Good day, everyone. Welcome to the Five9 Inc Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tony Righetti with The Blueshirt Group. Please go ahead, sir.

Thank you, operator. Good morning, everyone and thank for joining us on today’s conference call to discuss Five9's second quarter 2015 results. Today's call is being hosted by Mike Burkland, CEO; and Barry Zwarenstein, CFO. During the course of this conference call, Five9's management team will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are simply predictions, should not be unduly relied upon by investors and actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect our future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of certain risk factors that could cause these forward looking statements to be inaccurate and that you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission. In addition, Management will make reference to non-GAAP financial measures during this call. Management believes that this non-GAAP information is useful, because it can enhances in understanding of the company’s ongoing performance and Five9 therefore uses non-GAAP financial information internally to evaluate and manage the company's operations. This non-GAAP financial information should be considered along with and not as a replacement for financial information reported under GAAP and could be different than the non-GAAP financial information provided by other companies in our industry. The full reconciliation of the GAAP to non-GAAP financial data can be found in the Company's press release issued earlier this afternoon and available at www.five9.com. Now, I would like to turn the call over to Five9's CEO, Mike Burkland.

Thank you, Tony. Welcome everyone to our second quarter 2015 earnings call. We are very pleased to report results for the second quarter that once again exceeded our expectations across all key metrics. Total revenue for the second quarter was $30.3 million, up 23% year-over-year. Our solid top-line growth was complemented by a significant improvement in our EBITDA margin of over 2,000 basis points from a year ago. Bookings were another highlight as we set a new second quarter record. Given our strong results, we are increasing our revenue and bottom-line guidance for 2015. Our ability to help clients improve agent productivity, enhance customer satisfaction and reduce total cost of ownership is resulting in strong bookings momentum, solid win rates and increasing average deal size. We believe these metrics are clear indicators of our strong competitive advantages. Accordingly, we remain extremely enthusiastic about capturing more of the enormous contacts in our market by leveraging a number of factors that are unique to Five9, including our comprehensive end-to-end solution, our deep integrations with leading enterprise CRM applications, strong implementation and support capabilities and excellent stability in uptime performance. Now, I would like to share a few examples of recent enterprise customer wins. First, a large higher education institution chose Five9 to deliver a 300-plus seat solution to improve their recruiting admissions and enrollment process. In particular, this client required a submitted-response timeframe on inbound weather enquirers. We were able to more than meet this requirement by showing a 70% reduction in the time from when a potential lead registers on their website to when this person is contacted. [ph] The second example is a publicly traded global footwear and apparel company that selected Five9 integrated with Zendesk to replace their legacy solutions. This comprehensive implementation included our PCI compliant recording, workforce…

Thank you, Mike. As Mike as stated, we are extremely pleased to have outperformed our expectations by driving solid revenue growth in conjunction with improvements to our bottom-line. We remain focused on meeting our EBITDA and cash flow breakeven targets. Turning to our results, revenue for the second quarter of 2015 was $30.3 million, up 23% from the second quarter 2014. Recurring revenue accounted for 96% of our revenues in the second quarter 2015. Recurring revenue is made up of monthly software subscriptions, which are we based on the number of agency plus usage which is based upon minutes. The other 4% of our second quarter revenue was comprised of professional services fees generated from existing clients in implementing the Five9 solutions and optimizing its use. Gross margins adjusted to exclude all non-cash charges was 58.7% for the second quarter of 2015 compared to 51.5% for the same period in 2014. Adjusted gross margin came in higher than expected for two main reasons. First, the least cost routing technology we implemented in the fourth quarter 2014, again, delivered larger than anticipated increases in usage gross margins. Second, the benefit of high subscription and professional services revenue going against the base of largely fixed or semi fixed costs. It is important to point out that while usage revenue generates gross margins below our subscription margins, usage revenue comes with very minor incremental operating expenses and therefore generates considerable bottom-line leverage. Please note that a reconciliation of our GAAP gross profit to adjusted gross profit as well as other reconciliations on GAAP to non-GAAP results is provided with our earnings press release and in our investor presentation on our website. The investor presentation also provides details of the non-GAAP adjustments to operating expenses. GAAP R&D expenses for the second quarter of 2015…

[Operator Instructions] We will hear first from David Hynes with Canaccord.

Hey, thanks a lot guys. Maybe just first, Barry, if you can help us think about the guidance, the guidance for the back half of this year implies kind of high teens revenue growth you guys are coming off of kind of two record bookings quarter, so maybe just help us square up those comments and speak to maybe the level of conservatism in those kind of projections?

Sure, DJ. As you just alluded to, our second half is not the seasonally stronger one part of the year for us, but we have taken what we consider to be a realistic outlook just on how much that seasonal uptick will take place and that we will enjoy after the summer. As it turns out that we have been given too conservative. We will of course be happy to revise outlook in the next quarter.

Got it. Then, Mike, maybe a little bit on the pro-serve business. I know you have a new leader in place there. I guess it is maybe about four months. I realize it is a small part of your total revenue picture, but I think there could be some material implications on gross margin. Maybe you could talk about an update on the changes that have been made in that organization and then maybe you could touch on kind of potential implications on the numbers on the gross margin front?

Yes. Happy to do so, David. We brought a new leader in over our services organization Mike Crane joined us from Cisco a few months back as you mentioned. He has hit the ground running part of the revenue performance in the quarter was actually driven mainly by our enterprise business, including our professional services business towards that enterprise deployment effort of our enterprise customers, I should say. Mike has hit the ground running, there are a lot of things that we are doing in and around our professional services offering. I think the best evidence is coming in increased percentage of bookings that we see that involve professional services. As we continue to move upstream into larger and larger enterprise opportunities, our deal size continues to increase quarter-to-quarter and the larger enterprise customers quite frankly are looking for us to provide more consultative implementation services, which we are beginning to do.

Got it. Okay. That is helpful color. Thanks guys.

Thank you.

We will go next to Michael Huang with Needham.

Thanks very much. Good afternoon guys. Apologize for the background noise here. A couple of questions for your, just to follow-up on that last point that you may Mike around ASPs. If you sort of look at the enterprise segment, specifically, are you have been increasing ASPs kind of across the enterprise segment perhaps driven by higher average seat count or was that a comment that just reflective of fact that you are moving out market which obviously…

Yes. Great question, Mike, and I am glad you asked it. We are seeing increasing deal sizes specifically just within our enterprise deal flow. I think we talked about those in prior calls and quantified those average enterprise deal size and that is specifically what I am talking about. It has nothing to do with the mix. This is specific to just our enterprise business. Again it is increased seat counts for the most part with an ability for us to actually increase our price per seat as well within the enterprise market.

Great. Are you comfortable sharing kind of what you expect kind of the kind of the high end of the range kind of the range of the kind of enterprise opportunity that you are seeing? I mean do you get some other peers out there that are starting to see some interested cloud kind of opportunities kind of that are up to a valid and to find out and see some are you seeing kind of a significant uptake in those kind of opportunities as well?

Yes. We certainly are seeing the ceiling be raised, if you will, in terms of the larger transactions that we are involved in. As I alluded to on prior calls, the average annual recurring revenue deal size in enterprise was 350,000 in annual recurring revenue that was during all of 2014. We have actually seen sequential increases in that deal size in Q1 as well as in Q2, so we are just really, really pleased about kind of the opening up of the market so to speak above our sweet spot historically and I think it is just a great indication of the momentum that is occurring in our business.

Great. Okay. Just kind of last question, obviously, you guys were cash [ph] companies which mean that you are going to streaming out product innovation continuously. You we called up - is there anything about this that actually is more meaningful than another releases that you brought out to market or is there anything that kind of special about this that perhaps would be a catalyst for some of the opportunities you guys maybe working on? Thanks.

Yes. Thanks Mike. This is a game changer release for us. This is a leaps and bounds, the freedom release is really leaps and bounds ahead of our prior product releases relative to the user experience agent has. If you think about modern user interface, we internally like to use a lot of analogies, but again the idea here is that we have built the user interface that is so simply smart. It is amazingly easy to use for agents, but very, very powerful and guides the agent through and customer interaction to help them solve problems and find answers very, very quickly and get context around the end consumer on the other end of the call for example. This is revolutionary. That is why we call it freedom and we do expect this to just to extend our competitive advantage in the marketplace that we already have when it comes to usability of the Five9 solution.

Thank you very much guys. I appreciate it.

Thank you.

Thanks.

We will move next to Sterling Auty with JPMorgan.

Hey, thanks. It is actually Darren Jue on for Sterling. Thanks for taking the question. Maybe question for Barry on gross margins. I know you mentioned that the lease cost of routing was part of the explanation for the outperformance as well as the better usage revenue, but I wonder if you could maybe give us a little bit more color on how much of a factor the lease cost routing was in the quarter?

Yes. It was a considerable driver. Things were strong across the board, usage subscription PS. In terms of the particular sequential improvement, the ranking would be first on the usage side, second on the PS and third on the subscription.

Okay. Maybe separate question. I know there has been a lot of conversation around enterprise, but perhaps you could just update us on how things are looking in terms of the SMB market?

Yes. A very good question Darren, and again we do tend to focus on our enterprise business. Again, it is becoming the majority of our business over time. It has become. It is actually making up roughly 62% of our revenue. All that said, our SMB business continues to be a bedrock very, very solid business with the attractive returns. It is just that our enterprise market opportunity and growth opportunities is greater as well as the incremental return on investment we see in enterprise is higher. It is not the discount, the fact that we are doing very well in the SMB business as well.

All right. Thank you.

Thank you.

We will hear now from Nikolay Beliov with Bank of America.

Guys, thank you for taking my questions. I just want to clarify the 62% enterprise, was that for the second quarter?

The way we reported it is for the last 12 months.

Okay. Got it. Last year you called out the healthcare vertical during the 3Q call as a headwind and now in your prepared remarks mentioned it is going to at a tailwind. Just wanted to see what has changed here and if you can also update us on the BPO vertical?

Yes. Let me ask Barry to fill in any blanks here, but when it comes to healthcare, I think in prior comments, Nikolay, we probably were talking about kind of the Q1 tailwind through healthcare, right? It is really a Q4 in Q1 open enrollment season where we seem - not seem, we do get a nice tailwind. The end of open enrollment is February 15th, so we do not get any of that in the second quarter. I think that was our point before. When we look at kind of the go-forward, when we look at the seasonal nature of kind of the back half of the year, again, that is where we get our strong tailwind from certain industries like healthcare and others, where Q4 especially seems to be getting a nice tailwind.

Barry, a question for you, if you can comment on the retention rates, so like the trajectory there and when the overall retention rate is going to bottom out?

Yes. When looking at our retention rate year-over-year, the thing to keep firmly in mind is what we have just been talking about which is the Affordable Care Act. If we go back to the '13, '14 season, you will recall that period was characterized by repeated extensions of the sign-up deadline with a final deadline only occurring on April 15, 2014. In contrast, in the '14, '15 kind of season it ended firmly February the 15th.As a result, our dollar-based retention rate declined year-over-year at the end of June. If you take that into account, it is basically slightly up assuming flat. With respect to the inflection point, it takes some time to reach it. It is in a way reflective of what is happening in terms of overall revenue. We have got the faster growing enterprise business. We have got the growing, but somewhat slower growing SMB business. Because it is still 40% of the total, it takes the time to show up in the total corporate number, the same thing with the dollar-based attention where as you can imagine, the retention is below a 100% on the SMB business and above 100% on the enterprise.

Thank you. My last question is for Mike. Mike, can you give us an update on the enterprise sales force build up? Are you hiring according to plan? Are you ahead of the - below and how hard it is to find sales people?

Yes. Great question. As we have said in the past and we will continue to say, we are extending our sales capacity and enterprise at the rate of 30% to 40% year-over-year. I think it is a competitive advantage of ours and that we are able to hire very, very consistently proven enterprise sales talent that produce. Again, I think it is a competitive advantage we have given our sales leadership. It is a borderline network effect that we have amongst our sales organization and that we bring on great people and they bring on people that they have worked with in the past, in the contact center industry that have domain expertise and can do a solution selling that's required in the enterprise market and as I said it is a pretty significant competitive advantage that we continue to benefit from.

Thank you so much.

Thank you.

[Operator Instructions] We will move on to Brendan Barnicle with Pacific Crest Securities.

Thanks so much. Barry, I wanted just follow up on Nikolay's question on dollar-based retention rates. Can you remind us again of how you calculate that and then kind of walk through what the puts and takes are that are causing the downward pressure?

Yes. The way we calculate it is that we take a 12 monthly average for the most recent 12 months. If we calculate in the current number, and for each of those 12 months we compared the retention rate for the customer that were on our roster a year ago and what the revenue was then and what it is now and we take in the 12 monthly averages. With respect to the downward pressure, it is as I just alluded to, Brendan, largely due to the ACA. It is quiet a strong impact. Without that, we would have been basically flat year-over-year.

Would not that mean that like we have now anniversaried that ACA, because that was an issue last year, but as we go forward, we should start to see that pick back up from these levels?

Yes. That is a possibility. We are not making a projection though at this stage, Brendan, because as we have alluded to in the past there can be other factors. If you go back one quarter, I believe, it is, we did mention that we had a BPO that went out of business. These sort of inherent unpredictable events make us reluctant to say exactly when we reach inflection point. What we do know though is that if you take into account the fact that we have an enterprise business that is more than 100% and that eventually will come to constitute not just 62% of the revenue but say 70% to 80%. It will clearly start going up. We just are not able to say exactly what that timing is.

Great. Then Mike just quarter, when we asked you about competition, you said you were winning about 65% of the engagements. Is that still the right metric? Have you seen any change around that?

Yes. Good news there, Brendan. We have actually seen it entire in this quarter. Our win rates against our key cloud competitors was North of 70%, which again I think is a really good indication of competitive advantages and differentiators around our solution and they range from our end-to-end solution, our deeper integration with strategic CRM partners like Oracle and salesforce, our superior implementation and support as well as our reliability and uptime that is second to none.

Then just following up on your ASP commentary, if you take out those deal like the ACA and some others sort of one-off type deals, if we look at the impact or something like that. If we look at just sort of your general enterprise deals, how much larger would you say your high-end deals are? Not overall APS, but those high-end ones and how big are those getting to now?

Yes. We are seeing more and more deals get done for us between 500 and 1,000 seats. We tend to look at our business as continually evolving. If you look at our target market and you look at the North American enterprise market for contact centers, the good news is there is something like 52% of the available seats in contact centers that are between 50 and 500 seats, but we are clearly seeing north of 500-seat deals more and more in every quarter, so we are really pleased with that. Again, I just think you will continue to see us move upstream in a consistent fashion as we have I should say.

Great. Thanks a lot guys.

Thank you.

Thanks, Brendan.

From Barclays, we will move to Raimo Lenschow.

Hi, guys. This is Harry on for Raimo. Thanks for taking the question. A couple of quarter ago you talked a little bit about your data center in Europe and kind of providing as a strategic motivation just providing a little bit more of a global footprint for your multinational customers. Can you just talk a little bit about your international customers and what you have seen over the past quarter or two, changes in demand, increased usage, whatever it may be?

Yes. Great question, Harry. We did as you know put up our data center late last year in the U.K. We have made some significant strides, we have now put on our first sales team, our feet on the street so to speak internationally and have closed our first handful of deals over there and are various stages of deployment on those new customer wins over there. That said, we have also got existing customers that we have been working with to support local agents in Europe. All-in-all, as we have said in the past a pilot-proven scale international go-to-market effort, but I am really, really pleased with the progress we are making over there.

Great. Thanks.

Thank you.

Thank you.

At this time, I will turn the conference back over to management for closing remarks.

All right. Well, thank you everyone. We really appreciate you joining us on this earnings call. As I have said earlier on this call, we are just very, very pleased with the results we are delivering quarter-in and quarter-out. It has been nice to see our progress since our IPO of a little over a year ago. Again, I just appreciate you guys all joining us and we will talk with you soon.

That will conclude today's conference. Again, thank you all for joining us.