Good day, and welcome to the Five9 Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Tony Righetti of The Blueshirt Group. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today’s conference call to discuss Five9’s third quarter 2016 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 the future, financial performance of the company, Industry trends, company initiatives, and other future events. You’re cautioned that such statements are simply predictions, should not be unduly relied upon by investors, and actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of certain of the risk factors that could cause these forward-looking statements to be inaccurate and that you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in Five9's filings with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this call. Management believes that this non-GAAP information is useful, because it can enhance an understanding of the company’s ongoing performance and Five9 therefore uses non-GAAP financial information internally to evaluate and manage the company’s operations. This non-GAAP financial information should be considered along with and not as a replacement for financial information reported under GAAP and could be different 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. It's also on the Investor Relations Web site of Five9. Now, I’d like to turn the call over to Five9’s CEO, Mike Burkland.

Thank you, Tony. Welcome everyone to our third quarter earnings call. Our third quarter results were once again outstanding. Our revenue grew 27% year-over-year resulting in record revenue of $41 million. This revenue growth was driven primarily by the continued acceleration in our enterprise business, which delivered 43% growth in LTM Enterprise Subscription revenue. This is a key metric which we started reporting in the third quarter of 2015 when it was 35%. It has accelerated each quarter since then. Furthermore, we continue to enjoy exceptional leverage in our business model, resulting in record adjusted EBITDA of $2.7 million. Since our IPO adjusted EBITDA margins have increased by more than 34 percentage points to 6.7%. This trajectory gives us a high degree of confidence in attaining our intermediate-term goal of 20% plus adjusted EBITDA margin. Our results continue to be driven by strong enterprise gains, which are delivering high marginal profitability. We believe we're still in the early days of a massive push towards modernization of customer service and contact center technologies. Given our leadership position in this market and the strong momentum in our business, we are again raising 2016 guidance. I’m also extremely pleased that we set a third quarter record for enterprise bookings and that the pipeline again reached a record new high. Our exceptional bookings were again driven by continued expansion of our direct sales force coupled with the increasing leverage we're getting from our expanding ecosystem of partners including CRM vendors, resellers, master agents, referral partners, systems integrators, bars and ISVs. This expanding ecosystem of partners influence more than half of our enterprise deal flow in Q3. Our channel program continues to grow nicely and we remain extremely pleased with this program, which is yielding significant results and is exceeding our expectations. We continue to…

Thank you, Mike. Revenue for the third quarter of 2016 was $41 million, up 27% year-over-year. This growth is all organic and reflects the continued strong growth in our enterprise business, which now makes up 68% of our LTM revenue. Our commercial business which represent the other 32% of LTM revenue continued to deliver steady and consistent growth of around 10%. Recurring revenue accounted for 96% of revenues in the third quarter of 2016. Recurring revenue is made up of monthly software subscriptions which are based on the number of agency, plus usage which is based upon minutes. We enjoy a high retention rate on these recurring revenues. Our annual dollar based retention rate, in the third quarter of 2016 was 100% -- from 95% in the third quarter of 2015. The other 4%, of our third quarter revenue was comprised of professional services fees, generated from assisting clients in implementing and optimizing the Five9 solution. The decline from the 6% in the second quarter of 2016, reflects the variability of this part of our revenue stream. I will now discuss gross margins and expenses. A reconciliation from GAAP to non-GAAP results is included in the appendix of our inventor presentation in the Investor Relations section of our Web site. GAAP gross margins in the third quarter of 2016 of 56.6% and adjusted gross margins was 61.5%. GAAP gross margins increased by 2.5 percentage points and adjusted gross margins increased by 2.1 percentage points from the third quarter of 2015. On a sequential basis, gross margins declined marginally from the second quarter to the third quarter of 2016 mainly because of expedited hiring and professional services to support the accelerating growth of our enterprise business. We expect gross margins to remain at approximately this level in the fourth quarter. Looking…

Thank you. [Operator Instructions] We will go to our first question from David Hynes with Canaccord.

Hey, good afternoon guys. Mike, I want to ask you about the partner ecosystem, clearly the CRM guys have always been good partners of yours, but the efforts with resellers master agents that size, I guess is a newer development. Maybe just talk about where you’re seeing the best traction with those folks, maybe any way to kind of quantify how they’re contributing in the mix or the pipeline build? Just any additional color with those efforts would be helpful.

Yes, happy to DJ. As you said, the CRM partners continue to do more and more for us in the marketplace which is great. We talked about that a little bit on the prepared remarks, happy to touch on that later, but in terms of the reseller and master agent channel we continue to expand that. I'm really, really pleased with what I'm seeing there. [Indiscernible] and his team continue to sign more partners and the pipeline is growing at a very, very healthy [indiscernible]. So we’re just extremely pleased with the traction there and I'll remind everybody that you know the true reseller business portion of that is on -- kind of, in addition to what we're doing with our direct sales capacity growth, which is about 30% to 40% year-over-year for the past several quarters and we expect that to continue.

Yes, okay. And then, maybe one for Barry. So Barry, just [indiscernible] numbers here, we got two-thirds of the business gone 40%, you got a third of the business growing 10% I’m not a math guy, but that’s a lot faster than kind of what Q4 guidance implies 17% growth. So help us reconcile that and then I guess -- would you care to give kind of a preliminary view on 2017, just to help kind of [indiscernible] that there may be a deceleration on the horizon is the guidance implies?

Yes, fair enough. So with respect first to the fourth quarter this is our seasonally strong quarter DJ as you know. And we take a conservative prudent stance with respect to that. I just remind you that last year we in each of the quarters, slowly increased our guidance for the quarter. And by the fourth quarter we were up reporting higher by two percentage points and we ended up -- misses the prior year and we ended up in projecting 22% and we ended up at 25% for the year. So it's just a reflection of about consistent prudent approach. With respect to 2017, of course we looked at the analyst consensus out there and while we’re not giving formal guidance for 2017 until we report the fourth quarter. We can't provide some high-level commentary. First, revenue. We’re comfortable with the current street projections. And with respect to the seasonality pattern, I need to remind you that typically as we’ve just been talking about the sequential growth is stronger in the second half and fourth quarter, in particular and Q2 typically tends to be relatively flat. And second with respect to the non-GAAP net income, we comfortable with where the street is in terms of the fourth quarter of next year, which showed us reaching a positive non-GAAP net income in that quarter. However, we currently believe for the first three quarters, consensus is slightly aggressive because we expect our cost and expenses to increase progressively during the year and with some front-end loading due to the FICA reset that we always have and opportunistic hiring continuing that second place while the industry consolidates. And just again as a reminder, our philosophy around guidance and future performance is to be conservative.

Got it. Okay. That’s great color. Thanks, guys. I will pass the line.

We will take our next question from Scott Berg with Needham & Company.

Thanks for the call. This is actually Peter Levine in for Scott. I know in prior calls you’ve highlighted ARPU or guess revenue per seat. Can you provide any updates on where that number is today and how it's been trending? I guess, your expectations for the next 12 to 18 months. [Indiscernible] ask, because I’m trying to better quantify the dynamics surrounding revenue per seat longer term as you sell more modules in market in relation to how you price on the enterprise-level?

Yes, Hi, Peter. Happy to comment on that. As we said in the past, revenue per seat in total across our entire customer base has been around $200 per seat. Its slightly above that now and continues to take a slow rise, especially in our enterprise business which is becoming as you know the bulk of our business at 68% of our LTM revenue. So we’re very, very pleased. Again, it reflects competitive advantage and our ability to hold the line and not discount in the market, as well as our ability to sell more products to those enterprise customers and that trend is definitely a nice tailwind for us.

Okay. And what’s the balance between growth and investments? When the time comes across that threshold where do you spend those incremental dollars? Would you let it load to the bottom line [indiscernible] margins?

Yes. So, we're fortunate in some respects, Peter, because we unlike some companies that truly have to trade-off growth for profitability or one -- or vice versa. We’ve been able to have our cake and eat it too. And part of this is we got an enterprise business, which has an extremely attractive marginal ROI. We talk about customer value to cost to acquire LTV the CAG [ph] ratios and for our enterprise business it's about a 6 to 1 over as I assumed five-year period and that is it we ran that to the true life of an enterprise customer which in theory is in perpetuity. This is a very, very high ROI business. So we're continuing to invest in sales capacity and channel expansion for our enterprise business that's driving -- what you’ve seen is an acceleration on the top line of our business. Overall from 20% to about 27% over the past several quarters in total. But our enterprise subscription revenue is also accelerated from 35% growth. Again on an LTM basis 35%, all the way to 43%. So we’ve been able to invest, to drive that accelerating growth, but it's also driving our improved profitability and you’ve seen our EBIT margins. Since IPO go up 34 percentage points from approximately negative 28% to where we are today at 6.7%.

Great I appreciate it,. Thank you.

We will take our next question from Sterling Auty with J.P. Morgan.

Thanks. Hi, guys. Let's start with -- so with the acquisitions in your space, a lot of times you will see disruption in actually opportunities to step in and win incremental business as integration and uncertainty is happening. Are you seeing any of that opportunity given the two deals in your space?

Yes, Sterling. The short answer is yes. We’ve seen two of our very, very direct cloud competitors get acquired in the last couple of quarters. It is safe to say that that creates a very good situation for us. There's an uncertainty that goes with those combinations or mergers of those competitors, excuse me, and that helps us competitively against -- against those competitors. I will also add that we continue to see a nice inflow of resumes from the industry. It's not atypical when companies merge that they typically will lose people, loose some partners and potentially lose customers and we feel like we're seeing the beginnings of the benefits in all those areas.

Great. And then now that we’re at this point of evolution, the enterprise business. Can you give us even a -- just a qualitative sense of okay, with bigger mix of enterprise which probably have higher seat counts, but perhaps volume pricing and so maybe if lower revenue per seat, but yet we’ve got increased number of products that you can sell per seat. How these dynamics impacted your kind of average revenue per seat versus let's say a year-ago and how should we think about that trend moving forward?

Yes, so Sterling, first of all, let me just say that our -- you would imagine that as seat counts go up and this larger deals that volume discounts would kick in. It's actually not the case in our market. We are able to get an increasing amount of subscription revenue, if you will, per seat from enterprise customers. Again, part of its due to additional products, but even our base product is holding very, very steady in terms of pricing. So again, the mix shift is playing in our favor in that regard. And again, revenue per seat isn't that different in SMB and enterprise, so it's not a major shift that we will see from a mix shift standpoint occurring over time. But we have seen a nice gradual increase in revenue per seat across our customer base.

And then last question is, you talked about the investments specially frontloaded for next year, thank you for the insight. But maybe can you help us with the framework that you use in terms of the pace and the timing of when you’re layering on sales capacity. Are you looking for your existing sales or go-to-market force to hit a certain capacity or -- I’m sorry, productivity level like 70% on quarter and then you're adding on top of it or what is that framework that you use so we have a better sense of what we might expect moving forward?

Yes. So the insight that I can give you is the following, Sterling. We're pretty consistent on a quarter in and quarter out basis to expand that enterprise sales capacity at 30% to 40% year-over-year. Now again it does depend on when in the quarter we hire folks. We also tend to hire in batches and sometimes those batches come in at the beginning of a quarter, sometimes they come in at the end of the quarter, it's just a lot easier from a training perspective. That's one of the rationales. But quite frankly, it's not being triggered by sales productivity metrics. We've had very, very consistent sales productivity metrics over time as I've mentioned in the past and it's really just more of a timing framework than anything else and we have continually kept the pedal to the metal and growing that team at 30% to 40% year-over-year in terms of enterprise quota bearing reps and we will continue to do so, again, as long as sales productivity continues to be healthy.

Got it. Thank you.

[Operator Instructions] And we will go next to Nikolay Beliov with Bank of America.

Hi. Thanks for taking my questions. I wanted to ask you about the international strategy you mentioned a nice win with a global account. What does that entail from infrastructure point of view and sales presence internationally?

Yes, hi, Nikolay. So, we -- as I’ve said in the past, we have started the initial rollout of quota bearing sales teams in both Europe and Latin America. Those investments are starting to pay off extremely well in terms of our bookings this quarters in particular. In terms of infrastructure we have data centers abroad, we actually -- in Europe we have a primary end backup facility in Europe as well as what we do here in North America. And as we expand our global footprint in the future, we will be rolling out regionalized and global voice capabilities that allow us to keep calls within region and that's a really exciting technical development for us.

And better question for you, when you look at your new bookings, what’s roughly the split between up sale versus new business and how that is [indiscernible] over time?

In terms of -- so essentially what you’re talking about is the split between our new bookings from the direct field and install base bookings. And frankly, we’re doing pretty well -- I’m looking here at the numbers, we’re doing pretty well on both accounts. In fact, install base this last quarter was exceptionally good, but in general the trend is that the growth is somewhat faster on the -- its not generally, typically always is faster on the net new -- on the direct field sales.

Got it. And Michael last question for me on stream force was all about artificial intelligence sales force putting AI in all their product. How is that affecting your product plans and how you synced up with Salesforce there?

Yes, you're right on Nikolay. Salesforce, Dreamforce was -- one of the major themes was Einstein, their artificial intelligence offering and it's so complementary to what we're doing. We took the stage a few times with Salesforce service cloud folks. We also, as I mentioned, Deloitte took the stage and talked about their Patient Connect which is our product plus Salesforce running together. When it comes to artificial intelligence, you may recall we have a natural language processing engine, an artificial intelligence element of what we do and we're actually very, very tightly integrated with salesforce service cloud. In fact, we believe we're the only CTI partner that is integrated to service cloud lightning which is their newest platform and we're actually leveraging our natural language processing in that integration to complement what they're doing with Einstein. So our visions are very, very aligned. Our product teams are working with the Salesforce product teams. Not to mention other key partners product teams and I'm just really thrilled that the fact is we are way out ahead of the competition in this regard and that's why we took the stage with Salesforce at Dreamforce.

Got it. Thank you.

We will go next to Mike Latimore with Northland Capital Markets.

Great. Thanks. Congratulations on the quarter there. In terms of the -- just can you talk a little bit about the sales cycle, obviously getting into bigger deals, how is the sales cycle playing out maybe across the business and then what kind of influence does the channel have on that as well?

Yes, Mike, happy to comment on that. So the sales cycle, it has expanded by about 30 days on average. So this is over the last couple of years, so a couple of years ago when we publicly talked about sales cycles that were 90 to 120 days and now we are talking about 120 to 150 days. We're still not in a situation where we're doing, what I call, elephant hunting from a sales perspective, while these are very large enterprise wins that we're having. They’re also fragmented decision. So we're not walking into these large Fortune 500 enterprises and trying to win an enterprise-wide decision at first. This is a land and expand strategy. We will go into a very, very large organization like U.S Bank or McKesson or others and will be business first with one business unit, with one contact center, prove ourselves and then expand within that enterprise. And I've mentioned this in the past, our land and expand has been very successful. We actually take our top 10 customers and this is self-selecting, but we've looked at a compound annual growth rate. In monthly recurring revenue for those top 10 accounts, some of them have been with us for five or six years and we look at a CAGR on that. Some of them have joined us more recently and our average across those top 10 customers in terms a CAGR in revenue growth is somewhere around 150% compound annual growth rate. And that just gives you a sense for the opportunity within these large enterprises, but it also hopefully helps people understand that the sales cycles that’s why they're only a 120 to 150 days and it gives us a nice diversified sales pipeline and deal flow every single quarter.

Great. And the channel, does that help to expand the sales cycle or no difference?

It's probably too early to tell at this point. I would say the channel is bringing us into similar sized deals, if not maybe a little bit larger deals than what we're doing with our direct team, but it's really not that different. It's not like they're going after the bigger deals and work on after medium-size deals. They’re pretty similar in size. And in some respects that channel is walking us in as the preferred vendor. So we’ve seen some sales cycles that are very, very short with the leverage and the trust with that channel partner has within these enterprises.

And just on the professional services side of things, as you get more enterprise business in that sort of builds over time, what percent of revenue do you think that given more of a maybe normalized date?

Yes, so the PS revenue is on upward trend, we believe strongly. But it's going to take a period measured in many quarters or even years to reach a sort of plateau, which will be probably in the high single-digits, may be in the low double digits, but not more than that.

Great, excellent.

[Operator Instructions] We will go next to Jeff Van Rhee with Craig-Hallum.

Great. Thank you. Congrats, guys. Real nice quarter. Couple questions, I mean, maybe just start with the guide, I guess not so much the guide, its much as just a commentary on 2017, specifically on the non-GAAP net income for Qs 1 to 3, you talked about cost going up and front end loading of the expenses beyond FICA and other things. How much of that -- you talked about a little more aggression on the sales hiring front, how much of the EPS variants in those Qs 1 to 3 versus -- the Street versus where you think you’re going to end up is related to that front end loading of sales or would you point strongly in some other direction? Just trying to get a sense of a little the aggression on the cost side earlier in the year?

Yes, Jeff, I will start and let Barry kind of fill in the blanks. I think these were meant to be very high level comments on '17. As you know we're not giving guidance for '17, so I want to be careful what I say. These were much more philosophical in nature and again we -- part of this is we do have a seasonal pattern to our revenue as you know, right. We tend to have lower sequential growth in Q1 and very flat sequential top line in Q2 and then we typically have nice healthy sequential growth in Q3 and Q4, but our expenses tend to grow in a straight line. We are going to also in addition to that straight line there is going to be some frontloading, which is really just us opportunistically hiring not just salespeople, but some other talent from the two competitors of ours that just got acquired.

Yes, got it. Okay. That’s great. And then, just if you would on the bookings just to clarify, I think you said a new record on the bookings front, was that overall or was that for any Q3?

That was the strongest Q3, record bookings for Q3. We're just again extremely pleased with the year-over-year results that were showing in terms of bookings. And again, we continue to see the payoff from that growth in sales capacity plus the channel investments that we’ve been making. So extremely pleased with the Q3 bookings.

Yes, got it. And then just two other brief ones for me. The pipeline coverage as you look at the forward 12, is pipeline coverage at record levels? And then, just last one I will let somebody else jump on. You commented on perceptible increase in cloud momentum, just maybe a few more data points what really drove that home for you that include that in the script? Thanks.

Yes, happy to -- yes, the pipeline is at all-time record as it has been for the past several quarters. But again it keeps increasing and keeps reaching new records. In terms of cloud adoption and momentum, we've got a number of vectors that are influencing cloud adoption in our space. We’ve got legacy players that continue to struggle like a via and other legacy competitors that really are paying attention to their competitive product in our space and you couple that with all the momentum from the CRM partners of ours, like Salesforce and Oracle and their service cloud offerings, as they go in and read refresh if you will, legacy CRM for service whether it's [indiscernible] clarify. The CRM component is being modernized and they're bringing us in and we're modernizing the contact center infrastructure piece by replacing legacy of via Genesis and Cisco. So you know there's a few vectors that are driving this cloud adoption and creating a nice tailwind for us and this is a multi-year cycle. We're only 10% cloud today by our estimation in the enterprise portion of this market. It is $15.8 million agent strong worldwide we feel -- we just feel like we’re in the very, very early stages of this massive shift of the cloud.

Okay. Sounds good. Thanks for taking my questions.

Got it. Thanks.

And at this time, we have no further questions. I'd like to turn the conference back over to management for any additional or closing remarks.

Okay. Well, thanks everyone for joining the call today. We look forward to seeing many of you at our upcoming Analyst Day, in New York on November 15 where we will be able to give you guys a chance to hear from additional key members of our team, our management team, and get further insight into what's driving our success. So thanks again for joining us.

And ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.