Hi, everyone. Thank you for joining us here. This is my first fireside chat for our 26th annual growth conference here at Needham. Today with us, we have Five9. We have the company's CEO, Mike Burkland, company CFO, Barry Zwarenstein. Thanks for joining us, gentlemen. I'm sure those that are on the call are quite familiar with Mike and Barry. But, I guess, why don't we just, you know, kick off and get right to it? Scott, if you don't mind, I should have mentioned this to you beforehand. We just wanted to make a quick- I was just gonna say we're gonna cut to Barry 'cause he's gonna say the safe harbor statement, I'm sure of it. Yeah. Well, very simply, we're gonna be making forward-looking statements during the course of today's conversation about events and trends that may affect the company or the industry. The actual results could differ materially from what we say, and we refer you to our filings with the Securities and Exchange Commission for factors which would cause that change. Thanks, Scott. Yeah, great. Now we've done this once or twice, Barry. I had a sneaking suspicion that was coming. I guess with that, for those that are less familiar with Five9, how about a brief overview of the company? Yeah, sure, Scott, and welcome, everybody. We provide cloud software for enterprise brands to enhance their customer experience at the highest level. We call our platform the Intelligent CX Platform. Most of our business today is in the contact center portion of CX. We have opportunities beyond that, obviously, but, you know, the contact center market is a very large market opportunity, where we're replacing, with our cloud platform, legacy on-premise solutions from companies like Avaya and Cisco. A massive, massive TAM that is, in our estimation, less than 20% penetrated in terms of cloud penetration, and one that we believe we've got several years of very attractive growth ahead of us. It's an exciting time in our industry, as a lot of these on-premise solutions are being end of lifed, which is pushing these large enterprises to the cloud and onto solutions like Five9. And where AI has become very strategic and very instrumental in pushing large enterprise brands to take advantage of that AI technology, which you pretty much have to be in the cloud to do. So, that's a tailwind for our business as well, and it's just an exciting time. Great. Before we get started with the other questions, just from a housekeeping perspective, we will take some audience Q&A when we're finished here with my questions at least. There should be a Q&A box on the webinar screen that everyone's looking at the moment. Feel free to input those questions into there, or email them directly to myself at sberg@needhamco.com, and I will moderate those once we get through. You know, Mike, let's kind of start with a recap. You've been back with the company, at least in the CEO spot, for a little bit more than a year. You know, how would you evaluate the company's execution and opportunities, I guess, over that time, relative to your goals you envisioned when you stepped back into the CEO seat? Yeah, thanks, Scott. As many of you know, I've been with Five9 for 16 years in total, 10 as CEO, 5 as chairman, and now 1 back in the CEO chair. And the execution's been wonderful. I'm so proud of our team over the last year. You know, we've made a lot of progress on our 3 growth drivers, which are, namely our marching upmarket, our platform expansion, and our international expansion. And in each of those 3 areas, the marching upmarket, if you recall on our last earnings call, we talked about, you know, over 50% of our revenue, recurring revenue that is, coming from $1 million+ ARR customers. We've closed many, many large deals over the last year, including some megas, as whales, as we've referred to them as Scott, but we've also closed a lot of, you know, what I call bread-and-butter deals in that $1 million-$5 million ARR category, the dolphins, as we refer to them. This market, on the net new logo side of our business, has never been better. The pipeline, as we've talked about, has reached record levels. We'll talk about that more in a few minutes. Our international expansion has been absolutely wonderful over the last year. That part of our business has grown faster than the rest of our business. We talked about, on our last earnings call, 57% growth in EMEA bookings, as one metric to point two. It's just great to see the execution across, again, the mid-market, the international, as well as our platform. You know, we continue to add new solutions, specifically in AI and automation. We did the acquisition of Aceyus, which is a data integration and analytics solution that expands our data lake and essentially gives us a very, very good data strategy, which is important for delivering AI. And I'll finish with culture, Scott, 'cause you've heard me talk about it a lot. You know, culture has always been Five9's number one competitive advantage, and I would say we've made very good progress in the last year on our culture. I'll call out kind of two areas that I think are top of mind for me when I think about our culture. You know, it is a culture that is not about the individual. It's not about any individual; it's about the team. It's about team success, and I think we've made very good progress in that on that vector of culture. And I'd say the other avenue or other vector of culture that I really care about is, you know, our Five9ers, as I call them. This is not just a job, it's a passion. It's a passion for delivering customer success for our customers and their customers, and it's important, and it really shows through. We talk about the power of technology, but we also talk about the power of people. And a lot of these large enterprises are making decisions around which cloud vendor to go with based on our people, quite frankly. It's a big differentiator for us. Interesting that you kind of bring that up, and I only say that because as I looked at the wide swath of companies I've covered over the last 15+ years, the ones that typically get rated highest for internal culture also tend to be the ones with the greatest long-term growth opportunity. 'Cause customers naturally kind of gravitate to it a little, a little bit, so. Yep. All right. On the AI front, let's start with some product questions, 'cause I still get a zillion questions on the AI side, like I'm sure that you all do. I thought that the viewpoint on this might have been improved a bit a little bit, but I've had several questions over the last maybe couple months that would suggest that's not the case. But I guess to start, maybe could you recap a couple of the new AI functionalities that you've recently brought to market, in maybe later calendar 2023, mid to late calendar 2023? And why does a contact center vendor like Five9 benefit the most from this trend relative to an independent vendor serving up these applications, or maybe a WFO vendor that has these applications? Why does it sit really best in your particular platform in this ecosystem of the contact center? Yeah, we've talked a lot about this over the last year, Scott, and I think it's safe to say that, you know, in the CX category, Five9 has been leading the AI revolution ever since our acquisition of Inference about three years ago. And we've continued to innovate and add to that AI portfolio of products. You know, it's an important opportunity for these large enterprises to take advantage of AI. If you think about, you know, at the highest level, AI and automation are allowing us to really it's a tailwind for our innovation and our products being delivered to the market, but it's also a TAM expansion. Our average revenue per customer, if you will, the TAM, if you will, goes up pretty dramatically as we add these AI and automation products. We've talked about it, in terms of, you know, the average revenue per seat for a live agent being $200 in recurring revenue per month, and the average revenue for an automated capacity, if you will, at about $400 a month. So that's a TAM expansion for us. We're benefiting because we... Think of us as providing software for enterprises to manage and orchestrate interaction capacity, whether that's with a live agent, with AI assisting a live agent, or in true self-service, fully contained self-service. No matter which of those three flavors, and by the way, our enterprise customers are, you know, using a blend of all of those types of interactions, we monetize all of those types of interactions. So think of us as really helping these large enterprises orchestrate their interaction capacity. As interactions go up, our revenue goes up. So it's a, it's an exciting, exciting time. And when you talk about kind of platforms versus point solutions, the benefit of, you know, we call it the airplane, right? That we're delivering an aircraft or an airplane, an experience to a flyer, if you will. We're leveraging the best and brightest and the latest and greatest engines to power that airplane. But in the end of the day, you know, we, as the platform, we have visibility across all interaction types, that full customer journey end-to-end, which a point solution just is never gonna have. So again, whether it's our solutions in our platform or even third parties that wanna, you know, plug in and integrate to our platform, which we also monetize, we end up... Really the, you know, the, the platform is the control point, is the best way for me to say it. Okay. I know you've given these statistics historically. I think in calendar 2022, fiscal 2022, you know, roughly 10% of your net new bookings came from, you know, some of these AI capabilities and virtual agents. Not that you're gonna talk about the '23 contribution here, since you haven't reported the fourth quarter call, but is it safe to say that you've seen the adoption of these solutions increase even further in '23, or are customers maybe not there yet? No, it's definitely accelerated, Scott. We talked about a couple of metrics on our last earnings call. 80%+ attach rate on $1 million+ enterprise deals for AI and automation. So again, 80% attach rate for AI and automation. 250 active AI projects in the quarter in implementation phase as well as 150% year-over-year growth in our Agent Assist bookings. So again, it's happening, it's real, we're beyond the hype and our large enterprise customers are deploying our solutions at an accelerating pace. A core component of why some are concerned about your opportunities with the AI advancements going forward is that it could drive less revenue to Five9, whether it's through, you know, lower seats and the monetization of that ends up being lower over time. I guess, to this point at least, have you seen any evidence that customers you sell into, whether it's the IVAs or other function AI modules, that they've actually driven less revenues to Five9 than without it? ... No, just the opposite, Scott. As I said earlier, it's, you know, an ARPU increase, and that's what we've seen from our customers that are deploying our solutions. And again, it's a new market in some ways, but it's, I guess, playing out very much the way we expected. Hmm. I guess lastly on product, as you think about, you know, kind of your roadmap, obviously, I would expect some new AI capabilities to come into play here. But is there any particular functionality or capabilities that you're kind of most excited about that are coming down the pipeline that you're, you know, able to discuss here today at all? Yeah, I would, I would talk about it more thematically, Scott, in terms of, you know, our AI roadmap, and I'm really excited. The Aceyus acquisition that we did recently really opened up a whole new opportunity for us around data and conversational AI coming together. And, you know, data is really what allows for us to help our enterprise customers deliver that personalized customer experience. So we'll continue to innovate in our AI portfolio, mainly around those categories, where we're leveraging contextual data and generative AI to deliver that personalized customer experience for our customer's customer. And that is, that is what our customers want. You know, Mike, you mentioned the Aceyus acquisition. I guess, how is that integration progressing versus your expectations? And are you, you know, fully able to, you know, kind of leverage this today, or is this really more about leveraging, you know, once the pieces are put together, you know, maybe sometime here in 2024? Yeah, it's made quite a dramatic impact already in terms of, you know, our pipeline of opportunities. As you may recall, Scott, the Aceyus customer base is mainly in the Fortune 500, very large enterprise accounts. They're, you know, opening doors for us, so to speak. In terms of what we've talked about in the past, the Aceyus platform delivers really a couple things. It's a data integration and analytics platform that has hooks into a myriad of data sources, whether those are legacy ACDs, WEM, CRM, or other backend systems. So we just have access to more data and more backend systems very easily in these large enterprise accounts. But it also... That really helps us, you know, not just with our core products, but also with our AI products in delivering that personalized experience. But the second element of this is migration off of legacy on-premise solutions, like Avaya and Cisco, and to the cloud with Five9. The fact that Aceyus has these hooks into these legacy systems and is able to kind of normalize reporting and dashboarding through the migration to the cloud, that is a huge differentiator for us, and it's helping us take these large enterprise brands off of these legacy solutions and into the cloud in a seamless fashion, where they're essentially they can continue to run their business during this migration without any hiccups, if you will. Hmm. I think that's a good transition to talk about go-to-market a little bit. You know, large deals have been a Yeah ... you know, very large deals have been a more consistent component of your discussions over the last two years in particular. You know, the company's announced several transactions that have an ARR amount of greater than $20 million, say. But why now? Why are these really large, you know, transactions coming up today, and why is, you know, the large enterprise, you know, contact center market kind of ripe for these type of replacements? Yeah, there are a few things, Scott, but let me first start off with some metrics, 'cause you're right. I mean, this the momentum in this market, the large enterprise adoption, has never been better, and the momentum is significant. Couple of data points are, RFP flow, we talked about it on our last earnings call. 66% year-over-year increase in RFPs for enterprise and strategic deals, and 21% sequential growth, Q2 to Q3. And those are good indicators for kind of the demand that we're seeing. And you're right, this is different, and it's it's happening for three reasons. Enterprises are being pushed to the cloud because of these end-of-life announcements by some of the large, legacy providers, if you will. And, secondly, CX, you know, has become very strategic for these large enterprises. They're committed to digital transformation, and they're committed to moving to the cloud to enhance their customer experience. Thirdly is the AI revolution that we're talking about. That is a huge catalyst for these large enterprises to move to the cloud. And I would just add a fourth element to this, which is, you know, there is a bit of a herd mentality that happens as large enterprises see other large brands move to the cloud and have success, such as some of the ones that we've closed and talked about. It really helps a lot of these other large enterprises feel comfortable to shift to the cloud. Now, I guess within that, company has historically talked about your net revenue retention number, you know, in the upper 120% range. It's obviously dipped recently for all the macro items we know, but, you know, Barry, you've certainly mentioned that's your expectations of that moving back up into, you know, that 120% range, plus or minus. I guess, with landing these large deals, does that take away or maybe enhance your ability to drive that incremental customer growth? 'Cause if you're large, if you're landing just that much larger, maybe you can expand department to department. But on the flip side is maybe you have a chance to sell more modules. But does that change your long-term view on what your NRR could be like landing a large deal, like some that you've mentioned? ... Yeah, thanks, Scott. So, the key really here is the, the mix shift to those bigger customers. As you're right, we do have more, cross-sell opportunities or to upsell as we expand within these companies that have different divisions and so on. But the salient factor to keep strongly in mind is that, the dollar-based churn rate on these million-dollar-plus customers is meaningfully above the, the rate that we reported, in the, in the third quarter. And we expect that to be a key driver as it continues to become a bigger, bigger part of the overall picture as far as the growing, to help drive, the dollar-based churn rate up into the high 120s. Okay. Now, within all the, the large signings that you've had the last two years, whether it's the delivery service, the healthcare conglomerate, you signed another large healthcare conglomerate, I think it was in the second quarter of 2023. When we think of the implementations for those, have they been reasonably predictable? Because large means large scale, more that can go wrong, more that can go right, obviously. But have they generally tracked in line with your expectations for deployment, or as you've moved into these large ones, have you found that there's maybe, you know, incremental steps or time buffers or something to account for maybe that you hadn't previously? Yeah, the good news is, Scott, they remain largely on track, as we've talked about recently on earnings calls. And again, these are complex, they are multi-divisional, multiple business units that are rolling out. This gets back to the people thing I talked about earlier. We talked about the power of people and the power of technology. Our services team, as well as our partners that are now you know, part of Project Pull-through and we're enabling more and more third parties to implement these large enterprise deals for us. But our people are the best in the business. They're helping these large brands deploy our solution and integrate with all the back-end systems. These are very complicated deployments. But thankfully, again, I think we've got the best team in the business and the best partners in the business, and that's helping these large brands stay very much on track with these large deployments. I guess lastly, on the go-to-market side. Maybe not lastly, I got two more questions, I think. On the go-to-market side, I guess start off with the deals that you're seeing. Is it predominantly modernization from legacy contact center environments, or have you had the opportunity to also maybe displace some of your more modern cloud-based vendors through those processes? You know, Scott, it's a good question, and it's predominantly replacement of legacy solutions that are really just failing to deliver that customer experience. However, we have had some cloud solutions that we displace, some less mature solutions that just cannot deliver the scalability, reliability, feature functionality, integrations, and you know, in the end, the customer experience that these large brands want. So, but it's predominantly replacing, you know, legacy on-premise solutions. Okay. You recently noted that you're making some serious investments into your FedRAMP efforts. I don't think Fed is an opportunity you all have discussed significantly, at least historically, but is this a really large opportunity, you know, for you, do you think? Is it gonna be a competitive, you know, I guess, customer set for you to go after? And, you know, how does it maybe alter or change your go-to-market strategy? Because selling, you kno, to the federal government is obviously a very unique beast. Yeah, it's a huge opportunity. It's, you know, federal and even state and local government agencies that require FedRAMP certification. So it's a massive market opportunity, and it's a big investment. But it's also important to understand, Scott, that we're not, we're not gonna cross the finish line for quite some time. So again, we expect to be competing in that market, but it's not, it's not gonna be, you know, in the next quarter or two. Yeah. Yeah, I have a couple financial questions here, and then there's been a few questions from the audience come through. We'll certainly take those. For those that wanna ask a question, remember, there's a Q&A button within the presentation window. Feel free to input your question there, and I will moderate those towards the end here. So, Barry, your fourth quarter guidance, you know, consumer, or at least, you know, concerned with some of your consumer vertical customers, was, I guess, the main driver for some incremental conservatism in the guidance. You pointed to recent credit and debit card kind of spending as providing some logic or at least correlation to what you see with how those customers spend on your platform. Can you help us understand the dynamic here? Is this something that's very highly correlated if you go back, you know, 5, 7, 8 years? Or is this something, you know, from a newer trend that you've been able to identify that might help you get ahead of what those usage levels look like from your customers? Yeah, frankly, Scott... We haven't gone back several years. We've looked at the recent past, and we have a very good cross-correlation between the external credit and debit card spending. We happen to use Chase, but the others will do fine on discretionary spending and our internal month-by-month evolution in our consumer vertical. So just for everybody's level setting, our third biggest vertical is consumer after healthcare and financial services. And in particular, as I just mentioned, this consumer discretionary spending, things like auto loans, the laser hair removal, water deliveries, seniors, companionship, you name it, a whole lot of different things, home repairs. And we've had seen a strong evolution since the beginning of the year. Just as a reminder to everybody, that spending in January was 12% year-over-year. It declined in February when we were giving our, we didn't have the actual data, we read our internal data, to 8%, when we were giving our, indications for the year. And then subsequently, from March through August, it was 4% ±1%. Then, you know, we need to remind everybody that when you're talking about 1% growth, we're talking about negative transaction volume when you take into account inflation, and what matters to us is transactions. We would like to share the fact that we now have the data for the fourth quarter, and the growth rate there for consumer discretionary spending, which is where we track our installed base revenue for the consumer, was 1% in October, 2% in November, and 1% in December. Now, these numbers are subject to some minor revisions, but then you have the picture that is continued negative growth, so transaction growth. Given that, we feel, you know, pretty vindicated in that we took the prudent stance that we did when we gave the fourth quarter guidance. You know, Barry, given your commentary on your third quarter call, that would seem to indicate that spending was kind of or maybe usage on the platform was kind of in line with your expectations, right? That doesn't sound like it was a significant deviance, at least from your expectations. That's correct. We were prudent, and the numbers I just gave you indicate that that was indeed the case for that consumer vertical. Okay. On the, on the net revenue retention side, I know we kind of touched about how some of these large deals could impact that, but absent the macro impact with what seats has done over the last, you know, now, four or five quarters, I believe that it is. Can you talk about your cross-sell opportunity? Has the cross-sell opportunity remained fairly, which has been strong and in line to obviously drive customer growth there, and, you know, do we see this, reinflection around NRR really just more tied to seats over a period of time? Yeah, you've really put your finger right on it. To set this in context, go back to the second quarter of 2022, Scott, when we started seeing the weakening in the macroeconomy, and where we started talking about getting scrappy and selling more into the base as opposed to just the seat, which tends to affect the transaction volume. And there's been a persistent and clear increase in the proportion since then in the cross-sell opportunities we had, driven by a number of things, including things like AI and automation that Mike mentioned earlier. Mm-hmm. Last question from me, and we'll turn it over to a couple of the audience questions, is around R&D spend. You know, the AI investments that you've been making for the last couple of years, obviously have been significant. I think we'd all agree that there's probably a lot more coming. But when I look at your spend around R&D as a percentage of revenue, you know, it was 11% four or five years ago, increased a little bit in 2020 and 2021, but it's titrating back down now towards, you know, that 11%-12% range, kind of in line with historical estimates. Do you feel like you have to spend more money to drive the functionality that you really want, and your customers are demanding in this environment? Or can you accomplish your goals in the range where you're at? And I ask the question relative, because I, I get it fairly frequently, is where does leverage in the model come from after this year? So I think some are expecting R&D costs have a potential to go up, which might limit, you know, any sort of near-term margin expansion. Yeah, we'll tag team on this, Scott. Strategically, you know, again, I said it earlier, the market opportunity in large enterprise especially has never been better. This is a wonderful opportunity for the next, I think, 10-15 years for durable growth. We're gonna continue to invest aggressively in this market opportunity, including R&D. It's a big lever for us. We've got a leadership position in terms of our platform. We wanna extend that leadership. You know, it is a competitive race, if you will. I like our chances in terms of, you know, I always use the sports analogies, and we have the best team on the field. We've got, in my opinion, the best platform, but we wanna continue to extend that lead, and we will be investing strategically in a number of areas. That said, we do expect to get leverage in this business. Our marginal profitability is extremely high, and we've got a very good, you know, roadmap for gross margin improvement, which is where most of the leverage will come over time, I believe. But Barry, I'll let you talk about that. No, that's exactly right. On the operating expense side, the R&D expenses will increase over time. But we have offsetting that, the fact that in our long-term model, which calls for 23% EBITDA margins in 2027, we're below where in our biggest single element of cost, which is sales and marketing expense, where we expect to be between 26 and 30, and we just, in the third quarter, reported 25%. But as Mike said, the biggest leverage comes from going from our current 61% gross margin up into 70% plus. And there's a number of drivers over there, but where you need to keep very much in mind that when the revenue expands, our gross margin expands. We are managing to keep, despite really big investments in different areas, given the opportunities, managing to keep our gross margin where they are with the subdued revenue current, the current subdued revenue growth, we think is actually pretty good. And when inevitably, the macroeconomy shows a little less sogginess, if you will, a little more strength, we'll see that improvement come up in our gross margins as well, as we leverage our fixed and semi-fixed costs, which are quite substantial. Okay. All right, turning to questions from the audience, I have received several. I have a lot on, we'll call it, M&A, you know, in the space, in the company. I'm gonna not ask the question that way, but someone else asked a good question, I think, with regards to, you know, what's happened over the last maybe quarter. But how should we think about the potential for confusion from customers or channel partners on, you know, M&A activity in the space? Does that really hinder sales cycles? I'm sure customers ask questions, but would there be impact at all from that? You know, Scott, as you know, we issued a press release recently to clear some air around that topic, and it was, it was definitely aimed at making sure that, again, our customers and partners knew the reality of, of what occurred. And again, we're in a very attractive market. It's a massive TAM with, as I said, multiple years of growth ahead. There are going to be, from time to time, you know, larger companies that are interested in our space and interested in potentially getting into our space through acquisition. That said, we've got a wonderful, independent, long-term path ahead of us, and we felt it was important for our customers, our prospects, and our partners to know that. And they do know that, that we are, remaining independent and excited about the future. Good. I'm looking forward to having more of these. That's fantastic. We are, too. Good. All right, these are great. So this next question I think is super interesting, but it's around some of your legacy competitors who are stumbling out there, is: How much of that noise around, whether it's bankruptcies or product issues, lack of product roadmaps... I'm sure you know who I'm talking about. It's the top two or three vendors by seat count. You know, they're all legacy technologies out there. How real is that opportunity in the near term? Are you actually seeing customers look at that, you know, those vendors as not viable and issues or risk to their current businesses that they need to, you know, start addressing? Yeah, absolutely, Scott. That is a huge driver of that RFP flow that I talked about and the pipeline growth that we've seen. It is definitely a big driver. And again, it comes down to lack of investment, very explicit announcements that you know, some of these platforms, these legacy platforms, are not going to have any R&D put into them. They're not going to be supported. They're gonna be end-of-lifed. These are real announcements from, as you said, companies that have millions of agents in their installed base that we have been replacing for years, but that pace of replacement is going up. It's going up dramatically, and it's an exciting time in our space, and I don't think we've ever... I've been here 16 years, and I've never seen this type of opportunity, especially in the large enterprise part of the market. My guess is on the federal side, most of the opportunity there is gonna be replacing those exact vendors. That's probably safe to say. Oh, yeah. I mean, they, they have market share across, and again, very large enterprise, but also in the federal government. So, it's, it's a market opportunity. It's very clear to see, and it's... By the way, the barriers to entry are so high in our category and our space in terms of cloud contact center and cloud CX, that, you know, it still remains, a very much a three-horse race, in terms of cloud vendors that can really, provide a replacement solution for those solutions we're talking about here. So, again, we know that there are a lot of people that want to, want to get into our space, but it's, a lot easier said than done, and the barriers to entry are, are significant. We've seen it play out that way for years and years, where some companies may express interest and even make some announcements that they're getting into this space, and eventually, don't make it in. Well, fantastic. With that, we are going to wrap up. I wanted to thank everyone for joining us today. Mike and Barry, also appreciate your time. I look forward to catching up in San Francisco soon and, obviously on the fourth quarter call. That'll be, in about a month. Thanks again. Yep. Thanks, Scott. Thanks, everyone.