asked about, which industries.

We continue to see healthcare, financial services, education and then retail and consumer products and I'll leave it that broad because it can run the gamut.

It can be everything from food service delivery to technology solutions to e-tailing.

So it covers everything.

This is typically a very horizontal solution that fits lots of different industries.

The key there is making sure that you have an adaptable product that can fit within their environments and integrate to their back-office systems, which sometimes are industry specific.

So it's key to have our APIs and be able to go in and integrate with those.

So we're continuing to see a lot of the modern brands and companies that are coming and growing very, very quickly in new markets as this has allowed it to happen.

Help me with your next question.

You mentioned SIs again.

Yes.

It sounded like SIs may have performed better than expected.

You mentioned it in this call more so than some of the others.

Were there any particular partners, channel partners that stood out for the quarter going forward?

Yes.

In the SI community, Deloitte continues to increase the momentum and double down, both from our standpoint and theirs.

We're getting a lot from EY, from Slalom, IBM, Accenture.

Those are the key big SIs that we're working with and seeing great traction.

And then we're also seeing traction just in the reseller community when you look at the AVANTs and some of the newer ones that we've signed that have potential to go very large.

We're not at liberty to discuss publicly at a couple of those announcements.

So stay tuned on those, but we should have those in the coming months.

If I may, one last question about also your ecosystem.

Your technology partners, obviously, there's been a lot of talk about Microsoft.

And I attended Zoom's user conference and kudos to you.

At the key presentation on Contact Centers, you guys were the only ones who presented.

Even though Zoom has some other Contact Center partners.

I guess in terms of the integration with their product, is this more of -- is this going to be kind of like what you're doing with Microsoft where it's going to require incremental R&D investment?

And are you also investing in S&M within in terms of -- well, they have a direct sales team.

So are you more going to be training their folks?

Or is this going to be, yes, just standard partner and nothing special beyond that?

Very special beyond that.

So great question and a great segue from what I was just completing, which was the partners.

I failed to mention Zoom.

Absolutely, a key go-to-market partner with us.

And it does require some very straightforward, as Rowan alluded to earlier, simple integration, simple being because we've built the SDKs to be able to do that integration.

And when you think about integrating to a UC partner, in some cases, companies don't need integration.

Like we said, it's separate decision.

It's front office, back office.

In some environments, it's very rare to have calls or interactions move from the Contact Center out into the back office or vice versa.

And in other environments, they do want to have that integration.

And where they want integration, it gives us the luxury of having the ability for a Contact Center agent to pull down, as an example, active directory and see back office individuals that may be on the UC platform like Zoom and be able to say, oh, I can see their availability.

I know who they are.

I want to escalate this to a subject matter expert or an engineer because I'm not skilled to be able to handle their question and rather than schedule them for call back, they can immediately bridge in an subject matter expert that may not be a contact center agent, but can answer their question.

So doing point-and-click, 4-digit dialing, some of the key elements of integration with UC is absolutely there.

We're in the process of working closely with their product teams to have that integration delivered to the market very soon.

And also their sales team?

And their sales team, the integration and engagement is phenomenal.

We've got -- we've taken our wholesales organization, their wholesales organization and done a mapping of leaders to leaders and groups to groups, and we've done cross training of their teams so that they know our products, and we know their products.

And we definitely -- we're leading the way.

We have closed deals already.

Yes.

Deals already being closed.

And we will now move to Mike Latimore with Northland Capital Markets.

Great results.

Just on the channel, I guess one more time.

In terms of the category where they're actively reselling you, are you like, what percent of bookings were just coming through that -- through the channel?

And how has that changed over the last year?

Thanks for the question, Mike.

I love that question because historically, when you rolled trucks and delivered the servers and you implemented the solutions, the VARs could add a ton of value to putting it on their paper.

Even with our reseller partners, in many cases, they prefer to go ahead and have us put it on our paper.

So when you look at how many sales come through the channel and through the reseller, it's not as great as it would otherwise be in historic terms.

However, having said that, we do have resellers that are signing up and putting increased quantities, I'll say, on their paper and doing it more of the traditional way, which is resell it put it on their paper.

Now mind you, we still have -- because it's our cloud, it's our platform, we are doing 24/7 monitoring.

We're still monitoring it and being able to do [break] fix directly for those end customers because of what I just mentioned.

But we are seeing increased traction both as they refer business as well as they resell and put on their paper.

And again, we're starting to work with some of those global distributors that will definitely do that at scale.

Great.

And then just in terms of the customer interactions over the messaging channel, has the growth rate of messaging kind of accelerated over the last year?

Or has it been a pretty consistent growth rate?

I think it's been pretty consistent.

Messaging typically can be an outreach.

I won't say standalone, but it's an application that may be used by the Contact Center or may be used also by folks outside the Contact Center.

So most folks tend to put that in as more of a point solution.

And now some folks offer it, and we partner and offer it through one of our ISV partners that does the messaging for us.

But in most cases, the customers don't need or look for that to be fully integrated to the core.

With no further questions in the queue, I'd like to turn call back over to management for closing remarks.

Great.

Well, thanks to all of you for your great questions and listening to our call today.

Thanks to the management and leadership team.

I'm thrilled with the strong third quarter performance we had here at Five9.

We're making excellent progress on our strategic priorities that's been led by our increased investments you've seen us make in our product innovation and our go-to-market engines.

We've really added some incredible talent to our team.

So we've got now a fantastic leadership team and an extended leadership team as we bring in that talent, and we shared that with you previously.

So there is tremendous opportunity for Five9 here, and we look forward to sharing our ongoing progress at our Analyst Day in New York City next week on November 12.

We'll see you all there.

Thank you.

Once again, that does conclude our call for today.

Thank you for your participation.

You may now disconnect.