Good day, and welcome to the Five9 Fourth Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tony Righetti. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Five9 fourth quarter and full year 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 are 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 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. It's available on the Investor Relations Section of Five9's Website. Now, I'd like to turn the call over to Five9's CEO, Mike Burkland.

Thank you, Tony. Welcome everyone to our fourth quarter and full year 2016 earnings call. Our strong fourth quarter results capped off a record year for Five9. For the year we grew revenue by 26% at $162.1 million, an acceleration from the 25% achieved in 2015 and the 23% in 2014. Total revenue for the fourth quarter was $44.2 million, up 8% sequentially and 23% year-over-year. This revenue growth was again driven by our enterprise business which delivered 43% growth in LTM enterprise subscription revenue. Furthermore, we continue to enjoy leverage in our business model resulting in a record adjusted EBITDA for the year of $8.4 million, $13.6 million improvement over 2015 and a $31 million improvement versus 2014. For the fourth quarter adjusted EBITDA was a record $2.9 million. The adjusted EBITDA improvements continue to be driven by strong enterprise gains which are delivering high marginal profitability. We continue to make these improvements in profitability even as we accelerated investments in two areas. First, in enterprise sales to take advantage of the opportunity to hire talent from cloud competitors that were recently acquired; and second, in our professional services capacity in response to the ongoing growth and acceleration in our enterprise booking. Thinking of bookings, I'm extremely pleased that we set an all-time record for enterprise bookings in the fourth quarter and that the pipeline reached an all-time high. So the full year, our enterprise bookings growth far exceeded the growth in our enterprise quota bearing sales headcount which I'll remind you was between 30% and 40% year-over-year. Our exceptional bookings were again driven by continued expansion of our direct sales force coupled with the increasing leverage we are getting from our expanding ecosystem of partners. This expanding ecosystem of partners employs more than 50% of the enterprise deal…

Thank you, Mike. I will first talk about our fourth quarter results and then just discuss the full year. Revenue for the fourth quarter of 2016 was $44.2 million, up 23% year-over-year. This group is all organic and in fact the continued strong growth in our enterprise business now makes up 69% of LTM royalty. Our commercial business which represents the other 31% of LTM revenue continue to deliver steady and consistent growth of around 10%. Recurring revenue accounted for 95% of our revenue for the fourth quarter of 2016. Recurring revenue is made up of monthly software subscriptions which are based upon the number of agencies; such usage which is based on minute. We enjoy a high retention rate on these recurring revenues and your dollar base retention rate in the fourth quarter 2016 was 100%, up from 96% in the fourth quarter of 2015. The other 5% of our revenues in the fourth quarter of 2016 were comprised of professional services fees generated from assisting clients in implementing and optimizing the Five9 solution. I will now discuss gross margins and expenses. A reconciliation from GAAP to non-GAAP results is included in the appendix of our Investor Presentation in the Investor Relations section of our website. Growth margin in the fourth quarter of 2016 with 64.3% and adjusted gross margins with 61.9%. The first quarter at 216 CapEx gross margins were benefit by 7 percentage points due to $3.1 million dollars reversal of an accrual following a favorable SEC ruling excluding the $3.1 million dollars, gap gross margins increased by 0.7 percentage points; from the fourth quarter of 2013. We are particularly pleased with the gross margin improvement given the significant front-loaded investments that we have made and are making expanding our professional services team to implement our software…

Thank you. [Operator Instructions] We'll take our first question from Sterling Auty from JP Morgan.

So a couple of questions. Let's start with -- you mentioned some key hires on the sale side, you mentioned some professional services, can you give us a little bit more quantification of how much your capacity in sales area and how much your capacity in the professional services area has increased late with these investments?

Let me give you a little insight here Sterling. As you know we have been making some opportunistic hires in both enterprise sales, as well as our professional services organization, partially because of the competitors that have been acquired and the talent available to us and we've picked off some of the best and brightest. So we continue to expand our enterprise quota bearing sales capacity at 30% to 40% year-over-year in general but again we were -- to say at the top end of that range if not a little above it in recent months and quarters. And again expect that to kind of bleed into Q1. From a professional services standpoint again, because of the bookings outperformance that Barry mentioned, we want to make sure we're front-loading that investment professional services talent. It's really, really an important differentiator for us to enable our enterprise customers to deploy on our solution and be successful right out of the gates, it's something that our competitors have not been able to keep up with and we're going to continue to front-load that investment, make sure people are trained up on our team to be able to implement those enterprise customers with great expertise.

And Sterling, let me just add for the avoidance of doubt and since you asked about quantification on the PS side, that too was above at that high-end or above the 30% to 40% range.

Got you. And looking to 2017, coming off of 2016 with the great enterprise growth and 10% growth in mid-market, what kind of underlies your assumptions for 2017, in other words, are you thinking the mid-market will continue to grow 10% and would it be kind of factored in terms of your thought around enterprise growth?

Yes, I think the best prediction of the future Sterling is what we've seen in the rearview mirror. And we've been very, very consistently delivering enterprise subscription revenue growth, you know, the low to mid 40's as you've seen. And if you look at our commercial business, its being very, very consistently growing in and around 10%. So I'd say those are the best proxies for you to do to modeling.

Okay. And last question, seasonality, you made the comments around the second quarter; is that kind of centered around -- okay, we have an administration change as we think about Affordable Care Act and possible changes that maybe don't get the lift in the second quarter there versus the typical holiday retail surge you get at the end of the year?

Yes, I would say it's really all of the above but not anything specific to the administration if you will, Sterling. We've seen this pattern in -- you know for several years now in terms of our seasonal revenue curve and again, it has more to do with the growth in Q4 and the hockey stick we see every year in Q4 that bleeds into Q1, that drives that relatively flat sequential growth in Q2. So very consistent with what we've seen in the past.

Got it. Thank you.

And we'll take our next question from Scott Berg with Needham.

Mike and Barry, congrats on a great quarter; I have two quick questions. First of all, Mike can you talk about your assumptions around general productivity in your 2017 guidance. Your productivity of the last year to two year seems to be increasing but given kind of the competitive dynamic out there; are you expecting real changes or is it that pretty much in line with how you answered Sterling's question [ph]?

You know, it's -- we definitely have seen increases in productivity but at the same time our philosophy around guidance in general is very conservative Scott as you know. So we never really like to take any leaps of faith when it comes to the future even though it may have occurred in the past.

Sure, fair enough. And then a question on the last year's average deal size which is up basically 24% year-over-year; can you give us a little color on what roll the average deal sized hire? I know you've talked about larger deals and more modules, non-usage related components being part of the sale as well, just trying to get an understanding of maybe that mix that drove that. And then how much of that partners contributes to that ASP going up?

Yes, great question Scott. So again, in terms of average deal size it's really a combination of seats, more seats as well as more products and it's a blend of two-third, one-third; two-thirds in seats and one-third in additional products. So we're really pleased to see that -- kind of -- you know, ability to kind of fire above those cylinders in terms of average deal size growth. What was your second question, sorry?

Just partner impact to the deal sizes of that. Is partners continue to impact more and more of the business as -- are they driving higher average deals and I guess what you're seeing in your own direct sales, you know what you source completely yourself or maybe they are doing something less than that to try to understand their impact on how that numbers [indiscernible]?

Yes, as I've said in the past Scott, deal size in and off itself is not extremely different between our direct business and our partner lead business or channel business. I will say this though in terms of those channels as I said in the script, I'll reiterate, we are seeing tremendous growth in the master agent reseller category. Again it's still logged fairly small numbers right, as I said earlier on the call; resellers and master agents drove between 15% and 20% of our enterprise bookings for the year but that's up significantly over the prior year. It's becoming more and more meaningful part of our bookings engine and a big part of our future growth.

That's all I have. I'll jump back in the queue. Thank you.

And we'll take our next question from Richard Baldry with ROTH Capital.

Thanks. If you look at the full year '16, it looks like about 40% of your incremental revenue was dropped under the adjusted EBITDA line or the pro forma line. Can you talk going forward now that you've demonstrated pro forma profitability; sort of philosophically how much you think is more appropriate to try to drive from the top line into the bottom line given the large market opportunity you're facing? Thanks.

So the trajectory that we saw in 2016 in terms of top to the bottom will be somewhat more muted in 2017. Starting at the top of the income statement we are front loading some of the investments in PS in order to get ahead of the bookings growth -- enterprise bookings growth. In addition to that in '16 we still saw some benefit from the sharp increases in usage in terms of the gross margins there and inevitably that will tend to flatten out. We will certainly get gross margin improvements in the other two areas as alluded to in the script. Moving down in terms of the sales and marketing, pretty much the similar year upon year will maintain roughly 30% plus or minus. R&D, we didn't have very much growth in R&D in 2016. We do as we have been saying now for some time, going to not accelerate but at least tap the accelerator tad [ph] and increase the investment there. And then in G&A, you've seen nominal growth in G&A in '15 and '16 on a full year basis. You're going to see more growth in 2017 and the number of special factors but the two that I would draw your attention to is that this year we need to become X [indiscernible] for being compliant and for full BE compliant and that inevitably despite the preparations we've been doing over the last several years requires more expense. Now that it's real and second of all, like many other companies with six -- ASE six of six coming down the pike that is a non-trivial expense and even though like other SaaS companies, the impact is minor. There is still a tremendous amount of work that needs to be done tracking literally thousands of allocations with new software that even though I don't have to be -- there won't be a big impact in the revenue probably, DSO needs to be demonstrated and recorded.

Great, thanks. And congrats on a great quarter.

Thank you.

And we'll take our next question from David Hynes with Canaccord.

Thanks. So I want to piggyback on Scott's earlier question around average deal sizes. Mike, you saw that kind of two components of it which is -- you know, higher number of agents at land in more functionality proceed; I'm curious that the third which you didn't touch on is pricing. So would you seeing on pricing with new deals, is that a lever that's driving this increase for seeing in average deal sizes?

Yes, I would say that pricing continues to be very steady in terms of our base product. So again, we are -- over the years we've discounted less and less as we get and gain competitive advantage against our direct competitors. But at the same time we're moving upstream, we're doing larger deals, we're doing deals that are much, much larger from a seat count perspective and obviously there is a volume discount element to that. But -- you know, these are kind of offsetting factors that really result in kind of flat pricing from a base price perspective. But again, we're getting increased products in the mix which drives that number up and we're getting increased seats which also drives it up.

Okay. And then maybe Barry on the gross margin side; two part questions. So I understand that the need to ramp professional services hiring; anyway to quantify kind of what -- you know, you talked about a goal to get that business back to breakeven; is there a way to quantify how much of a drag that is on margins? That's question one. And then part two; you know, gross margins -- we've been kind of stuck in neutral for the last -- I don't know, four/five quarters and that kind of 61.5 to 62 range -- any thoughts on kind of linearity of how that progresses in '17 as we reach towards those intermediate term targets?

Yes, so talking first about the professional services; let me begin by saying that we've made tremendous progress in terms of improving or narrowing rather the losses that we have on that business. And that both the revenue curve which -- if you do the calculations, you will see that that PS business grew in the 70's in 2016 and that comes from the success that our sales team had in terms of increasing proportionality to the -- with enterprise customers who expect and demand that. Now we will take quite an extended period -- I'm not taking quarter, I'm talking a year or two before that gets -- those negative gross margins get to breakeven than positive. In the meantime it's an overall drag of between 1 to potentially 2, 2.5 percentage points on an overall gross margin. In terms of the trajectory of gross margin increases overall, we have -- only somewhat slower increases in 2016 as usage improvement slowed. It's heavily dependent upon revenue growth because we do always get improvements on the subscription side, not every single quarter but most quarters. And that's simple function of the revenue growing faster than the cost of the co-location, the data centers and the check-ups and so on, customer support. And that will continue, it's a slow steady improvement on two-thirds of our revenue and we have a high degree of confidence on that, we've got another two years -- two to two and a half years to go to get to the midpoint of 65 to 70 and our models are comfortable getting us there.

Got it. Okay, great. Thanks for the color guys.

And we'll take our next question from Jeff Van Rhee with Craig-Hallum.

Great, thank you. Congratulations, the numbers look very nice. Couple of pieces for me here first, I just maybe start high level in terms of context center in the environments you're selling into; could you just give a little color on what you're seeing trend-wise. You know which particular channels of contact are driving urgency within the call center to address in terms of the sort of omni-channel experience obviously messaging chat, always lot of different channels that folks are trying to deal with. I'm just curious if you could call in the higher level trends that are sort of leading the urgency in terms of purchase decision in the call center right now.

Yes, happy to Jeff. You hit it right on the head. I mean the omni-channel experience is really you know -- what we're seeing most of our enterprise customers strategically focused on. So again, our partnerships with the likes of Salesforce and Zendesk and Oracle and bringing together our omni-channel solution with their CRM solutions and being able to do things like customer journey analytics across those multi-channel environments whether again it's a Web site visitor, an IVR visitor a chat -- you know we have some very unique capabilities and were uniquely positioned with those CRM partners to add value to their solutions to intelligently route omni-channel interactions and Army agents with what they need very visually and very -- analytics driven so that those agents can really help customers through whatever issue they're facing. So the overall trend is to a truly integrated omni-channel solution and we're way out ahead of the competition in terms of true omni-channel, as opposed to siloed multichannel and there's a big difference between those two.

Yes, absolutely. Okay then, and I'd appreciate that. Two others for me than on the professional services side, the talk to me about how you work through the tradeoff between controls verses passing -- you know, control versus margin drag. Obviously, you know a lot of partners, a lot of pretty good channel partners out there do a lot in this space. You've got to find the right balance between controlling engagement and the experience versus taking on lesser margin. You know, talk through how you think about that tradeoff?

Yes, happy to Jeff. So we've been at this a long time, we do -- from time to time use third-party's to do implementations but it's the exception not the rule; and we're very, very careful to make sure that we only use third-party's that are as good as we are at implementing Five9 in an enterprise contact center. And we've seen competitors and I know you're familiar with some of them that have actually solved for margins instead of customer satisfaction and it backfired on them, and what it resulted in was customer churn on their side; and quite frankly, customers coming to our platform off of theirs. In the end of the day, we need to be solving for customer satisfaction and customer experience amongst our enterprise customers as a first priority. Even with that control of doing it ourselves we're talking about a multi-quarter to potentially multi-year cycle to get that professional services business profitable. But even with that, the most important element of our business is bringing on new enterprise customers and satisfying them through that process and having them have a successful experience on our product and our platform. And it's working extremely well, you see it in our retention numbers, the customer satisfaction levels of our customers compared to our competitors who try to outsource professional services. It just is -- it's a different equation and I think in the end of the day it's a big reason we've delivered the bottom line leverage that you've seen over the past 2.5, 3 years since we went public. Again 35 percentage points in EBITDA margin expansion, a big part of that is just profitable revenue growth in enterprise and that 6to 1 CAC LTV [ph] we talk about and being able to just continue to sell that next customer with the positive reference customers we've got that have been through our implementation process. So I know it's a long answer but it's a really, really important strategic element of our business.

Great, I appreciate that. And the last for me then, in terms of the midpoint of the guide, maybe that's the right way to approach it. You talked about a couple of different factors, some driving your recurring subscription and some influencing usage. Can you narrow it down to what the -- sort of the point differential is on growth if subscription is growing X, usage is growing a couple points less than X. I think you called out -- obviously some customers are coming up with their own usage solutions and other reasons were that attach rate might not be steady. I'm just trying to understand how that varies in the forward guide?

Yes, the best way to think about this Jeff is as follows. We have mentioned two reasons that subscription revenue growth will outpace usage revenue growth, those two reasons are that when we sell more products, more solutions to every seat that's out there right; you're going to -- we're going to have subscription revenue growing much faster than usage revenue which is enough; and agents, and agents, and agents they're going to be on the phone so to speak and using our platform X number of minutes out of every day, that doesn't really change. So subscription will outgrow usage for that reason. And the other reason is from time to time enterprise customers choose not to purchase usage from us but just our software on a subscription basis and stick with their carrier to buy their long distance services. The best way for me to quantify the impact of that or the spread in growth rates is actually to look at the revenue mix and as Barry said I believe in his prepared remarks, there is about a 2% to 3% shift annually in that mix of subscription revenue and usage revenue. And you know, it's about two-thirds, one-third mix today, so you can kind of do the math yourself I believe.

Yes, got it. Okay, great. Thank you. I appreciate it.

And we'll take our next question from Frank Braselin [ph] went Pacific Crest Securities.

Thank you. I've got two questions if I could here. Mike, I want to start with you. I also wanted to drilldown in the enterprise business; my question is more on the enterprise sales cycle. On one hand you get the benefit of larger deals, obviously $450,000 going to $560,000; good lift there but I would imagine larger deals take longer to close. On the other hand, you are also seeing increasing contribution from some your partners. So as you think about the benefit of partner selling large deals, and then the drawback of just longer sales cycle process; what's that -- are you seeing a lengthening of sales cycles from the enterprise side or are the partners helping accelerate the sales cycle for you for large enterprise deals?

Well, I will tell you this, the partners definitely accelerate the sales cycle, it really helps when Salesforce or Oracle or Zendesk walk us into one of their prospects as the CTI partner or the contact center infrastructure partner of choice. It also really helps when we're working through master agents and resellers that you know are putting our solution in front of their prospects. So just to quantify this, you know, sales cycles have gotten longer as we've climbed up into the larger enterprise market over the years but I'm talking about -- you know, at IPO our sales cycle was 90 to 120 days, that was three years ago and these days it's about 120 to 150 days So we're still talking about a pretty minor increase in average sales cycle in enterprise; and this is just for enterprise I'm talking about, obviously our commercial business is much shorter than that. But I expect that overall trend to continue but we're still very much in a land and expand go-to-market strategy, we're not elephant hunting even though a lot of these deals we're doing are close to $1 million I talked about a few deals today, you know, $700,000 and $800,000 and a $1 million deal. They are large deals but they are still a division or a subset of a large enterprise contact center opportunity that we're going after and because of that we're not having to go through protracted enterprise-wide decisions where you see some software companies focused on the enterprise market having to be up against.

Very helpful color. And then Barry, a couple follow-ups for you if I could; one of the start which is the midpoint of the guide, 16% growth, just given an increasing mix on the enterprise side and the growth there; obviously that would imply if a growth were to continue to guidance is pretty old -- very conservative, let's put it that way. Just given the makeshift to enterprise is the assumption that pro services starts to kind of slow as you rely more on partners? What's the delta that we should think about the guide versus the increasing mix on enterprise side?

I'm going to be brief for a change. It really comes down to philosophy of being prudent, you will see that this has been a pretty consistent pattern and I'm just going to leave it at that.

Got it. So a lot of conservatism there. My last question for you is just on the CapEx; I heard a $10 million number for this year and that obviously would be bigger than what you've done in the past. So one, correct me if I'm wrong and I heard the wrong number. And two, if not walk through what the plans are for the investment you're planning this year?

Well, thank you for that question. Your numbers are right, we ended up 2016 with 9.4 and our guide for the coming year and that's being increasing in the second half of the year and our guide for the coming year is 10 to 12. And there is one simple straightforward reason for that; we've got a lot of enterprise bookings, we have to get the additional capacity in terms of the hardware in the datacenters. Now a top flight take-off steam is doing that and by the way that is also being a little bit of a headwind because that new hardware that we're accelerating comes with additional maintenance expense which we've allowed for in our guidance.

Very helpful. Thank you.

We'll take our next question from Mike Latimore with Northland Capital Markets.

Just two quick questions on the booking commentary; I just want to clarify is the bookings a record for the fourth quarter specifically or kind of any quarter? And then secondly, did you say bookings grew faster than sales headcounts, meaning they were over 40%?

Yes, thanks for clarifying Mike. Q4 was an all-time record regardless of what quarter you look at. So it was an any quarter record which is great news for us and again, something that just gives us a lot of bullishness around the future obviously. And I would add that I did say in my prepared remarks that the bookings for 2016. I did not comment on the Q4 number but in this regard, but I did say that the bookings for the full year 2016 far exceeded the growth in our sales capacity of 30% to 40%.

Okay, great thanks. And then on the master agent reseller growth, you said that doubled in 2016; I guess what's the fact going forward, are you going to sort of allow the ones that you've added to mature or you expect to continue to add a lot more master agents and resellers?

We're going to continue to add, this is still very, very early days. Especially on the reseller side Mike, we have just begun to scratch the surface. As you probably imagine, you know, with Avaya is filing for Chapter 11, there are a number of Avaya-vars [ph] out there that are very sizeable companies that have actually been making a living for decades reselling these legacy on-premise solutions. They are at a point which as you'd expect given the downward trend for Avaya's business, they are looking for alternatives very aggressively and they are very aggressively embracing cloud and we're increasingly becoming the choice. So there's just a tremendous opportunity for us in the reseller channel that is just in a very, very beginnings in terms of what's in the rearview mirror versus what's in the future opportunity for us.

Great. And the last one; in your enterprise deal what percent of the time are you actually competing against a cloud company versus an on-premise company?

Yes, we've been pretty consistent over the past several quarters Mike that we see one of the leading cloud competitors or both of them about half of our enterprise opportunities.

Okay, thanks.

That concludes today's question-and-answer session. At this time I will turn the conference back to management for closing remarks.

Well, thank you everyone for joining the call today. You know 2016 was another record year for Five9. We believe our increasing momentum in the enterprise market combined with some recent shifts in the market landscape that I've talked about today puts Five9 in a very unique position to strengthen our leadership position in 2017. So very excited about the year to come and thanks again for joining us today.

This concludes today's call. Thank you for your participation. You may now disconnect.