Five9 Inc (FIVN) 2021 Q1 法說會逐字稿

Thank you for joining us today. On the call are Rowan Trollope, CEO; Dan Burkland, President; and Barry Zwarenstein, CFO.

Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors. 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, including the impact of the COVID-19 pandemic and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and available in the Investor Relations section of Five9's website at investors.five9.com.

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

Thanks, Lauren. And thanks to all of you for joining our call this afternoon. Our first quarter results exceeded our expectations across the board and demonstrate the success we've had in pursuing our mission to help businesses transform their contact centers and reimagine customer experience.

Our first quarter revenue was a record $138 million accelerating to 45% year-over-year growth, an all-time record growth rate. The acceleration in revenue growth continues to be driven by our enterprise business, as demonstrated by LTM enterprise subscription revenue, which also grew 45% year-over-year.

While we're having success in all of the parts of our business, Today, I'll focus my comments on the success we're having in the enterprise business. This success is best demonstrated by the fact that in the first quarter, we closed another 2 exceptionally large multiyear global deals. We anticipate that these 2 deals will generate over $14 million and $6 million in ARR, respectively.

These 2 deals follow the fourth quarter $12 million ARR win with a leading European insurance company. Now Dan will elaborate on these deals in a moment. But in the meantime, it's clear that something has changed. Why is it that Five9 is having such success in winning large global deals? In my opinion, there are 3 key drivers. One, market momentum. Two, Five9's product innovation. And three, our go-to-market machine, which I'll now discuss in turn.

First, the market. The market is driven by 2 immutable trends, the premise to cloud transition and digital transformation. The strong demand is persisting at a similar rate as it did before the pandemic as many businesses focus on customer experience and contact center refreshes. There's also an emerging demand for AI-driven automation to increase efficiency in the contact center. The resulting savings are especially appealing to larger enterprises with the scale and resources to automate.

Second is product innovation. Last quarter, I put a stake in the ground and said that after 2 years of focus and an increased investment, we'd reached a critical milestone in delivering a hyperscale architecture. Every Five9 product is now redesigned to run in the public cloud in a container-based architecture, which takes advantage of public cloud storage, elastic scaling and multi-zone redundancy to name just a few. This modern platform has also enabled us to take the lead in providing exceptional digital-first experiences.

With Five9, businesses can seamlessly transfer their end users from digital to live engagement while ensuring that the context isn't lost for the customer or the agent. The increased preference towards a digital-first experience is reflected in digital interactions on our platform, which increased 80% year-over-year in the first quarter. The traction we have in digital is particularly important as we expand internationally, especially in parts of the world where digital channels like WhatsApp are already the channel of choice.

Now we further differentiated our product by building a leadership position in AI-powered automation with our IVA and Agent Assist offerings and with our workflow automation platform. We have many customers adopting these technologies. For example, a state government agency has recently gone live with Five9 IVA to answer FAQ-style questions and are reducing their labor costs by automating 31% of the thousands of calls they receive every single day.

Another example, this time using Five9 Agent Assist is TruConnect, which provides mobile and wireless services, handling more than 62,000 calls a month across 3 contact centers globally. Now True Connect uses our AI-powered Agent Assist solution to assist human agents with real-time transcripts, call summaries and coaching cards. Together, these technologies make their agents more efficient, resulting in savings of 7.5% of their labor costs in the first year and 20% in subsequent years.

So whether it's AI-powered automation or digital channel innovation, it's clear that our customers are confident in expanding their business with us as demonstrated by our LTM retention rate, which accelerated once again to a record 121%, up 10 points year-over-year and 4 points sequentially. Now I'll remind you that the 121% is a blend of enterprise and commercial, so the enterprise retention is higher. And within the enterprise, the larger clients tend to have meaningfully higher retention rates.

Finally, the third reason I believe we are making such strong progress upmarket is our increased investments in our go-to-market machine. Our strategic sales teams, which we created just over a year ago, have been partnering with our channels team to deliver these recent landmark deals. And we anticipate that the momentum will continue.

We're also investing aggressively internationally with our EMEA and LATAM bookings increasing year-over-year by 3x and 2.5x, respectively. With our international momentum increasing, we're significantly increasing our international headcount, which is now double what it was a year ago, and we're stepping up our marketing initiatives by building thought leadership and driving localized campaigns in-region. We've also doubled our partner resources internationally and have added key partners in EMEA, like Cancom and Conn3ct.

And of course, all of our customers, domestic or international, big or small, can count on Five9's PS and customer success managers to treat them with our widely recognized white glove service. This is a key differentiator for us and is demonstrated by metrics such as our strong NPS scores consistently in the 80s and occasionally even in the 90s and a big contributor to the strong and improving retention rates I mentioned earlier.

So with that, I'd now like to turn it over to our President, Dan Burkland, to share some specific customer wins. But before doing so, I'd like to give a huge thanks to all our employees, many of whom are new to the Five9. You have all executed incredibly well and have demonstrated your unwavering dedication to our mission. We've started this year off incredibly strong as a result of your contributions. So from the bottom of my heart, thank you. Dan, over to you.

Thank you, Rowan. As Rowan mentioned, we continue to execute upmarket with larger and more complex businesses globally. It is clear that the largest enterprises in the world are now embracing CCaaS and Five9 in particular. Our Q1 new logo bookings set an all-time record for any quarter, and our installed base bookings set an all-time record for any Q1. Our pipeline continues to grow to an all-time high, and our ecosystem of partners once again influenced over 2/3 of our deals.

And now I'd like to share a few key wins for the quarter. The first example is one of the world's largest parcel delivery services companies. They're moving their entire global contact center operations to the cloud with Five9 and have contracted with us for a 5-year term. This transition from Cisco, Avaya, Genesys, all premise-based systems, over to Five9 is designed to allow them to greatly improve efficiency, consolidate to one common platform and reimagine their customer experience through innovation and automation.

This includes IVAs, WFO and integrations to their ServiceNow, Salesforce and their proprietary CRM solutions. They also recognized the trust that Five9 has built in the market to deliver high-touch around-the-clock customer service, along with dedicated technical resources to support them 24/7 throughout all corners of the world. This global company is standardizing on our platform and has placed an initial order for an anticipated $14 million in ARR to Five9.

The second example is a large systems integrator who recently spun off their IT infrastructure services business with over 90,000 employees to form a new company. They chose Five9 to replace their Cisco and Avaya solutions to provide them with the flexibility of the Five9 platform so they can accommodate the unique requirements of each of the enterprises they serve.

This customer plans to use our IVA not only for self-service, but also for more advanced dynamic call routing. They will also be leveraging a complete omnichannel solution, our comprehensive WFO solution as well as integration to both ServiceNow and Salesforce CRMs. This will enable them to service clients from more than 20 contact center locations throughout the world. We anticipate this initial order to result in over $6 million in ARR to Five9.

Our third example from the quarter is a major commercial airline based here in the United States. They chose Five9 in order to innovate and differentiate the customer experience and deliver self-service options to their passengers, crew and partner communities. They were using a hosted Genesys solution, which did not give them the functionality, the real-time visibility nor control over their contact center operations.

Now with Five9, they will have a full omnichannel solution, our WFO suite, including workforce management, QM, performance management, speech and text analytics and integration to their custom CRM. Our advanced workflow automation solution will also provide them with SMS alerts to notify passengers of flight status, upgrade notifications and other important changes. We anticipate this initial order to result in approximately $2.4 million in ARR to Five9.

And now as I normally do, I'd like to share an example of an existing customer who has expanded their use of Five9. This healthcare facility network with over 45 hospital campuses, over 80,000 employees and serving over 5 million patients annually, has been a Five9 customer for over 3 years. During this time, they had accumulated several other hospital networks, and were running on many disparate platforms.

Five9 had already expanded to more than 50% of their contact center agents. It was now time to consolidate to a single provider to help them deliver an innovative and consistent patient experience while also improving efficiency by being on one system. They recently added over 750 seats to complete this consolidation and are anticipated to increase their spend from nearly $2 million to over $3 million in ARR to Five9.

So as you can see, global enterprises of all sizes and complexities are recognizing that Five9 delivers the reliability, scale, innovation and global support required for their contact center operations. It gives us great pride to be able to help our customers reimagine the experience they deliver to their clients and the mission-critical role that Five9 plays in this effort. With that, I'll hand it over to Barry to share our financials. Barry?

Thank you, Dan. First, a reminder that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliations to GAAP are posted in the Investor Relations section on our website. We had another very strong quarter with both top and bottom line results, far exceeding our expectations.

Our enterprise business continues to be the key driver of total revenue accelerating into the 40s for the first time as a public company. On an LTM basis, enterprise customers accounted for 83% of revenue. And our success in enterprise was complemented by continued strong execution on the commercial side of our business, which accounted for the other 17% of revenue and which grew more than 20% year-over-year. The split of our total revenue between recurring revenue and onetime professional services was 92% and 8%, respectively.

Turning now to the rest of our financials. First quarter adjusted gross margin was 64%, essentially flat year-over-year despite increased investments in public cloud. First quarter adjusted EBITDA margin was 16.1%, up 120 basis points year-over-year. First quarter non-GAAP net income was $16.1 million, an increase of $5 million year-over-year.

Non-GAAP EPS for the first quarter was $0.23 per diluted share, up $0.06 year-over-year. First quarter DSO was 32 days and operating cash flow was $13.8 million. We have now maintained our LTM operating cash flow margin in the teens for 12 consecutive quarters, and we remain optimistic about our potential for continuing cash flow generation.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the second quarter and full year 2021. In terms of top line, we are guiding Q2 revenue to a midpoint of $132 million, which represents a 4% sequential decline closely following the guidance pattern that we have established over the last several years heading into Q2. However, I would like to point out that the implied year-over-year growth at the midpoint is 32%, which is the highest growth rate we have ever guided to in any quarter.

For the full year, we are raising the midpoint of our revenue guidance from $520 million to $550 million, which represents an increase in the year-over-year growth rate from 20% to 26%. As for the bottom line, we are guiding Q2 non-GAAP net income to a midpoint of $9.6 million, which represents a $6.5 million quarter-over-quarter decrease, driven by increased investments in R&D, go-to-market and public cloud. Despite these investments, we are raising the midpoint of our full year guidance from $60.6 million to $66.7 million.

Additionally, I would like to provide more color on the quarterly profile of both the top and the bottom line for the second half of 2021. For revenue, consistent with guidance in past years, we expect it to increase sequentially in the third quarter and more strongly in the fourth quarter. Given the shape of this revenue curve, we expect third quarter non-GAAP net income to improve to approximately $14 million and more significantly in the fourth quarter. Please refer to the presentation posted in our Investor Relations website for additional estimates, including share count, taxes and capital expenditures.

In conclusion, we are extremely pleased with our first quarter performance and by the evident strength of our business. Our demonstrated ability to execute like clockwork continues to drive further momentum upmarket. And we believe our increased investments in key strategic areas position us well for the future. We look forward to updating you on our progress as the year unfolds. Operator, please go ahead.

We have our first question from Meta Marshall with Morgan Stanley.

Great and congratulations on the quarter. Obviously, you guys are seeing a lot of traction in the market. Just trying to get a sense of what you're seeing around sales cycles shrinking or sales cycles kind of staying the same. I guess I'm just trying to get a sense of from some of the large deals that you've executed on last quarter and this quarter, did any of those really kick off after COVID started.

Yes. Thank you, Meta. This is Dan. The sales cycles in these large enterprises remain what they've really always been. I think what we saw with COVID was perhaps some acceleration into them getting to a process and starting a process sooner than they may have otherwise. But the process itself still requires them to go through the full due diligence and really vetting all the different options that they have. And with these types of deals in the large, high end of the enterprises, these are typically global with rather complex, not only infrastructure changes and requirements, but staffing on their part as well as on our part. So the sales cycles haven't changed, but I think there's been more of them that have come to the surface.

Got it. I mean just in terms of -- the same question, but just does initial interest in AI capabilities elongate the sales cycle? Or what does that do to the sales cycle?

It can. I think a lot of folks, not only Five9, but really as an industry, we're all stressing and really positioning automation and how customers can innovate and really reimagine their customer experience that they deliver. And I think that there's immediate interest in that. I don't think it necessarily lengthens it. I think you just spend more time focusing on those innovations, some of the more traditional applications that they kind of take as table stakes and we spend more time certainly on the innovative opportunities that they have.

Our next question is from DJ Hynes with Canaccord.

Congrats, really incredible momentum at the high end here. So 2 questions related to that. So number one, can you just like address services capacity? I mean you alluded to white glove service being a differentiator? Like do you have what you need to get these big customers over the hump? And then number two, Rowan, I remember in the past, you saying like, hey, we're going to avoid this mega, mega business because these large customers can influence product road map and demand customization, all sorts of stuff that they're gnarly to deal with. How do you avoid kind of falling into that trap?

Yes. The short answer on services is, yes, we do have what we need on that front. And we continue to enable our partners. And the path there very much is to enable those partners to deliver services. But as we told you before, we're taking a crawl, walk, run. We think that, that's the right approach here.

On the larger and larger deals that we have been signing and sharing with you all, it's really about making sure that we have a great fit with those customers and with the capabilities that we've got in the portfolio and not trying to sell stuff that we don't have and so forth. And that's, I think, what we've been finding is that, with the expanded portfolio, we've created a much better fit for some of these larger enterprises. And clearly, the AI technologies that we've both organically built and acquired are very strong pulls for some of those larger enterprises. They're really looking for that efficiency story. And so yes, I think it's a matter of making sure we have the right fit. But we don't really have a hard limit per se. It's just looking at the market and making sure that we can serve the customers, and we're finding essentially just more and more of these very large customers be a better fit with our portfolio. So we'll keep doing that as long as the opportunity is there.

Next question is with Raimo Lenschow with Barclays.

Congrats from me as well. Quick question. I wanted to change over to the commercial side of the business. You talked about 20% plus growth. Dan, it's probably more for you now this time. That's a crazy good number. Can you just talk a little bit about that acceleration we've seen here? Because I can't remember last time that number was that big because it's almost like in addition to what's going on in the enterprise.

Yes. Yes, Raimo, I'm glad you brought that up because that's really been a -- over the last several quarters and a couple of years, it's returned to a growth engine for us. It's still not growing at the rate of enterprise, by any means, but the fact that it's gone to double digits and now...

I think Dan's Internet connections, maybe -- can, you could still hear me guys?

Yes.

Yes. Because it has -- I'll just pick up where Dan left off. We can finish each other's sentences at this point. The fact that it's kind of accelerated above 20% and -- or into these double-digit range now is really reflective of the strong market demand. But I think more importantly, because I think that demand has been there. I think it's actually about the team's execution. We have an incredible commercial team. And since we made that shift, what was it, Barry, like 2 years ago, I think...

That's right. Yes.

About 2 years ago, they have just taken off like a rocket ship. And it's a different sales motion. We have new -- it's actually the leaders have grown, but we've actually hired quite a few new headcount into that team. They've proved that we should go invest more in that category. So yes, just across the board, that team has been doing fantastically well. So hats off to our commercial sales team. They've been killing it.

Excellent. Yes. And then Barry, one for you, just on the gross margins. Obviously, we have the investments into the public cloud at the moment. Can you just remind us like what's the impact there? What's the timing there a little bit to kind of -- because I keep asking you about the gross margins going higher. So kind of at some point, I need to hold you to task there.

Yes. Thank you, Raimo, and we would like to be held to task on those gross margins. We are as confident as one can be about things in business that we'll get to that 70% over the upcoming years. But in the meantime, we're making this very valued investment in the public cloud, as you referred to. We were basically flat year-over-year despite the increased investments. That's partly because of a higher proportion of subscription, something that we've talked about for a long time and also one of the 3 key drivers that will take us to those 70% margins. And yes, for the full year, when we gave our Q4 results, Raimo, we said it would have about a 2% impact. We still are guiding to that very strongly, and I'll leave it at that.

Our next question is from Drew Glaeser with JPMorgan.

This is Drew on for Sterling. Congrats on the quarter. I was wondering if you could provide some color on the flow of customers coming from partners at this stage, specifically from Microsoft and Zoom.

Yes. Dan, do you want to take that one?

Yes. So seeing tremendous traction. If you think about our complementary solutions to Microsoft, Zoom and the whole UC environment. It's great to build deep integration so that customers can seamlessly move traffic between front office, back office, contact center and so forth. And so that's been a great, great set of partners for us. In particular, when we talked about acceleration in doing deals both with Teams as well as with Zoom, and those partnerships continue, and we look forward to working with them for a long time to come.

Our next question is from Scott Berg with Needham.

Welcome back, Dan. Glad you get your internet back up and running.

Thank you.

I wanted to focus on the international side. The last 3, 4 quarters, in particular, have been super impressive there, along with the overall results of the company. But I guess it's kind of a 2-part question. One, as we're getting deeper and deeper, especially maybe in EMEA, are those customers there buying any modules differently? And then the second part of that, which is an extension, is are those customers ready for some of the AI and automation-based solutions that customers here are starting to buy? Or are they in their typical behind maybe the U.S. trends by a couple of 3 years?

Yes. I'll take that one. Yes, and yes. They are buying the AI solutions. That's clearly top of mind. And the other thing that's, I guess, different, and we -- I think we commented on this somewhere maybe in the script, but maybe not. Hat our international customers are also, I would say, bigger adopters of digital channels than we had seen in the U.S. And that's definitely been a theme. And so the investment that we made in our sort of digital-first approach and all the stuff that we did on that last year really, really has been paying off. And there are parts with our Inference acquisition who had customers in various parts of the world, one of the things that we had seen there was, in some parts of the world where -- I think South Africa as an example, where phone is sort of just not really even a viable option because of the cost. So they're almost entirely WhatsApp-based support lines for their customers. So yes, I think that's one of the differences that's emerging in Europe, is a stronger adoption of digital channels and then clear interest and adoption of our AI technology. And we are just getting started internationally, to be clear. Been going well, but we've got a lot more to do.

Our next question is from Samad Samana with Jefferies.

And I hope the airline that you switched out uses -- is the airline that I had to fly for work. So maybe but to my question. When we think about EMEA and the strength there, did you call out which countries maybe you're doing the best? And where Five9 has the best partner coverage and maybe where the focus areas are within the region to ramp partner capacity?

Yes. So great question. This is Dan. We established our European headquarters in London. So the U.K. is certainly the biggest market, and so that's where we started. And then we've expanded beyond that in -- really throughout the rest of Western Europe. Part of the challenges there is making sure that we have the right, not only infrastructure, but then the languages on the platform. So over the last several years, we've added the languages where we've got personnel throughout Western Europe, we've got Germany, now France, the Netherlands and the Nordics. And so sticking with some of the western countries is key. But we're finding our customers are taking us to and our partners are taking us into many new areas.

So if you look at the map itself, as Rowan mentioned in the earlier remarks, we've doubled the size of our team throughout Europe. And a big part of that is expanding well outside of the U.K. Our initial pod was in the U.K., but then we've had to really look at having local personnel, not only to sell, but to support those customers throughout Europe. So it's something that we're seeing great momentum from, and we'll continue to add as the demand is there. And as we talked about, they're certainly in the early innings of cloud adoption, and I think our timing couldn't have been better.

Great. I'm going to break the rules and squeeze one in for Barry. But Barry, I know as you do bigger and bigger deals and you don't report ARPU, but just maybe how does ARPU look as you get into larger customers? Are you seeing them attach more of Inference and Virtual Observer, so maybe melting higher units to have better pricing dynamics. Just how should we think about that ARPU seesaw as you get into these really mega deals that you talked about?

So great question, Samad. And the pattern is pretty clear. These bigger customers can afford to buy more. So they might well get a keener price on the base core virtual contact center, VCC. But they've got those deep pockets to buy all the things that go with it, not just WFO, but enhanced reporting, enhanced connectivity, the AI features, et cetera. So that's one of the reasons that we expect the ARPU to increase and help us also, by the way, with our dollar-based retention rates going forward.

Our next question is from Terry Tillman with Truist.

Congrats, a tremendous quarter. I won't break the rules. I'll have a 2-part single question. So the first part of my 2-part question is just related to, it ended up proving pretty smart to make the strategic sales team investments a while back. How is that doing in terms of the productivity? Do you still have some dry powder there in terms of productivity?

And then the second part, I'll go ahead and throw it out there. It's for you, Barry. Keep you working here is we're talking a $14 million deal. Those are big deals. Those can really affect the revenue. Are those ramp deals? Or will those roll out within, call it, the first 12 months or so. How do those shake out?

Yes. So I'll take the first part of that. And really, you're exactly right. We looked at our sales organization. And as we started seeing the range of opportunities in our field organization from whether it's 50 seats or several thousand seats, those sales motions are extremely different. And we didn't want to just randomly, based on geography, have somebody working the deal that's 1,000 seats that doesn't have the skill set. They take very different approaches. So we actually not only added our strategic sales teams, which are just thriving right now in these opportunities.

But also we took the enterprise team, and we looked to downmarket and said, let's create a mid-market team also. So our field organization is now segmented with mid-market, enterprise and strategic. So that we always have the highest odds of success, and therefore, and what it is translating into activity levels. Like you said, because we've always got the right person with the right skill set approaching those transactions.

The mid-market is much more transactional. The high-end strategics are year-plus long sales cycles and require a whole team of folks. So that's been the dynamic there. And yes, it results in more productivity. And yes, there's a long runway ahead of us. When we talk about early innings and we talk about the percent of the TAM that's been penetrated and moved to the cloud. If you take the high-end enterprise, it's far less. We're in the first inning. You can say top of the first, maybe middle of the first inning when it comes to large enterprise. So there's tremendous opportunity and upside coming there.

The second part of your question, as far as ramping naturally, these larger companies take longer to plan and implement and then roll out to scale. So those large -- the main 2 large deals, the $6 million ARR and the $14 million ARR, those will be rolling out throughout the rest of this year and well into next year before we realize that full revenue stream that would hit us. Barry, anything to add to that?

No. I think, Dan, you handled it very well. I would say that the $12 million deal isn't shabby either. It was just 3 months earlier. And we've -- you've noticed, Terry. And by the way, congratulations on your excellent single but bifurcated question. So we increased our guidance from -- traditionally before COVID, we would go up 19%. Now it's 26%, and that's part of the driver. But as Dan said, and I really want to emphasize, that it is very much towards the end of the year and much, much more in 2022.

Our next question is from Jim Fish with Piper Sandler.

Congrats on the quarter again. And Barry, I don't know if I've seen you smile this much, so congrats on that. Just keep getting larger and larger deals and a lot of the time we're hearing from you, Dan, that it's not just move to the cloud, it's consolidation as well of the contact center. So I guess, can you kind of frame it for me in terms of the large customers left out there that Five9 doesn't have yet at this point. How much would you say is both of these kind of dynamics versus one or the other? Is there one that is essentially more favorable in your view? And then to cheat here a little bit like everybody else. On the competitive side, what are you seeing from other cloud-based solutions out there with some of these larger deals? And as you move larger, how do you view the competitive nature, specifically more from an Amazon Connect or a Twilio Flex?

Yes. So great questions. I think when you look at both of those factors are true, right? When you look at these large, large enterprises, a lot of them have gone through their own M&A activity and acquired other companies. And they have a hodgepodge of different systems that are kind of working as independent silos and very inefficient. For companies that want to create a global consistent customer experience, it does make sense to consolidate. So certainly, there's a whole group of those, and they need to get off of the old premises-based solutions anyway. That would be kind of the third element of that.

So you've got premises-based solutions. You've got many cases where they're disparate and operating as silos of technology. And then you've got the requirement to innovate and really deliver a customer experience that's new and unique so that they can stay ahead of their competitors. But that phenomenon is just getting started up. So when you look at large enterprises, this is -- there's a tremendous upside to what's out there. That's -- the first portion is absolutely the market is very large, and the customers were just getting started. When you say what's left. It's the vast majority and then some. So keep that in mind. Well, and the second part of your question?

Competitive nature from...

Oh, the competitive, yes.

From cloud and specifically, what you're seeing as you move up upscale from -- yes, go ahead.

Yes. I think one thing, not only do the customers recognize and trust Five9 and appreciate our focus. I mean if you -- well, this is what we do. This is our 100% energies are placed into how we help enterprises deliver and reimagine the customer experience they deliver to their customers. And if you think about who else is serving those large enterprises, most of the organizations that attempt have many other focuses to their businesses, right? And if you look at our key competitors, if you just look at us versus -- Genesys is getting their cloud platform coming upmarket a little better than it had. It's new to the market. But they've got a huge installed base of their old premises-based solutions. So we continue to see, if somebody wants a true mature and innovative platform, Five9 is a very logical choice. And again, they know that we can service and support them, unlike most of our competitors.

The other is, if you look, you mentioned Twilio and some others -- Twilio and Amazon. If you look -- they tend to play in a much more narrow niche. Meaning that Twilio is in and around the contact center extensively with lots of customers that also have Twilio. But they don't really look to Twilio to be the full end-to-end replacement of their legacy Avaya, Genesys, Cisco aspect type environment. But they tend to do more point-to-point solutions that are highly custom and more to developers, whereas we come in to replace the entire end-to-end.

And then Amazon does well far upmarket where you want to put a platform in and then really either hire a firm or have an extensive R&D or IT organization that wants to take and build their own. We've actually -- I've mentioned on previous calls that we've seen several of those that get 6 or 8 months into their process and realize they're not going to get to the vision they had for at least a couple of years, and they can kind of hit the ground running with us. So that's been beneficial as well.

Our next question is from Dan Bartus with Bank of America.

So definitely a lot of good trends to ask about potentially here. Maybe I'll ask about something that you didn't mention or maybe I missed it, which is also a positive though, too, is -- and that's the AT&T opportunity. Just how meaningful was the AT&T relationship in the numbers in this quarter? I'm wondering if it's really moving the needle yet. And then how could that ramp look throughout the year? And just kind of bigger picture related to that, just how important are service provider relationships for you in general? Are these the kind of partnerships that you can do a lot more of in the future and you see becoming a bigger piece of your offer?

Yes. I'll take that one.

But they're related at least.

Yes. We -- AT&T is beating our internal expectations, so it's doing well. And in terms of materialities to the business, we're not breaking that out specifically, but it's doing better than our plan. So on track and ramping, I would say. The most important message there is it's ramping. And really great support from the AT&T team. They're terrific to partner with, and they're very, very excited about Five9. So I think we should continue to see that expand and be more impactful to our revenue number.

In terms of the SP market in general, absolutely. The answer is, yes, I do think there are more and more opportunities, particularly in the international sort of world everywhere outside of the U.S., the SPs. And in various countries, they are more or less important, but they're pretty much important everywhere. And one of the nice things about the Inference acquisition is they did bring us some incremental SP opportunities. And those SPs are looking now to move towards the public -- or towards public cloud software companies like ours. And that wasn't always the case. In years past, they've been looking to the legacy vendors to take their sort of prem software and reconfigure it for SPs. I think with AT&T being one of those examples of one who said, "Hey, throw on the towel on that, that was not the right path for us. We're going all in with a cloud vendor." I think we're going to see that with more and more service providers. And so that is going to be, I believe, an important channel for us over the long run.

Next question is from Mike Latimore with Northland.

Great. Awesome quarter. Obviously, the sort of the CX team is pretty impactful nowadays. I guess are you seeing any opportunities sort of outside the traditional contact center? I think last quarter, you talked a little bit about a healthcare use case. But are you finding just the need for CX is broadening a little bit here?

We're definitely hearing that from customers, and we see that as an opportunity over the long run. It's not something that's particularly driving the business today. But it is -- it's a topic of conversation amongst the industry analyst community. It's a topic of conversation amongst the UC crowd. We'll obviously have that footprint beyond just the contact center. We've been working with one of our great partners, Zoom, to try to stitch those together in new and interesting ways.

So for example, A call comes into the contact center and, let's say, we pull up the customer record from the CRM system. And the contact center rep says, "Hey, look, you need to talk to Mary over there in accounting or in some other part of the organization who's not in the contact center technically, transferring that call through the UC system, but keeping the CRM data with it. So that when Mary gets that call, it's sort of like a contact center experience lite, where it presents the CRM data and the case information or the ticketing information and so on.

So we do think there are interesting opportunities, although -- they're still nascent. With -- the last thing I'll say is the pandemic, I think, opened everyone's eyes to, and frankly, may have even sort of accelerated a shift into this question, which is like what exactly is a contact center. I drove through a drive-through other day where the agent wasn't -- the person talking to wasn't wearing a big headset sitting in the restaurant. But they were actually a video agent sitting at home. That's a contact center.

So I think you're going to continue to see these shifts across many industries as we now come out of the pandemic as they rethink, what is the contact center really? What does it look like? And can we -- especially in a remote-first world where more and more companies want to do that remote engagement, I think we're going to actually see a shift away from these -- a shift towards the sort of new and interesting expansions of what the contact center is and could be.

Next question is from Peter Levine with Evercore ISI.

Great. Congrats on a great quarter. So maybe one on the Inference acquisition. When thinking about automation and virtual agents, right, like how important or how much of a priority today is deploying virtual agents? And then maybe to piggyback off of the prior question on pricing dynamics is how should we view the ARPU or pricing for digital agents going forward?

Yes. It's increasingly important with our customers. So as we've mentioned now, many of these large deals are including IVAs. And what's new, what is essentially really different -- because IVAs have been around for some time. They were just extremely expensive and complex to set up and maintain. What's new now is we're making it available to many more customers. And we're seeing that demand. So it's a shift away from, hey, the traditional IVR and moving towards the IVA.

From a pricing perspective, the way that we've taken that to market, it's a range. We're looking in the somewhere $400 to $500 average ARPU per digital agent. And so if we replace one human agent, which we would normally charge couple of hundred bucks for a human seat, we're going to monetize that at roughly 2x the rate by selling the IVA product. And it is playing out the way we had discussed with you all around the way customers are thinking about this is how can I sort of capture and resolve these incidents with -- without ever letting them hit my human beings so that I can have less agents. And so there's a direct ROI trade-off math that they can do, which is why it's sort of emerged so strongly in many of our larger deals who they have -- where these savings can be very, very significant.

Our next question is from Steve Enders with KeyBanc.

I just wanted to follow up a little bit on the Inference acquisition that you made last quarter. I guess, a, just kind of wondering what you're seeing and how that's ramping versus your expectations and your ability to go sell that into the base. And then secondarily, with some of the other acquisitions you made like Virtual Observer and when do how those are ramping? I know you called out a few WFO opportunities been wondering how those are scaling in there.

Yes. So Inference, to start off your question, it's been, I think, 2 quarters now. And the theory was that there was going to be really strong interest in our larger customers, and we've seen that, but we've actually seen it across the board. So we're seeing a tremendous pipe on that front, and we're ahead of our plan. And we're ahead of plan essentially on all 3 acquisitions. Virtual Observer has been -- we've now had that in the portfolio for, what, 5, 6 quarters, somewhere in there, doing phenomenally well. And this is not just Virtual Observer, by the way. We also, as I think most folks know, we resell Verint.

So we've just seen an increased adoption rate of WFO overall or workforce engagement management, whatever you want to call it. That category has grown for us overall. But Virtual Observer has absolutely led the growth. We've finished the first major set of integrations that we wanted to make. So when you buy virtual -- when you buy Five9 now, it's a complete integrated suite. The user experience is sort of tied in natively. So that was something that I think our customers were looking for. And so yes, we've been really, really thrilled with that.

And then the last one was the workforce automation or Window acquisition, going really well but coming from a much smaller base. And probably also the much, much smaller base because they essentially didn't have a run rate in terms of revenue. So that's not material to the business yet. But we do see it as being increasingly critical in some of these larger deals where you always have this corner case or something that our product doesn't necessarily do out of the box.

And so the fact that we have this low-code, no-code workflow product helps us close these larger deals. And so there's a factor also of enablement that comes from the workforce -- workflow automation product, where we're able to land more of these large deals as a result of that technology. So across the board, I would -- I'm very pleased with how our acquisitions have been doing.

The next question is from Will Power with Baird.

My congratulations on another strong quarter. I wanted to come back either for, Rowan or Dan, whoever wants to take it to the large deals in the quarter. I'm really just trying to understand what's really differentiating you versus some of the other large cloud vendors who invariably you're competing with. I know it sounds like IVA is part of it, Agent Assist is doing well and a lot of that's getting incorporated.

But AI is a big focus for a lot of your competitors as well. So what's really helping you stand out in that field? And the second part of that is, what is it that gives them comfort with the product road map? Where are you headed with those products that I'm sure they're probably driving you towards the particular things they're looking for that you're going to have down the road here?

Yes. Thanks, Will. I'll take that. If you look at those large deals, like you said, it's a combination. It really is the technology and it's our approach to those technologies. Everyone is talking about AI, and everybody is talking about how to help the customers automate. But when they dig deep and understand our architecture, and where we've taken it, and where it's going, they feel much more comfortable that we're on the path that will fit what they want to do over the next several years. And that, combined with our approach, and Rowan alluded to it earlier, a big differentiator that he alluded to the white glove approach of how we take care of our customers. Don't underestimate, the power of technology is part of the equation. But what you can do to consult with the organization and bring that and extract the value from that technology is equally as important, may be, in some cases even more important because I can have the greatest technology in the world.

But if I can't If I can't really utilize it effectively, it doesn't help my business. It's not good. In fact, we replaced a lot of systems out there that we look and go, "Gosh, they could have done this with their existing system, but they didn't have the organization and the focus". When I talk about focus, it's day 2 and beyond, it's -- there's a reason we have the highest scores in our surveys on implementation. It's that professional services team that goes in and consults designs in conjunction with the customer configures integrates and does all the customization to meet their needs. There's a reason we come out of that with the highest scores in the industry by far. There's a reason our NPS scores are the highest in the industry as well. And there's a reason when we look on an ongoing basis at the retention rates that we have that are unparalleled.

That all stems from our ability to help our customers for the long haul, really be able to recognize that I've not only got a technology, but I've got a partner here that's going to allow me to extract the most value from it. And that's getting recognized not only when we go into new sales, but they're talking to our other customers. And that's what our other customers as references are explaining. Hey, it's -- part of it's the technology. A big, big part of it is also that Five9 is going to help me and get me to where I want to go.

And I'd just add, Will, that our strategy was really simple. We -- Dan and his team felt like it was the moment for IVA to cross over and sort of hit that mainstream adoption. And in a shift like that, the strategy is simple. Go buy the best technology and buy the best team. And that's what we have. We think we bought the best technology and the best team. And frankly, since they've come on board to Five9, they just have been knocking it out of the park. So it's going well.

Our next question is from Michael Turrin with Wells Fargo.

Nice start to the year for everyone here. On the expansion rate, I recognize, Barry, this is a little bit of a different metric than the prior. But regardless, you broke through 120%. And Rowan, it sounds like you're also commenting that's maybe better on enterprise or with larger customers. So I'm just wondering how you think about the potential range there and what's sustainable, especially as you're adding things like IVA and automation to the platform?

Rowan, can I take it?

Yes, please, Barry.

Yes. So we're very excited about this, up 4 points sequentially, 10 points year-over-year. And as confident as people can be about things in business over time, that's going to continue to go up for 3 reasons. Now there's going to be fluctuations. These big customers come on at different times at different rates. The 3 reasons are, as Rowan talked about, we have the $1 million-plus customers are growing at a faster rate than the rest. And when he said they have a meaningfully higher rate, you should take that meaningfully, put it into white font, put a darkest green you can find as the highlight color and increase the font size to 18. And that's really helping. And then finally, also as a tailwind, the mix shift from commercial to enterprise because commercial is much lower. And then finally, the increased product portfolio that was talked about earlier is going to increase ARPU over time. But don't expect anything dramatic. It'll just be that slow and steady increase, and fluctuating increase.

Our next question is from Ryan MacWilliams with Stephens.

Rowan, bank win last quarter and airline win this quarter, impressive since these are seemingly but nicely slower movers to Cloud Contact Center. So what do you think has changed for these industries that they're now adopting cloud solutions? And do you think we'll see a further pipeline of these customers moving to cloud?

Yes, maybe I'll throw that to Dan.

Yes. I think you're exactly right. We are going to see and we are seeing an increased pipeline from these large enterprises. There's a few things we had to get across as an industry and crossover in order for enterprises to trust the cloud, right? We had to prove scale. We had to prove reliability. We had to prove security and protecting their data and their customers' data. And then we had to make sure they weren't going to sacrifice any capability. So we had to basically emulate the feature functionality of all of the old premises-based systems. And then we had to give them an innovative platform. And that's really in the last year or so what we've been able to show them is, hey, you've got innovations here with IVAs, with AI, with workflow and so forth that you just can't achieve at the premises levels, especially when you're building -- when you have silos of these small efficiency centers. So it's a combination of all those things.

Now that we've proven all those And they're able to see in the large enterprises, many of them have the mindset that they don't want to go first. They want to see that others have. Well, now we've kind of checked that box and we can show them that, hey, we've got customers now with many thousands of seats all over the world, being supported very effectively and they're able to innovate like never before. And that makes others say, "well, if Five9 can accomplish for them what they're doing, then I know they can do that for me. And that's always comforting to not have to go first. And so we should see more.

Our next question is from Andrew King with Colliers.

So during the quarter, we saw Microsoft actually acquired Nuance. Could you talk a little bit about the impact to the competitive nature? And then also among the UCaaS providers, they've always talked about this push into the EU and talked about how they've been behind the U.S. in cloud adoption. Can you talk about the adoption rates over there currently versus the U.S.

Sure. I'll take the first part. The Nuance acquisition, Nuance is powering a lot of the -- many of the IVAs, but as a technology supplier to companies like ours. So we actually partner with Nuance and sell that technology to some of our customers or use that technology. It plugs into our platform, for example. We made a bet 3 years ago on the next generation of voice technologies based on sort of what we were seeing around machine learning advances coming out of Amazon and Google. So that's very much the direction for the company.

However, as we made the Inference acquisition, one of the things that's shifted in terms of the strategy is we've really become a platform that ride on top of those underlying technologies. So whatever underlying technology you want to use from a speech to text or text to speech or natural language processing, we can plug those in together. So we can -- we support Amazon, we can support Google, we support IBM, we can support Nuance. We have our own technology that's built them. And I think that's an important statement is that where we're playing at the value stack is actually sort of one notch up from the underlying sort of speech vendors.

Now I think we don't know a lot about Microsoft's strategy beyond what they've said publicly. So anything would be pure speculation. But their note on what we have read about their rationale for buying Nuance was making progress in the health care space. And so we're not 100% sure exactly where they're going with that. But again, we're playing at a different layer of the stack than Nuance, for example, plays. I don't know if -- Dan, there was a question about international.

Yes. In relation to your question on EU, it's interesting because we talked about a quarter ago the large insurance company based in the U.K. but operations throughout the EU. Very much interested in the innovation and really a behavior and a buying cycle that was very similar to what we see here in the U.S. But for the most part, when companies are going to change out their contact center infrastructure and they're going to make a move, they're not going to purchase a premises-based solution. They're going to look to the cloud first. And so the opportunity is definitely there. Do they tend to lag a little bit behind the U.S. in decisions? Yes, their deals tend to be, except for that one exception, they tend to be a little bit smaller in nature. But they certainly are on the way of catching this -- the same drivers that are occurring here in the U.S. are certainly occurring throughout Europe.

An industry analyst that looks at the European market recently shared with us that they thought that post-COVID, cloud acceleration was going to accelerate in the contact center space. And their numbers, they had it going from 27% to 32%. But fundamentally, I think those numbers are high. But nevertheless, I think the general trend is an acceleration to adopting cloud.

And our last question is from Matt VanVliet with BTIG.

Great job on the quarter. I guess kind of a 2-part question thinking about different areas of the market. But Rowan, you mentioned some emerging markets tend to be very messaging based in a lot of the digital channels, curious if kind of what the rationale is why they would buy Five9, something that's very robust, very feature-rich if voice isn't a huge portion of it. Can they get away with or are competitors trying to get in there at a cheaper price point? And then maybe conversely, on the other end of the market, you mentioned the case with video being integrated. But are you seeing more customers wanting to at least offer video comp as part of an offering?

Yes. Great couple of questions. So kind of hitting the book ends here. On the digital channels, one of our kind of core value adds here is that we make it really seamless to switch between your digital channels and your live sort of, let's say, analog channel voice. That's really important for a lot of these customers. In fact, what you see in many of them is they've traditionally had bifurcated workforces that are -- some people are doing messaging and some are doing phone and some do e-mail or what have you. And the trend is toward what we've been calling the multimodal contact center workforce, which is they're using all of those technologies, and they're using them all the time.

And so this legacy in our space of vendors that kind of just went after digital, that's pretty much going by the wayside. You can't do that anymore. You need to have one platform that ties them all together. And I think that extends all the way into eventually into video, right? You're not going to want to say, well, we've got one answer for video and one for voice and one for WhatsApp and there's other things for our web. You want one platform that can handle all of that, and that very much is Five9. We have been selling video through partner-based solutions and integrations with our platform. It's not a huge driver to be -- by any stretch of the imagination in the contact center today.

But if my fast food experience is any -- is telling in any way, I think it's going to be an increasing part of the market going forward. I think we will see more and more video use cases emerge, especially in things like telemedicine. where today, they're kind of like -- they've gone to products like Zoom or Microsoft Teams, really, those are contact center use cases. And you need to be able to have that full contact center infrastructure underneath the cover. So I think the future very much is an integrated end-to-end platform from video all the way to the lightest weight digital channels. That's what your larger companies and more mature companies are going to be interested in acquiring for their environments. It keeps the complexity down.

And I'll turn it back to Rowan for final comments.

Thank you so much. Well, thanks for joining our call today and for all the great questions, really terrific. We couldn't be happier with our exceptionally strong results across all of the metrics which reflects the strong and strengthening market and our clear progress, especially as we mentioned in the prepared remarks with larger enterprises. So we're investing strongly as we pursue this mission that we've been on to help our customers reimagine customer service, and we feel extremely good about our prospects.

And to reiterate what I said at the beginning of the prepared remarks, our progress is the result of the dedication and the hard customer-focused work of our incredible employees, and they deserve all the credit for the performance that you've seen from Five9. So thank you very much to all the Five9 employees. And thanks to all of you for joining today. We'll see you next quarter. Thank you.