Five9 Inc (FIVN) 2021 Q4 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 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 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 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 on 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.

I'm pleased to report that we closed out the year with excellent results for both the fourth quarter and 2021. As you'll hear, the market momentum remains very strong, especially upmarket, driven by the transition to cloud and digital transformation as well as our differentiated AI and automation offerings. There's no question our world-class team has continued to execute like clockwork.

Now fourth quarter revenue grew to $174 million, up 36% year-over-year against a prior year quarter that was raised by onetime COVID benefits. For the full year 2021, revenue grew to $610 million, an increase of 40% year-over-year, driven by the continuing strength of our enterprise business where LTM subscription revenue grew 51% year-over-year.

And continuing our commitment to balanced growth, I'm pleased to report that despite the increased investments in a number of areas, including professional services and public cloud, our fourth quarter adjusted EBITDA came in strong at 21%. These results clearly demonstrate that not only do we continue to be a leader in delivering on this massive and barely penetrated opportunity, but also that our business model supports a very attractive combination of high growth and strong margins.

Today, I'm going to focus my comments on 3 of our key growth drivers: AI and automation, our march upmarket and our global expansion. So let me begin with AI and automation. Our intelligent virtual agent or IVA has captured the market's attention as illustrated by the following statistics: in 2021, IVA has accounted for approximately 10% of enterprise bookings to new logos. At the same time, IVA usage tripled year-over-year. Now while it's still very early days, these are encouraging signs.

Now let's step back for a minute and talk about the opportunity. It's estimated that the incremental TAM from automating contact center labor is $34 billion, and we believe that there are 2 macro factors which will ultimately but inevitably lead to widespread automation of labor. First, the increasing acceptance by customers that technology has reached maturation and works, and it's resulting in tangible ROI for our customers by automating repeatable tasks and realizing labor cost savings. And second, contact center leaders face labor shortages and high turnover rates, making automation a necessity for operating a contact center efficiently while continuing to improve customer experience.

We are laser-focused on further increasing IVA cross-sell rates for our new customer bookings and into our installed base, and we plan to achieve that along 3 vectors. The first is continuing to step up the rate of innovation. We recently launched Studio 7, which is our new conversational AI orchestration interface. And this platform is helping customers get started faster and allowing them to implement increasingly more complex automations as well as enabling entirely new technologies such as Virtual Voiceover, which makes Five9 IVAs sound incredibly lifelike.

Second, we're ramping up go-to-market spending to meaningfully accelerate our IVA sales momentum. Most notably, we'll be increasing the size of our dedicated AI and automation sales team, expanding professional services and customer support and stepping up our marketing campaigns.

Finally, third, we'll increase our focus on selling IVAs stand-alone into noncontact center opportunities with unified communications, CRM and service providers. We had success with this motion last year with a $1.7 million European IVA booking from an internationally recognized hotel chain where we didn't sell the Five9 Virtual Contact Center at all. And we believe this is a large untapped opportunity for us. Now also bear in mind that on occasion, these stand-alone IVA opportunities morph into full RFPs for the entire contact center.

While IVA is our most scaled AI solution, we continue to invest in making our total offering the industry-leading AI engagement platform. And here's a brief update on our other AI investments. First, we continue to see growing customer adoption of Agent Assist with deals in the double digits across various industry verticals. We expect continued strong adoption as customers realize improvements in KPIs such as customer satisfaction, average handle time, first call resolution and so on. Now we'll soon be launching new capabilities to continue to improve our Agent Assist offering, including agent script adherence through real-time guided checklists that coach the agent on what to do next and then automatically verify that they do it.

Second, to help us scale our IVA and Agent Assist to every customer globally, we're investing in a technology we call, Conversation Architect. This technology provides a central hub for building and managing AI applications, such as IVA and Agent Assist in the contact center. Conversation Architect provides a no-code solution that enables customers to train AI models off of their own data without needing machine learning or AI expertise, just business expertise. Now traditionally, this training process has required machine learning experts that are hired as part of a lengthy and expensive consulting arrangement. But with Conversation Architect, these costs are dramatically reduced opening up a larger market opportunity for AI in the contact center.

Now finally, in addition to investing in our own AI products, we're also investing in our AI platform with technologies like VoiceStream, which is a groundbreaking and developer-friendly, cloud-to-cloud, real-time streaming API. Partners are building products on this platform with use cases ranging from customer authentication via biometrics, things like agent assistance, agent coaching, training, real-time speech analytics and sentiment analysis. Now when customers turn to Five9, they can use our own products or choose from a range of third-party products built on top of our platform. So that's AI.

Now let me turn to our next growth driver, namely our march upmarket. Enterprise accounted for 84% of fourth quarter LTM revenue. We continue seeing especially strong growth in the high end of enterprise. And in a moment, Dan will elaborate upon the tremendous booking success that he and his team delivered in the fourth quarter. But in the meantime, let me simply mention that we ended 2021 with 134 customers generating more than $1 million in ARR, up from 91 a year ago. These larger customers are the fastest-growing part of our business with a CAGR of 93% since inception and have meaningfully higher retention rates. So while AI and automation have emerged as the latest driver behind our success upmarket, that builds upon our strengths that we have like reliability, channel and trust.

Let's start with reliability. Now reliability, as you know, is simply nonnegotiable. A CCaaS provider can offer all the features in the world, but these features don't matter at all if the system is down and supporting customers is impossible. The investments we've made and are making in our cloud operations team have allowed us to successfully build out our public cloud operations and mature our operational disciplines through tooling and automation. These investments have also allowed us to achieve what may well be industry-leading uptime and velocity, and we're doing that globally. I couldn't be happier with the results that we're achieving in this very important area.

Next, we continue to develop our channel, including systems integrators, service providers, technology solutions brokers, VARs and ISV partners. And I'm extremely proud of how far we've come in this area and the potential that still remains. Our strong bookings growth continued with channel bookings increasing 66% year-over-year in 2021. The channel loves how easy Five9 is to work with, and this continues to be a differentiator for us in the market.

One of our marquee partners, AT&T, is building momentum across a wide array of verticals. We now have over 50 customers sold, and these wins range from large enterprises to small and include public sector successes as well. Agents, through the AT&T partnership, are servicing customers in over 60 countries, indicating the full reach of this partnership. Additionally, the recent launch of the AT&T IVA is based on the Five9 IVA we talked about earlier. Our relationship with AT&T continues to grow from strength to strength, and we're also pleased to support them in their latest campaign, the CX Revolution, which is focused on helping customers migrate from their legacy on-premises contact centers to the AT&T Cloud Contact Center powered by Five9. Take a look at cx-revolution.com.

Now finally, and perhaps most importantly, is the trust we've built up over the years with our customers. We've made sustained and significant investments in professional services and customer support allowing us to commit to and deliver lightning-fast implementations worldwide. And the result of this is our industry-leading Net Promoter Scores of 85 and higher for both professional services and customer support. And we're seeing even stronger growth outside the U.S. where most agents are located. First, some statistics. International revenue from companies headquartered outside the U.S. in the fourth quarter grew 57% year-over-year and marked the fifth of 6 quarters where the growth rate exceeded 40%.

The investments we've made in expanding our international business are clearly paying off in these results. We're focused on continuing this growth and achieving our objective of having the international business be a mid-teens part of overall revenue by 2026. Quite simply, 2022 will be an exciting year with more international headcount, more channel partnerships, more marketing, more public cloud instances, more languages and so on. So in conclusion, we've made significant progress and executed strongly on all fronts this past year, while solidifying Five9 as a market leader with an even greater opportunity ahead.

Now before turning it over to our President, Dan Burkland, I'd like to give a huge thanks to all of our employees across the world. You've delivered consistently and exceptionally and despite the difficulties and the worst of COVID. None of this would have been possible without you. So thank you.

With that, let me turn it over to Dan. Dan, go ahead.

Thank you, Rowan.

As mentioned, our go-to-market machine continues to accelerate upmarket. And we not only set records for bookings and pipeline, but also shattered the record for the number of new logo bookings over $1 million in ARR. And now I'd like to share 4 examples of these record wins, all of which are well north of $1 million in ARR.

The first example is a Fortune 25 company and one of the largest retailers operating over 2,500 stores, dozens of retail brands, along with manufacturing and distribution. They chose Five9 to provide IVAs for self-service and call steering as well as Verint WFO for speech and desktop analytics. And they're also leveraging our connectivity solution for Citrix VDI for the remote workforce. We anticipate this initial order, along with a follow-on order which booked in early January, to result in over $4.7 million of ARR to Five9.

The next example is a global health insurance company based in the U.S. with over 80 million members worldwide. Their contact centers were based on Cisco and did not support their future vision for delivering customer experience. They chose Five9 to enable their digital-first strategy, including e-mail, chat, SMS, visual IVR and our industry-leading IVAs to replace Nuance in addition to all the traditional voice applications. We're providing a deep integration with Salesforce, our Verint WFO solution and Five9 performance management and dashboards. We anticipate this initial order to result in over $3.7 million in ARR to Five9.

The third example is a traditional and peer-to-peer lending company. And their contact centers service individual borrowers, banking clients and collections efforts for past due loan payments. They were using a combination of Cisco for inbound and LiveVox for outbound in the collections department. They chose Five9 for our single-blended platform for both inbound and outbound. And we also are delivering a holistic experience for their agents by integrating with Oracle, Zendesk and a homegrown CRM system, consolidating it all onto one single desktop. For their inbound business, they will also be using our chat, e-mail, SMS for a complete omnichannel experience, making it as easy as possible for borrowers to make payments. They will also use our IVAs for processing and providing status updates on loan applications. We anticipate this initial order to also result in over $3.7 million in ARR to Five9.

The last example is a fast food chain with nearly 3,000 restaurants across the U.S. They've been outsourcing their contact center operations, which wasn't giving them the visibility and control to deliver an exceptional customer experience. They began the process to bring the entire operation in-house and chose Five9 to help them deliver on their CX vision. They now have the ability to leverage an omnichannel solution from Five9, including chat, e-mail, SMS, along with voice to give customer convenience and choice for all of their interactions. They are using our IVAs for customers to place orders, check status of deliveries, check on rewards points and access standard FAQs. We are fully integrated with their Salesforce CRM and will provide the full WFO suite from Verint. We anticipate this initial order to result in approximately $2.5 million in ARR to Five9.

So as you can see, our move upmarket is significant and accelerating. And we're seeing more enterprises embracing our AI and automation solutions to deliver a completely reimagined customer experience.

And now I'll hand it over to Barry. Barry?

Thank you, Dan.

Before going into specifics, a reminder that unless otherwise indicated, financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website.

As Rowan mentioned earlier, we had another excellent quarter with revenue growing 36% year-over-year. Importantly, fourth quarter sequential revenue growth was 12%, our highest pre-pandemic sequential growth rate ever. This gives us even more confidence that, as we have been saying, we have retained most of the benefits we saw from COVID.

In terms of revenue composition, enterprise made up 84% of LTM revenue, and our commercial business represented the remaining 16%. Our commercial business grew in the 20s on an LTM basis. We expect our commercial business to grow in the teens for the next several years as we continue to focus the majority of our investments on moving upmarket.

Recurring revenue accounted for 93% of our total revenue in the fourth quarter, and the other 7% was comprised of professional services. Our LTM dollar-based retention rate was 122%. Despite inevitable quarterly fluctuations, we expect the retention rate to trend towards the high 120s by 2026 due to a higher mix of enterprise customers, especially larger ones which have demonstrably higher retention rates and higher ARPU from our automation and other offerings.

Fourth quarter adjusted gross margins were 62.8%, a decrease of approximately 360 basis points year-over-year. As we have been communicating, we continue to invest aggressively in 2 key areas, namely professional services and to a lesser but still appreciable extent, public cloud. The increased investment to ramp our professional services has been significant. Let me illustrate by discussing the pattern of our professional services headcount growth. We accelerated year-over-year PS headcount growth to over 60% in the second half of 2021, and we plan to continue at the 60%-plus rate in the first half of 2022 before starting to normalize it in the second half. We have been increasing professional services to support the growing number of significantly larger customer deployments, including in entirely new territories, and enhancing training and other certification programs to help our partners ramp more quickly. With regards to public cloud, we are investing to build out new instances globally, including in Western Europe, Latin America and India over the next year.

Fourth quarter adjusted EBITDA was $36.9 million, representing a 21.3% margin, approximately 150 basis points below the COVID-assisted Q4 '20 margin and in line with the Q4 2019 margin. Fourth quarter non-GAAP EPS was $0.42 per diluted share, a year-over-year increase of $0.08 per diluted share.

Before turning to our full year performance, I'd like to report that our average concurrent seat count for the fourth quarter grew to 246,712 seats, up 34% year-over-year. Note that we estimate our concurrent seats to be equivalent to approximately 370,000 seats on a named-seat basis, a unit of measure that some others in the industry cite. As a reminder, we provide the seat count metric only on an annual basis.

And now for a closer look at the key full year 2021 income statement metrics. 2021 revenue was $610 million, up a record 40% year-over-year. 2021 gross margin was 63.5%, a decrease of approximately 200 basis points year-over-year, driven by the same factors that impacted the fourth quarter gross margin, namely our ongoing investments in professional services and public cloud. 2021 adjusted EBITDA margin was 18.1%, a decrease of 160 basis points year-over-year, also driven by the professional services and public cloud investments, partially offset by continuing operating leverage. 2021 non-GAAP EPS was $1.16 per diluted share, a year-over-year increase of $0.17 per diluted share.

Finally, before turning to guidance, some balance sheet and cash flow highlights. I would like to begin my comments on cash flow by pointing out that during the fourth quarter, we implemented a new billing system to allow us to scale as we continue to move upmarket and expand internationally. As a result, invoices, all of which were individually checked and validated, went on days and in some cases even weeks later than normal, driving our DSO to be higher than normal at 36 days. Thus, our operating cash flow was $8.1 million versus the high teens operating cash flow we would normally generate if our DSO had been in the low 30s as they have been for the past 3 years. The normal cadence of invoicing is resuming this quarter, and we expect DSO to normalize back to the low 30s in the next 2 to 3 months. We would expect the LTM operating cash flow margin currently at 5% to increase meaningfully in the longer term given our demonstrated ability to expand EBITDA margins, our substantial NOLs and our typically low DSOs.

I'd like to finish today's prepared remarks with a discussion of our guidance for the full year 2022 and for the first quarter. For the full year 2022, we are guiding revenue at the midpoint to grow at 24% year-over-year to $756 million. For those of you who have been following Five9 for some time, you know that we start each new year with prudent revenue guidance. For 6 consecutive years, we started the year with guidance of 16% year-over-year growth. Last year, we raised it to 20% and now we are raising it to 24%. The step-up in guidance reflects the strength of our business as we continue to win the larger and larger customers that Rowan and Dan talked about and as we realize gains from our AI and automation initiatives.

Before providing 2022 EPS guidance, I would like to make high-level comments on margins. We expect both 2022 adjusted gross margin and adjusted EBITDA margin to decrease year-over-year by approximately 2 to 3 percentage points as we capitalize on our massive market opportunity by accelerating investments to continue our move upmarket, to drive automation initiatives and to expand globally. It would be irresponsible for us not to do so given our differentiated offering and such favorable market conditions. But we are fully committed to maintaining a balanced growth approach and gaining leverage longer term to reach our 23%-plus adjusted EBITDA margin target by 2026. So for 2022 non-GAAP EPS, we are guiding to a midpoint of $1.14 per diluted share, above the $1.09 per diluted share outlook we provided during our last earnings call, underscoring our complete confidence in our operating plan.

For the first quarter, we are guiding revenue to a midpoint of $170.5 million, which represents a 2% sequential decline, better than the 3% to 4% quarter-over-quarter decreases we have been guiding to in the first quarter in the past 3 years. Also, the first quarter year-over-year growth at the midpoint is 24%, which is the highest growth rate we have ever guided to when compared to pre-pandemic first quarters.

We expect first quarter non-GAAP EPS to come in at $0.13 per diluted share at the midpoint, a decline of $0.29 per diluted share sequentially. I would like to point out that the first quarter non-GAAP EPS is always the weakest of the year because of the seasonal revenue headwind and the FICA reset. For the first quarter of this year, however, we are guiding to a somewhat larger-than-normal sequential decline, entirely due to the decision to accelerate hiring, especially in professional services, as I detailed earlier.

Additionally, I would like to provide more color on the quarterly profile of both the top and bottom lines for the remainder of 2022. For revenue, consistent with guidance in past years, we do not expect sequential growth in the second quarter. However, following seasonal business patterns, we do expect revenue to again increase sequentially in the third quarter and more strongly in the fourth quarter as is typical in our business. Given the shape of this revenue curve and the transitory first half gross margin headwinds from the 2 factors I mentioned earlier, professional services and public cloud, we expect our second quarter non-GAAP EPS to be in line with our first quarter guidance of $0.13 per diluted share, but it should improve modestly in the third quarter and more significantly in the fourth quarter.

One final guidance comment, this one concerning operating cash flow in the current quarter. The success we have had with our IVA has resulted in the Inference shareholders being entitled to their full earnout. We will be making the payment this quarter. The amount will be $24 million, of which approximately $6 million will be reflected in operating cash flow and another $18 million will be reflected in financing cash flow. Let me just add that we could seldom be happier to make such a well-deserved earnout payment.

Please refer to the presentation posted in our Investor Relations website for additional estimates, including share count, taxes and capital expenditures. In summary, we are very pleased with our fourth quarter performance as we continue to execute like clockwork. We remain laser focused on investing in key strategic initiatives to continue driving LTM enterprise subscription growth in the 30s to achieve our long-term targets.

Operator, please go ahead.

(Operator Instructions) Our first question will come from Ryan MacWilliams at Barclays.

Okay. Just trying to get the video on. There we go. Communication analysts, we can figure it out. Okay, guys. So Barry, I know you did a really good job at the Investor Day kind of outlining how to think about your go-forward guidance in tandem with some of the proxy numbers that were released during the potential Zoom acquisition. As we look at the guidance for this year and investors may be thinking about kind of that gap or that delta between this full year guide and those proxy numbers, can you just kind of remind us how you're thinking about guidance in light of that? And then maybe if there was any change from the Investor Day?

Great. So let me take, Ryan, the very last part of that first, which is essentially no change at all versus the financial Analyst Day, November 19. So in terms of the proxy, that $2.4 million in 2026, as we've explained, that was a 50-50 type projection. Down the fairway is the way we described it, equal chance of making it or not making it. For those of you that have been with Five9 for the last many years, you'll know that we start the year always and generally throughout the year with a very prudent guidance philosophy, which we then, as the year unfold, and we see the revenue materializing based upon seasonal and other factors, we continually raise it, 2 different approaches, 2 different outcomes.

I'll conclude by saying, Ryan, that even though that 2026 $2.4 billion, which, by the way, would imply a 34% compound annual growth rate between our guidance for 2022 and the $2.4 billion, something that we've done very often, well, consistently. And we've certainly been saying for a long time that we have durable 30s type growth. But the point of what I said, we seldom put out numbers that we do not believe in, and we believe in those as well.

And I'd just add one thing to that answer which is, just look at the last 2 quarters, 2 different approaches from a guidance and obviously the top-down proxy that we shared. But ultimately, we still came in beating the proxy in both quarters. So I think it's 2 different approaches, and we're going to continue to be consistent in our guidance philosophy.

Moving on now to a question from Sterling Auty at JPMorgan.

So I'll take the other side of that in terms of the margin question which is, all right, you gave us some nice color in terms of the gross margin and gross margin impact. But how should we think about that 2% to 3% decline in EBITDA margin? How much of that is going to come in sales and marketing with some of the initiatives you pointed out versus R&D to further build out IVA and other capabilities? And then just kind of, if you could extrapolate, when should we hit kind of the bottom and begin more of that steady climb towards the ultimate targets?

Great question. Thank you. In terms of where the 2 to 3 percentage point hit will occur, it will occur primarily in the gross margin area. And let me just answer the second part, but I'd like to come back to that gross margin, if you don't mind, Sterling. In terms of the trough, it will probably be somewhere around the second and third quarter before inflecting out. And I do though want to talk about those gross margins.

The first thing is, and this is important, we want to disabuse anybody about pricing pressure. And let me be concrete on that. We give you each year in the fourth quarter the seat count. We give you obviously each year in the fourth quarter our revenue. And you can do a calculation, and you'll see that depending upon exactly what the percentage is that we're up again this year by over 2 percentage points year-over-year. And by the way, a fair amount of that, we can go into a separate discussion, due to AI and automation so. And before I leave the subject of pricing, bear in mind that the increase was bigger than we've had in the past, but would have been even bigger, materially bigger had it not been for some usage headwind because in the second half of 2020, we had more than normal usage on the platform for telephony.

Now where are we investing? We're investing in 2 areas as we said on the call, professional services and public cloud. On professional services, this is such a smart approach. We've got these megacustomers that are on the platform. They're starting to ramp. There's more going to be coming in the pipeline. And they require more initial work. They require geographic expansion. We're going into areas that we were not in before for the partner qualification, and a lot of that investment is transitory. Once you've established yourself in Brazil, you don't need to re-establish yourself in Brazil on a professional services basis.

And currently, because of this, we have quite significant negative margins in professional services, Sterling. And you know that we've been breakeven in the past. We can get to breakeven. And just like many other B2B SaaS companies get into the high single digits. And the reason that we're so confident about that is that the leadership that Rowan has brought in, and that team as we've tended to, is just quite world-class.

The other area is public cloud. We, again, geographically, we need to have these data center pairs across the world. We've already done a fair amount in 2021, more coming in '22 and '23. And we're also investing in a hybrid architecture where it's a matter of debate, but certainly there's going to be probably in the teens cost savings in cost of revenue once that architecture is completed. So we think we're doing the right thing for the long term, and I'll leave it at that. Sorry for the long answer.

Moving on now to a question from DJ Hynes at Canaccord.

I'm going to give Barry a break. Rowan, one for you. So you spent a lot of time talking about IVAs in the prepared remarks. For the customers that have adopted your IVAs, does the data suggest that the number of requests that could be handled by the bots just continues to increase as the algorithms get better or are there signals that like at some point IVA productivity just kind of starts to plateau? I'm trying to think about how that might impact kind of the economics that you can demand from customers long term.

Yes. No, really, we're at the beginning here. So I'll give you one example of a company that implemented this is in the health care space. And they were able to drive $185,000 of savings per month in their labor costs based on the IVA. And that was just really scratching the surface of their labor costs. And so they implemented the high-volume, low-value kind of work that we had talked about. But I think that's going to be the gift that keeps on giving for them because as we get more data and more learning, they'll be able to drive more automation.

And so now it's too early yet to be able to see that, for example, in the DBRR because we're just getting these implementations started across these various industry verticals. But I believe we're going to see an initial tranche of implementations and then a set of growth metrics as we get more data and as the companies sort of learn the tools and as our own PS teams learn those businesses to be able to help those customers.

And that's, by the way, again, not a voyage of discovery. This is very much a replay of what we had seen in the past just with more of the legacy technology approaches. So it tends to start small and then grow to big. But we're already, and when I say small, that's relative with scare quotes because these are already quite significant savings, $185,000 per month as just one example. I think I had previously mentioned our largest customer by agent count had actually done the math and said that they would save many, many millions of dollars, double-digit millions of dollars over a long period of time by implementing this. So the numbers, especially in the larger accounts, which is where we're seeing the most traction, are very, very material. And we think that they're going to go up over time.

Got it. Super helpful. Maybe just sneak one, very quick one in. I'm breaking the rules here, I know. But just given how the stock's reacting, maybe it's some of the guidance stuff. But Barry, just you kind of laid out how you typically guide conservatively. I think we all get that. But when was the last time you actually reported a sequentially down Q1 revenue period? I mean, I look back at my model, I can't find one.

DJ, with that direct question, the only way I can answer is that you'd have to go back very far to find one, very far indeed.

Moving on now to a question from Meta Marshall at Morgan Stanley.

Great. Maybe a question for you, Dan, on just what you're seeing with the pacing of some of these 7- and 8-figure deals that you've got brought on over the past couple of quarters and just maybe building upon that for Barry, if there's just any financial impact we should see of kind of quarter-on-quarter lumpiness as some of those customers come on.

Yes, Meta. To address the question, we've been onboarding those megacustomers, if you will, beginning in Q4. And they'll continue to ramp through 2022 and into 2023, in addition to the significant number that we booked just in Q4 alone. I talked in the prepared remarks about shattering our record for million-dollar ARR customers. And we did just that. We brought in around double the most we had ever brought in, in a previous quarter.

And if I could just build on that, Dan, because you made reference, Meta, to DBRR. As Dan just said, those are ramping. We'll see quite, they're not yet seasoned in terms of the DBRR calculation because they need to be there the year before. So when they start ramping in the second half, especially and in 2023, you'll see the impact improvement as they season into the DBRR calculation.

More generally though, and this is really the key, one of the important arrows in the quiver to that $2.4 billion in 2026 is the expansion of the DBRR into the high 120s. And one of the key drivers is those bigger customers. Those bigger customers are growing, as Rowan mentioned, at a CAR of 93% and therefore, since their inception. And therefore, that will inevitably have a big positive impact on the DBRR calculation. It makes intuitive sense, the bigger the customer, the more that they can expand. And also, they are the ones that can best afford and have the imperative to be able to invest in AI and automation.

So while there's very few things in business you can be sure about, we believe there's an article of faith within the company that the DBRR will expand with all the beneficial impacts on that on the top and bottom line. But we also want to stress and I'll repeat this really clearly that there will be fluctuations as they have been in the past, in the future on DBRR, including in the near term.

Next up from Needham, Scott Berg.

This is John on for Scott. Just curious if you could provide a little bit of additional color on the partner channel. How is that continuing to ramp up? And what type of an impact are partners having on selling kind of the AI and automation capabilities?

Yes. Sure. I'll take that one. Thanks, John. Regarding the channels, we are hitting on all cylinders. And as you may recall, if you flash back 4 or 5 years ago, we were just getting started with partners, almost leaning into them, trying to get them to carry the product. They had alternatives in the premises-based solutions, but they really didn't have the appetite to carry cloud until the market opened up, customers started demanding it, and they came running and they've leaned in.

We brought in several folks, Andy Dignan, Jake Butterbaugh, to really head up that effort. And we've seen a rapid expansion. In fact, as Rowan mentioned in the prepared remarks, I think it was 61% year-over-year for 2021 over 2020 across the channels. So keep in mind, not in that equation are the channels that refer business to us like the SIs. And when I say refer, they're actually managing those large-scale digital transformation, migration to the cloud projects for big, big clients. And so we see a great deal of traction there and success with them. We're also seeing internationally our channels play a much bigger role internationally because in many markets companies want to buy from a local known entity. And so we've signed up more and more service providers as well as the AT&Ts of the world. The partnerships that we've established are across all 5 categories when you look at it, from the technology solution brokers, as Rowan mentioned, to the local VARs, to the referral partners, to the SIs and then the big global service providers.

So hitting on all cylinders, they make a great entrée into many accounts. And your point about automation, they're bringing us in because they have a customer that has a pain point or a need. And the beauty is, right now, we're at the early stages of the AI and automation game where we're grabbing very low-hanging fruit. I mean, when you think about it, the easy business case is those that, hey, it's highly repetitive, mundane questions, agents don't want to answer them either. So they're dealing with that dilemma of labor and trying to keep their folks employed. And this is a way to offload those mundane, repetitive questions with automation and let their agents focus on the customer and the empathy and the ones where they really need human interaction. So the channel is helping us participate and actually capitalize on that opportunity.

Moving on to Samad Samana at Jefferies.

So I wanted to ask a follow-up on the IVA, the stand-alone selling of that. Maybe just how we should think about the ramp of that sales team? And what have you seen already in terms of success out of what sounds like an existing small unit? And then just, I guess, Barry, is it embedded into guidance that, that will be contributing on a stand-alone basis in 2022 or is that something we should think about more in the forward years? That's a multipart question, but all on the same subject.

Thanks, Samad. I'll let Barry take the second part. But let me start out with the IVA stand-alone selling. Very excited about that team. We've put, actually, the leader of that team is the same gentlemen who helped us with the commercial business back in the day, if you remember that, kind of was doing this and kind of did this and continues to be a nice contributor to our growth. So we've got really incredible leadership there. That's reporting into Andy Dignan's organization.

We're seeing the results already. I mean, we obviously shared that. But as we look to 2022, that ramp, I mean, we're looking for them to double or possibly quadruple the sales from the previous year. So there's very, very big expectations on that team. I think they haven't agreed to quadruple by the way, but we certainly have some big numbers. And it's not, by the way, I would add that, that team is not just focused on IVA stand-alone selling. They are focused on helping customers adopt AI and bring AI into the sort of, into the fold for each of these companies. And that's not just IVA. It's also Agent Assist. It's also the rest of our technologies that help our customers sort of optimize their labor.

So it's more about kind of value selling and helping customers look at their labor spend and figure out how to be much more efficient with that, and at the same time, improve customer experience. And so they're bringing in specialists who have done that for other kinds of companies before and so far, so good. Barry, maybe you can comment on the second part of the question.

Yes. Samad, so obviously, the early signs, as Rowan has just described, are very encouraging and the 10% attach rate on the enterprise new bookings, the energy around it and the popularity with the sales team, et cetera. At the same time, these are early innings. And we know that the curve is up, but we just don't know what the gradient is and when it really starts inflecting. And so we've taken a conservative approach.

We'll take a question from Taylor McGinnis at UBS now.

So if I look at sequential growth for 4Q revenue, I believe it was around 12.5%. And if you go back pre-pandemic, growth was sequentially normally like in the 10%, 11% range. So can you just maybe talk about what you're seeing in the demand environment that led to some of that performance. And as we look ahead, how durable are some of those trends as we think about the potential for sequential growth in future quarters.

Great. Yes. That's exactly right. We grew more at the 12% to 12.8%, was higher than we've ever had pre-pandemic. It was higher in the pandemic itself. Now a couple of things contextually. The fourth quarter is always our seasonally strongest quarter. And we just, and seasons vary, some are stronger than others. This was a good season, obviously. We also had some benefit in the quarter from the fact that one of those megacustomers started ramping and helped the quarter as well.

With respect to the future quarters, and it's really important to look at the sequential growth rates as we put COVID further and further in the rearview mirror and get past those very difficult compares. But what we're encouraged by is the fact that we have been growing not just in the fourth quarter but in the prior 2 quarters as well by rates that were very similar to the pre-pandemic rates of growth, 4% to 7%. And you should expect those sorts of things at a high level going forward as well.

At the end of the day, the big driver over here is our enterprise business. Rowan, for a number of years now, has committed to durable many years of LTM enterprise subscription growth in the 30s. And that's now over 60% of our, slightly over 60% of our revenue and excluding PS. And so it gives us a lot of confidence. And our exact sequential amounts, Taylor, will depend on the particular year.

Moving on now to Piper Sandler's Jim Fish.

Great to see you and congrats on the quarter. Maybe working off of Barry, actually your last comment. We're hearing a large amount of seats are up for grabs in the next few years in the financial services vertical specifically. And that's not historically been a vertical you get heard kind of called out. And we even heard one of your competitors talk about an initial 20,000 seat win going to 40,000.

Now while underneath, sounds like you guys have some very exciting deals to announce the next few quarters. I don't think Dan can stop smiling on some of these upmarket wins. Is there anything post these investments you're making that really will prevent Five9 from competing for those size deals given the infrastructure sits on public cloud, now that provides really unlimited scale in theory. And look, I know you guys historically have participated well south of 10,000 seats. But what prevents us from now going after these big titan kind of opportunity?

Yes. I'll take that one. Thanks, Jim. Nothing. We are absolutely moving in on every opportunity that comes up. We know confidently we can serve the largest companies in the world. We're already doing that. And that's a new opportunity for us. Now good thing is that the market is opening up at the time that our investments have really paid off. All those investments we've made over the last 3 years around public cloud, around scale, around our professional services organization, around our coverage and go-to-market model are all really paying off at a time when the market demand, as you said, whether it's finserv, frankly, or many other industries, but definitely finserv will be one of them. And we are seeing those already, and that's what's got Dan smiling ear to ear. So stay tuned on that front, but there is nothing stopping us.

Moving on to a question from Terry Tillman at Truist.

I'll be disciplined to keep it to one question. A lot of my questions have been answered, but maybe I'll focus on AT&T. I think you talked, Rowan, about 50 deals now in a variety of verticals and having good progress there. And I think you mentioned public sector. But curious if you could just add a little bit more color about how that relationship is continuing to ramp into '22. Anything that stands out from that just as you all have more seasoning with that relationship and how impactful that could be in '22 versus maybe '23?

Yes. Absolutely. Dan, feel free to add to this since you're on the ground with this one. But we're still very positive on that. We had a really solid QBR, our most recent QBR, where we met with their leadership team at our sales kickoff that we held in person in Las Vegas. Actually, I shouldn't call it a QBR, it was a shorter meeting than that. But nevertheless, the executive level commitment from that meeting was very clear.

I think I shared just in my prepared remarks earlier, cx-revolution.com, which is a marketing campaign that is being driven by AT&T, but it's really backed by the Five9 Cloud Contact Center. They also have now adopted IVA for their, they've taken that IVA and they're going to be using the Five9 IVA there. So AT&T have really gone all-in with Five9. And we're seeing deals, again, across the spectrum from large to small.

So it's not that they're just getting started. But as you know, these service providers are very large organizations and they take a while to get ramped up and to get the attention, especially for something that's new like this public cloud offer. So we're seeing it. We mentioned the 50 deals. We also mentioned that it's happening across many, many, many countries. So we're actually seeing agent locations all around the world as part of those 50 deals, and we definitely see more upside there.

We continue to do more work in the background to be even more integrated with various AT&T partners as well, including RingCentral, because they want to make sure that it's as clean out of the box as they can get it. And so all these things are solid investments here, and we anticipate they'll continue to pay off. And we'll see that growth continue. Dan, do you want to add anything?

Sure. Yes. And Terry, you can imagine a large service provider like AT&T who's OEM-ing the product, there's a ton of work behind the scenes. They want to get it integrated into their billing system. They got to get everything done. And so they take time to get going. But once that momentum starts, especially in the field, once they get educated and understand what they can do with these products and how they can sell them, it does catch on and spread like wildfire and give validation.

That same holds true for Jim's last question, too. The reason we were able to do more million-dollar ARR deals, double, roughly, than we had in any past quarter is because those megadeals are going in successfully. Everyone wants to see that we can successfully implement. And in fact, we're working on more megadeals, as Rowan just mentioned. And the best validation we have is they know each other. They talk to each other. And so having them reference and turn to someone who does well north of 10,000 seats and say, wait, they're doing 10,000 seats highly successfully. The best vendor relationship you've had in years, if not ever. And that validation says more than we could ever say as a sales team.

And so we're seeing, nobody wants to go first. We spent years and years kind of knocking at the door of larger enterprises. And now that the floodgates have opened and they've really opened due to the incremental value they can achieve from AI and automation. That was the real difference, the real linchpin to say, aha, enterprises should disrupt their whole enterprise and make this massive change. Whereas before, they were like, well, what's really the incremental value I'm going to get? And it really wasn't, it was hard to put their finger on it other than cloud. And yes, it's easier and more convenient. I pay as a subscription and I don't have to maintain servers. But until we came out with the AI and automation, that's what really opened things up in the large enterprise. And they're now turning to each other to say, is this true? Is it working? And we're getting a resounding, yes.

From Wells Fargo, Michael Turrin.

Barry mentioned the price per seat is moving up in the model very clearly earlier on. Dan, can you talk about the in-the-field view towards bundling, where you are with any efforts there and how that impacts maybe both price per seat and some of the product adoption patterns you're driving towards with some of the supplementary areas you piloted as well?

Yes. Awesome question, Michael. And we came out with our bundling at the beginning of 2021 and built 4 bundles. And they were designed around making it simpler and easier, primarily for the channel, but also for our internal, our sellers. Because as you can imagine, with the laundry list of all the different SKUs and capabilities, it can become cumbersome.

We were looking at that and there's always the risk factors of, does that reduce dollars per seat and bring people into a lower bundle. It actually did do the opposite because it's like, oh, if you want that one thing, you've got to jump to the next level of the bundle. You'll get some things that you may not need or want or use. But guess what? That one thing is there. And so it gets people to hike up into the next highest bundle area. So it's actually helped us from a cost per seat and it's also made it very, very simple from a billing perspective and from our channel's training perspective. So all goodness on the bundle side.

I have a question now from Matt VanVliet, BTIG.

So Barry, you talked and gave us lots of details around the professional services investments and what you're scaling, and we're continuing to hear a lot more projects that are going to have the high touch services component for Five9. But I guess on the flip side, you've also been building out a lot of these global SI partnerships. And so maybe, Dan, can you help us think about where the demand for the Five9 employees on the services side is coming from? Why do you feel the need to increase headcount 60-plus percent versus trying to get more of those partners in the door that you create that flywheel of recommendations for new projects?

That's a great question. Thank you, Matt, for raising it. Because one of the things, keep in mind, when we sell those megadeals, those large multimillion-dollar that have sometimes a rollout schedule from the time of placing the order for a year or even more. And what we have had to apply there is the consulting resources, the design resources. It's a lot of internal meetings on their side, on the customer side that we need to participate in and coach them through what's capable and what's possible. So there's a ton of work that's done with no revenue coming in the door. So that's when you look at the margin hit, it's because we're putting in the cost and we don't yet see the revenue to offset it.

So when you look at the backlog of projects we've sold, we're moving ahead of schedule. We're moving as fast as the customers can move. And so it's not a restriction on our side, it's on the customer side. And so we're progressing along those lines. If you look at the partnerships that we've established and built, it takes time for them to learn and get the skill set to be on par with what we deliver from the world-class best professional services organization, bar none in our industry. I mean, by far, our NPS scores are off the charts compared to others. And if you look at that, we're not going to sacrifice quality in order to just push that cost out to the channel.

So we're helping them onboard and enable their resources to get skilled to be able to keep the level of quality where we want it, and that's happening. We have several customers or several partners that are picking up the services component, but it does take time. It's something that we've taken great pride in perfecting over the years. And over the next several quarters and years, you'll see us be able to augment our PS with external sources.

Yes. And just to reiterate the strategy, on every one of these deals, we have partners by our side, but they are learning and coming up to speed. So we have to help with that process, and that's an investment we're making in them. But once you see that happen, that begins that flywheel effect of the next deal they've been trained and they can train themselves going forward. But to be very clear on the strategy, it absolutely is to leverage partners on the services front. But as Dan said, in these early stages, especially with these larger and larger customers that we're landing, we want to make sure we get it right out of the gate and that we invest in it and don't leave it to chance at this point. We want to make sure those are wildly successful because of the impacts of DBRR and all the additional stuff that they will add as we make them successful. So that's fundamental. I just want to reiterate that.

And the reflection, as I mentioned earlier, of the success of those projects gets communicated to other prospective customers. And so it's very important that we maintain that high level of quality, and it's critical in those stages. So I've seen and we've seen firsthand others in our space that have pushed it out too early to the partner and the partners weren't ready, and it created a negative impact that we don't want to experience.

And now we will take our last question from Matt Stotler at William Blair.

Maybe one in terms of the buyer that you're addressing. Obviously, historically, you've been a line of business buyer. But as you move upmarket and you see this digital transformation spending turning into kind of enterprise-wide rationalization or broader projects in terms of rationalizing contact center implementations or full communication stacks, are you still seeing that entry point being the line of business buyer? Is that, I guess, drifting more towards centralized procurement decisions? And if so, how do you get visibility there? Is it internal advocates? Is that where like the SI partners come in? I would love to get some more color there.

Yes. I think there's been a consistent trend towards the increasing influence of the LOB executives within these companies, whether or not they're the buyers. And what we have seen as we move, especially into the largest enterprise and where you see larger digitization initiatives going on, that those do tend to come back together with IT. But what happens from our go-to-market motion is really landing that internal LOB champion and we built our entire sales motion around that. But at the same time, that gives us more friends in the room when there ultimately is an IT conversation.

And so we do see IT involved. And look, there's always, of course, centralized procurement and other things. I mean, these are not LOB folks generally writing checks themselves, especially in these larger enterprises, right? So you have, and we are incredible at managing these larger enterprises and the complex buying processes that they have. And Frank and Dan's team is just absolutely the best in the businesses at that. And we do see IT more and more in the larger enterprises, but it's always with a, let's call it, a greatly empowered line of business influencer at the table.

And this is one of the reasons why, by the way, we've spent quite a lot of time building up our Microsoft relationship because where you're seeing Teams is getting amazing traction. We want to make sure that if that's the product that they're looking to deploy, we fit hand in glove with Teams so that the customer gets that single experience that they want. They get the presence. They get the ability to transfer back and forth between Teams, back ends, whatever PBX they happen to be using. And so that's an important reason why we've been investing in Microsoft, in particular, for those strategic enterprise buyers where we just think Microsoft absolutely dominates the market.

Okay. That was our last question. I'd like to thank everybody for joining our call today and for all of your terrific questions. We look forward to an amazing 2022. Our business did great in 2021 and in Q4. We've got an incredible 2022 lined up. Our employees are fired up. Our customers are happy. Dan is grinning ear to ear. So stay tuned for a lot more from Five9.

With that, I'd like to thank you all for joining, and we'll see you on the follow-up calls. Thank you very much.