Good day and welcome to the Five9, Inc., Q2 2017 Earnings Conference Call. Today's call is being recorded. And at this time, I would like to turn the conference over to Lisa Laukkanen with 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 second quarter 2017 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 in 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 non-GAAP financial information is useful because it can enhance the 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. A full reconciliation of the GAAP to non-GAAP financial data can be found in the company's press release issued earlier this afternoon and is also available on the Investor Relations section of Five9's Web site. Now I'd like to turn the call over to Five9 CEO Mike Burkland.

Thank you, Lisa. Welcome, everyone, to our second quarter 2017 earnings call. I'm very pleased to report that our second quarter revenue exceeded our expectations growing 23% to a record $47.7 million. This revenue growth continues to be driven by our enterprise business, which delivered 39% growth in LTM enterprise subscription revenue. This is a key metric that reflects the growth in our enterprise business, which is the majority of our overall revenue mix. Furthermore, we continue to deliver leverage in our business model with record adjusted EBITDA of $3 million in the second quarter, our seventh consecutive quarter of positive results on this metric. The improvements to adjusted EBITDA continue to be driven by our enterprise business, which enjoyed excellent unit economics and is consistently increasing as a proportion of total revenue. I'm also extremely pleased to report that we had our best quarter ever for enterprise bookings in Q2. Our pipeline reached another all-time high as well. Our exceptional bookings were driven by the massive push towards modernization of customer service and contact center technologies, the improved market landscape, the growth in our direct sales force, and leverage from our expanding ecosystem of partner. This ecosystem of partners influenced more than 50% of our enterprise deal flow in the second quarter. As a reminder, Five9 has deep partnerships with industry leaders in areas such as CRM, with the likes of Salesforce, Oracle, Zendesk, and Microsoft, WFO with the likes of Calabrio, Verint, and CallMiner, and unified communications with Microsoft Skype for business and Cisco. Our channel program continues to grow nicely and is yielding results beyond our expectations. For example, bookings from master agents and resellers represented more than 25% of our enterprise bookings in the second quarter. Our rigorous channel partner on boarding program includes, sales and…

Thank you, Mike. Revenue for the second quarter of 2017 was $47.7 million, up 23% year-over-year. This growth is all organic and reflects the continued strong growth in our enterprise business. It now make up 71% of LTM revenue. Our commercial business which represents the other 29% of LTM revenue continue to deliver growth of around 10%. Recurring revenue accounted for 94% of our revenue in the second quarter. Recurring revenue is made up of monthly software subscriptions, which are based on the number of agency, but usage which is based upon minutes. We enjoy a high retention rate on these recurring revenues. The other 6% of our revenue in the second quarter was comprised of professional services fee, generated from assisting clients in implementing and optimizing Five9 solutions. I will now discuss gross margin and expenses. A reconciliation from GAAP to non-GAAP Result included in the appendix of our investor presentation in the Investor Relations section of our Web site. Adjusted gross margins were 62.3%,. an increase of 40 basis points from the second quarter of 2016. Given the nature of the gross margin improvement drivers that I will discuss in a moment. Our year-over-year adjusted gross margin increases have not been large. The increases though have been consistent and have now increased year-over-year for 18 consecutive quarters. I will also remind you that we are making significant hires in our professional services team, in response to our strong bookings growth. Specifically, our U.S professional services team at the end of June was 40% larger than a year-ago. This frontloaded investment positions us to have the trained staff down the road necessary to ensure our enterprise customers start on the Five9 platform is positive and differentiated. In addition, we're diverting consumer PS resources to help ramp our channel partners.…

Thank you. [Operator Instructions] Our first question will come from David Hynes with Canaccord Genuity.

Hey, thanks, guys. So Mike, you pretty regularly call out your win rate against your competitors. It's been strong and consistent. It's been almost a year. I guess, since in contact and interactive were acquired. So, I guess, I’m curious, can you give us your view of kind of what the acquirers have done with those assets? I mean, does it feel like they’re getting their act together at all, I mean, their numbers will suggest that’s not the case, but we'd love to get your take on what’s happening?

Yes, good question, DJ. Our win rates do continue to go up against both of those cloud competitors, mergers are difficult and they’re in the midst of integrating and merging their organizations. And it's almost always a distraction, but I will tell you that there has been more disruption at one than there has at the other. And, again -- but our win rates have actually gone up against both of them, which is again not surprising in my opinion based on what we expected to occur. I think if you look at one in particular where you had a merger of very direct competitors with multiple platforms. There is a lot of internal conflict in terms of those multiple platforms, in terms of where they’re going to put their investments from an R&D perspective going forward and how they’re positioning those different solutions. And I think on the other case, again we’ve seen some marketing, branding activity, but not much in the way of real product releases.

Yes, okay. And then on the partner side, where are we in the build out of that ecosystem? I know, I think you referenced Avaya's challenges and that’s driven some resellers towards you guys. I mean, are you still looking -- is the focus now that to build and add partners or is it really now about kind of identifying the best in enabling those folks? I mean what’s your focus on -- how you think this evolves.

Yes, as I mentioned in last call, last quarter we -- we’ve added a lot of Avaya VARs to our reseller channel. We continue to add additional resellers, but I think I said this last call as well. Our strategy is going to go deep as opposed to continue to just go broad. So the goal here is to work very closely with those Avaya VARs that are leaning in and are having the most success in the market with us and that's definitely the case. I mean our pipeline is growing very, very nicely with the Avaya VAR channel. As I said, we continue to add channel partners there but we're also going much, much deeper with the ones that we’ve signed over the last three quarters.

Yes. Okay, it makes sense. Great. Good set of numbers to sell the [indiscernible] line.

At this time we will take a question from Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys. So given where the competitive dynamics I’ve gotten to, despite -- I kind of curious what are you seeing in the market in terms of the pricing dynamics and the deal that that you’re winning?

Yes, Sterling, it's interesting. We do see some of our competitors that aren't having quite the success we are, get aggressive on price. The good news is most enterprises are not making a decision based on price. When it comes to contact center infrastructure this is mission-critical. It's all about enhancing the customer experience for these enterprises and again you know a 10% price differential is not going to be the deciding factor, but we are seeing our competitors are very direct cloud competitors. Star 2, attempt to price a little more aggressively.

Got it. And one follow-up in terms of talk about -- going deep with the Avaya Partners. What kind of activity levels are you seeing through those partners at this point? Are they sourcing leads and getting deals closed or is it still on the -- in the on boarding process?

Yes, we are definitely investing a lot to on board these Avaya VARs, Sterling. It involves everything from sales training to product training to implementation and support training as I mentioned in my remarks. All that said, these guys are in the market they been in the market with the Avaya products that for a long time and they're definitely sourcing deals for us, our pipeline, as I mentioned is increasing and it's very, very sizable and as I also mentioned it. The master agents and resellers made up more than 25% of our bookings -- our enterprise bookings in the quarter, and that's up from the last quarter and that was up from the prior quarter.

Great. Thank you.

We will now hear from Raimo Lenschow with Barclays Capital.

This is Mohit Gogia on for Raimo. Congratulations on the quarter, guys. I’m wondering if you can -- so you’ve talked about the operating leverage and the R&D, and how that can help you reach your targets in terms of margins. So can you discuss that against the backdrop of the product roadmap you have for the next few years and how you think about the trade-off and delivering on both funds? Thank you.

Yes, I will start and Barry chime in with any color you want to add Barry. But strategically we are in a very good position in terms of the delivery that’s coming out of our R&D organization. And it's not about just adding bodies, and expense to that R&D machine. It's about making sure the talent we have in our engineering organization is delivering new product, innovative product, rock solid product on a great cadence. So they’re doing that. And this is at last summer releases, great evidence for that. We definitely see an opportunity to grow our R&D investment over -- in the future. But not as fast as revenue. Therefore providing some leverage. Barry anything to add?

No, that cover them, Mike. I mean, we’ve had excellent leverage up until now. We remain public. R&D was 20% of revenue, down to 12% steady progression, but we have ample resources to continue the cadence of product delivery that we just being enjoy.

Okay. And the second question I had was -- so you have been talking about 10% growth in your SMB business over the last few quarters. And I’m just wondering is that -- so if you think about that business long-term and the [indiscernible] and price mix, is there a sense of the growth rate in that segment that you have or -- do you think that there is some, tweaking that still can be done in terms of investments or more investments or scaling back investments versus the growth rate? Thank you.

Yes, very good question. So, again, commercial is now 29% of our LTM revenue. We seen about a 4% shift in favor of enterprise in a way from commercial, in terms of our revenue mix. As we stated growth is around 10%, and we think that’s a pretty good number. But at the same time it is going to become less and less significant to the overall mix over time.

Thank you, guys.

We will now hear from Meta Marshall with Morgan Stanley.

Great. Thanks guys. Quick question, I know you guys have talked about scaling over professional services organization, but it clearly invested a lot in it over the last year. Just wonder they get a sense of, are we getting into the point where professional services, kind of growth will be more in line with revenue growth, or is there still future scaling there. And then the second question is just, if we could get kind of an update on now that a significant portion of the revenue is enterprise, are you seeing sales cycle shorten or where are kind of seen a typical enterprise deal cycle. Thanks.

Yes, Sure, Meta. So from a -- let me take last one first from an enterprise sales cycle perspective, we continue to do deals that are much larger than we were doing. So it three years ago, and our sales cycles on our IPO were around a 120 days plus or minus and now we are kind of in the 150 days plus or minus. So again the larger the deal, longer the sales cycle. But again we are still I think we are not looking at protracted elephant hunting type of enterprise deals which is great.

And I would say for the other question around PS, expense growth relative to PS revenue growth. We do see the PS margins as a good lever in the long run at the gross margin line in total. But again we are going to have, I think quarters were we might invest more. And other quarters where we seem to get that leverage, but we expect to get leverage over the coming quarters from a PS perspective.

And if I could just add a few things to that. We are going to be looking on both [indiscernible]. In terms of the revenue, we have demonstrated success in terms of increasing the rate per hour, charging for more hours, increasing a proportion of ACV that comes from PS, from the implementation, pushing on a open door to some extent. To that in the upcoming quarters, many quarters, we will also have additional revenue from training and optimization. Things that we are particularly well positioned to deliver, which our customers very much appreciate and even demand. On the cost side, it's a matter of continuing the excellent leadership that we have in that area. These things don’t come overnight. It's a matter of a number of single and a number of home runs and those just have to take the time to look through. One last comment, this business can be lumpy. If you look at our Q2 of last year, with which comparing year-over-year, we had a 69% year-over-year increase in revenue, making it a particularly tough compare this year. So -- but normally we will be expecting an upward trend in terms of growth rate of revenue which was smaller this year for PS.

Great. Thank you.

[Operator Instructions] We will now move to Mike Latimore with Northland Capital Markets.

Thank you. Great quarter there. On the -- just sort of the -- you touched on sales, what about deployment timelines on average? And then maybe for similar size deals of your deployment timeline, stabilize -- have been stable or shrunk with similar size deals?

Yes, Mike, I'd say that our deployment cycles remain about the same over the last 12 to 18 months. They’re a little bit longer than what they were at the IPO very much like the sales cycle. But again, we’ve moved up market and we’re doing larger deals and again those deployment cycles are going to be a little bit longer. But we are still talking about maybe a 30 day difference in terms of deployment cycle compared to where we were at the IPO.

Yes. And then, it sounds like deal size is continuing to increase, I guess, that is recurring?

You know, Mike, we do talk about deal size at the end of every year and we look forward to giving you guys the update at the end of the year.

Okay. Got it. And then, you mentioned that up-sell where the customer is buying now with omni-channel one or two the broader analytics around this kind of customer journey notion. With regard to that sort of analytics customer journey context are you seeing kind of sort of significant increase in demand for that feature?

Absolutely, Mike. It's -- as you know a completely different world out there in terms of the digital and mobile consumer. And our enterprise customers are really strategically focused on delivering a comprehensive omnichannel service offering. And again they've got -- our enterprise customers have to be able to interact with their clients, their customers, whatever channel that customer wants to interact on. Again, whether it's chat, whether its email, whether it's social media, whether its messaging, whether it's web self-service, we have to be able to handle all those transactions, and we are and we are helping our enterprise customers really make that digital transformation. And it's pretty powerful stuff.

Okay. Thanks.

At this time, we will take a question from Nikolay Beliov with Bank of America.

Hi. Thanks for taking my questions. You guys talked about favorable market environment in terms of the M&A that has happened and also the struggle that Avaya is going through. And LTM enterprise revenues here are pretty strong, they’ve come down to 39% from 43%. In light of that, what’s happening in the marketplace? Why aren't you guys seeing acceleration in your enterprise business?

Yes, good question, Nikolay. I think the most important element of this is we talk about bookings. And I know we're not quantifying bookings, but we have set record bookings all-time record for bookings and the way we look at the favorable market conditions are really how that translates into bookings. And it is -- it is very much as expected. Our win rates are going up, our bookings are reaching records, just about every quarter over the past several quarters. And if you look at that 43% in enterprise subscription, LTM revenue a few quarters ago, we did have -- again we turned up three very, very large -- very large enterprise customers in Q3 of '16. And that drove that 43% number on an LTM basis. If you look at the long haul here, the long-term, from a modeling perspective here, we’ve said this for a long time. We are going to continue to grow our enterprise sales capacity, our quota-bearing sales capacity at 30% to 40% year-over-year. That ought to drive bookings growth in and around that same 30% to 40% range, assuming consistent sales productivity per rep, and that's what you should expect to see from enterprise subscription revenue growth in the long run. So that 43% was a bit of an aberration to some extent, because we've been investing in 30% to 40% growth in sales capacity. We just turned up a few very large enterprises all at the same time.

Got it. And my second question was around the 2017 summer release. It sounds like the major enhancement there, I guess, the first question here is does the summer release significantly expand your total addressable market that you talked about with global enterprises? And number two, do you need something -- do you need to do something incremental different to address those -- this incremental market?

Yes, very good question, Nikolay, because as you did know, one of the big themes in this summer releases are global offering and this really is -- centered around the voice PoPs that we're now scattered around the world and we will continue to add as we go into new countries. And it's a huge, huge advantage and it does expand our addressable market. As you know, most -- very, very large majority of our revenue today comes from North American clients, and this allows us to go international at a faster pace not only with our U.S based multinational clients, which are very important to us and this offering is really meant to help them, but also as we go into local markets doing business with local enterprises in those markets, that will also help that. So, yes, it expands our addressable market. And the question -- second question about there is something else incremental that we have to continue to add, I will just say this, we have -- we believe the most complete end-to-end solution today in our space for both North American-based enterprises as well as the international clients. But at the same time we are going to continue to invest aggressively in R&D and extend our lead.

Thank you.

Thank you.

We will now move to Jeff Rhee with Craig-Hallum.

Great. Thanks. Just two quick one for me. If you could just circle back a second to the sales capacity, I know you’ve targeted the 30% to 40%, from time to time you’ve commented if you’re running a little hot or cool relative to that range. Just thoughts on the hiring success thus far and any updates on the year? And then secondly, if you could just expand a bit on usage growth both enterprise and SMB, any notable trends that varied of from what you’ve seen over the last 6, 12 months whether it be usage as well as gross margin on that usage?

Yes, happy to do that, Jeff. So on the sales capacity as I said, we continue to expand that quota-bearing sales capacity for enterprise at 30% to 40%. We have had a lot of success this year. And part of the disruption that we see at a couple of competitors [ph] that have been acquired is, there are resumes on the street there continue to be a good flow of resumes from those companies, and we've been very selective in picking off kind of the cream of the crop. So, again, we've had very, very good success in hiring from the industry this year. But we've been doing that for years and years because this is a pretty mature industry with other players that we can also recruit from. In terms of usage growth, Barry, you want to take that one?

Yes, sure. So first of all on usage growth, Jeff, the business as we’ve said quite often is growing meaningfully slower than the subscription business. We quantify that by saying that there is a mix shift of 2 to 3 percentage points per year away from usage to subscription and you can easily do the math to see what the numbers are approximately. In terms of the gross margins, they remain very firm. We've got an absolutely crack team on doing this, and we provide a very valuable service to our subscribers in terms of things like redundancies and voice quality and so on. So that is a bright spot.

Okay. Thank you.

Thanks, Jeff.

And at this time, we have no further questions in the queue. I will turn it back over to management for any additional or closing remarks.

Well, thank you. I just want to thank everyone for joining us on the call today. I'm just thrilled with the continuing momentum in our enterprise business. This latest release that we've been talking about is a great differentiator for us and puts us even further ahead in this market. As you guys know we are going after a massive market opportunity, so we're very well positioned to continue to gain share in this market. Thanks again for joining us today.

And again that does conclude today's conference call. Thank you all for your participation.