Good day, and welcome to the Five9 Q1 Fiscal Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Lisa Laukkanen. Please go ahead, ma'am.

Thank you for joining us today. On today's conference call are Rowan Trollope, CEO; Dan Burkland, President; and Barry Zwarenstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors. 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, including the impact of the COVID'19 pandemic and other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and available in the Investor Relations section of Five9's website at five9.com. And now, I'd like to turn the call over to Five9's CEO, Rowan Trollope.

Thank you, Lisa, and thanks to everyone for joining our call this afternoon. Our thoughts today are with those affected by the coronavirus. In these unprecedented times, we've been laser-focused on taking care of our employees so that we're able to continue delivering for our existing and new customers. As a result, our company is fully operational with 100% of our employees working from home, and we're continuing to execute on our key priorities. First, a quick summary of the results we reported today. Q1 revenue was a record $95.1 million, up 28% year-over-year, a Q1 record growth rate as a public company. Enterprise subscription revenue grew 33% on an LTM basis, and our adjusted EBITDA margin was 14.9%. These record results demonstrate the team's discipline and execution during a challenging time and our focus and commitment to our balanced growth strategy. Whatever happens in the macro environment, we will relentlessly maintain this focus as we navigate through 2020. Now let me address the issue that's front and center in everyone's mind, the impact of COVID-19 on our business and how we've adapted. We are not immune to COVID-19 headwinds, and certain parts of our business have been adversely impacted. We've had increased levels of reductions and cancellations in our commercial business, although after an initial burst, they have slowed somewhat. In addition, some enterprise customers, most notably in travel and hospitality and consumer discretionary have also been reducing seats. At the same time, we've experienced a surge in demand to deliver the work from home model. In recent weeks, our customers have transitioned their agents to work from home across the globe without hitch. With Five9, the agent only needs a computer, the headset and an internet connection. Customers now recognize the critical nature of business continuity plans for…

Thank you, Rowan. Once again, we had record bookings for Q1, and our Q1 pipeline approximately doubled that of Q1 2019 due to the sustained sequential growth for the last 4 quarters. Additionally, over 60% of deals were influenced by our ecosystem of partners. Before I turn to key wins for the quarter, I wanted to share something that was truly remarkable at the end of Q1. While our customers were all in the process of moving their workforce to a work from home model, our teams were also adjusting to our own work from home transition. And as Rowan mentioned, they didn't miss a beat. This was reflected in our Q1 bookings performance as well as achieving our largest quarter ever for seat turnups by our world-class professional services team. And now, I'd like to share some key wins for the quarter. Starting with what you may have seen in a recent press release from us where we jumped into action and enabled the hotline for the SBA loan program. Some of those calls go directly to outsourcers using Five9, and others are routed to non-Five9 based outsourcers. We also set up hotlines for New York, Detroit and Orlando to assist these cities and counties with their COVID inquiries. The second example is an online bank, which had been outsourcing the majority of its interactions to a BPO operating on Avaya, which gave them very limited visibility and control over their operation. They chose to bring all of their contact centers in-house, looked at all the various cloud contact center options, and they chose Five9, which now gives them complete visibility and control, while also giving them a comprehensive omnichannel solution, including chat, e-mail and deep integration to their CRM. We anticipate this initial order to result in over…

Thank you, Dan. Before going into specifics, a reminder that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliation from GAAP to non-GAAP results are included in the appendix of our investor presentation on our website. We had another strong quarter with both top and bottom line results exceeding our expectations. Revenue grew 28% year-on-year, driven primarily by our Enterprise business, with subscription revenue increased 33% year-over-year on an LTM basis. Enterprise now makes up 81% of LTM revenue, and our commercial business, which represents the remaining 19%, grew in and around 10%. Recurring revenue accounted for 91% of our revenue, the other 9% of our revenue was comprised of Professional Services. As a reminder, our continued success in winning larger and larger enterprise customers has introduced more fluctuations as they come onto the platform at different times and ramp at different rates. This, again, was the primary driver of LTM Enterprise subscription revenue growth rate coming in at 33% versus 34% last quarter and LTM dollar-based retention rate coming in at 103% versus 105% last quarter. First quarter adjusted gross margins were 64.1%, an increase of approximately 70 basis points year-over-year. First quarter adjusted EBITDA was $14.1 million, representing a 14.9% margin. This is a decrease of approximately 100 basis points year-over-year, which reflects the continued investments we have been making in go-to-market and R&D initiatives. First quarter non-GAAP net income was $11.1 million, a year-over-year increase of $1.1 million. With regards to balance sheet and cash flow highlights, DSO were 34 days in Q1. First quarter operating cash flow was $10.4 million, and we remain optimistic about our potential for continuing cash generation given our long-term model, our substantial NOLs and our low DSOs. Now to guidance. Rather than reading you the guidance numbers in…

[Operator Instructions]. We'll take our first question from Sterling Auty with JPMorgan.

Here is our hopes for everyone staying healthy through this quarantine situation. Just in the surgeon enterprise business that you talked about, can you give us a sense, what portion of that, perhaps, could be temporary? So things like special programs that the government might be rolling out that can go away versus what portion of it do you think are permanent sticky seats that stay with you well beyond the work from home situation?

Dan will answer that one.

Yes, Sterling. Thanks, and that's a great question. As we came through the end of Q1 and entered into Q2, we did see some very specific COVID projects, as we mentioned in the prepared comments. The SBA loan program, we jumped into action, and then we set up a few hotlines. And there were a handful of folks that came to us and said, "Hey, stand up something quickly so that we can get through this." We were very conservative in how we booked those and didn't book them as permanent anticipated revenue. So we booked those in the 2- to 3-month type of cycle that we expect them to stay online. And again, that was only a handful of opportunities. So Q1 was very, very strong, as we mentioned, from a bookings perspective, and we executed very well through the last few weeks as this impacted us. And that included some puts and takes, but we've seen a great build to the pipeline, as I mentioned, and we feel very strongly about the fundamentals of the business.

Our next question comes from Terry Tillman with SunTrust Robinson Humphrey.

Appreciate all the insights. A lot of color. It's really helpful to us. I guess I'm just going to focus on AT&T. That seems interesting to me. You guys are building out channel relationships and building out the ecosystem. Seems like more points on the board. But with AT&T, maybe just a background on -- do they have a contact center strategy in the past with their customers? Kind of how was that a formal bake off? And how do we think about that in terms of becoming a new growth driver? So I did ask 1 question, but three parts.

I'll take the last part of your three part question first. Yes, it's definitely going to become a growth driver for us. It's not currently baked into the 2020 numbers, so that's upside. In terms of the first part of your question. Yes, they have had a cloud contact center offer. We're the new -- we're now selected to drive this a new product, I think, that they're launching, but they have had and offered other contact centers previously. We're going to be powering their AT&T cloud contact center offer, which is their lead offer for contact center in the market, and it's the lead offer for -- they're positioning it for customers of all sizes. So we're really thrilled, candidly, to be able to have this relationship established with them. They've signed exclusively with us. So it's a huge, huge opportunity. AT&T is absolutely one of the market leaders here. They also have a UCaaS offer that's powered by RingCentral. And so that will be sitting right alongside that as the CCaaS offer from AT&T. So very exciting for Five9.

And we'll take our next question from Meta Marshall with Morgan Stanley.

Just a couple of questions for me. Just in terms of usage as a percentage of revenue, how did that trend during the quarter? And were there any spikes that we should be mindful of as we head through the year? And then maybe, Rowan, just for you. How do you see kind of sales cycles post-COVID? Do you see them kind of shortening, that people are more aware or too early to tell?

Barry, you want to grab this part?

Sure. Could you repeat that first part of the question? I didn't hear it because I'm on a cell phone.

Okay. So just on usage as a percentage of revenue and whether there was any spike here that you should remind on.

Perfect. No, there was -- the usage revenue continues very steady in relation to our subscription. What's happening is that more and more of our business is enterprise, as you know, 81% now. And those enterprises are very effective in utilizing the agents efficiently throughout the day. And you can only speak so many hours a day. And so it stays reasonably constant. And Rowan?

And then -- yes, Meta, I'll answer the second question that you asked, which is about sales cycles. I think going into this, we -- there was a question around, hey, would enterprises be willing to do deals, essentially, with Zoom meetings and virtually? Or do you need to go and press the flesh? And is that something that's sort of a requirement? I think that that's something that's been answered emphatically to us. Business continues on Zoom and other messaging meetings products. We're able to close deals. Customers are still operating, especially in the Enterprise. We've seen -- and frankly, even in our commercial segment, businesses are continuing to do business with us and to sign big deals, and that happened at the end of Q1, and it's happening through the beginning of Q2. So we're not seeing any issues with operating our sales organization and closing deals, very large deals or very small deals across both segments of our business and so really pleased to see that folks have adapted to that. In terms of sales cycles lengthening towards the end of Q1, we saw some acceleration of deals. So the opposite of that as customers who were potentially -- who were already in our pipeline said, okay, this is going to be easier for us to just make this decision and switch to the cloud now rather than wait and try and take our existing on-premises product into a COVID environment where agents needed to work from home. So we did see some acceleration. We are being prudent as we always are for the back half. We already have good visibility into Q2. So we've given you the guidance there. For the back half, we're being prudent in the guidance. And we're not anticipating, specifically sales cycles lengthening, particularly. However, given the macro and what might happen from a recovery perspective since we just don't know. We're kind of just being very prudent about the guide. So -- but as of right now, we don't see any specific results of COVID that are sort of drying out sales cycles or anything else.

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

Maybe dig in on the sales motion a bit, and maybe this is for Dan. Dan, how would you characterize the mix of expansion bookings versus new customer bookings that you've seen kind of post-COVID?

Yes. David, great question. I think what we've seen, both in the commercial and the enterprise space that we're executing with our installed base very nicely. I mean, sure, we have talked about some industries that are vulnerable or that are being impacted negatively from the COVID crisis along the lines of travel hospitality, retail, we're -- we have very little of our installed base in those sectors, thankfully. We're seeing other sectors that are actually increasing and booking a lot of additional business when you look at natures like health care, financial services and other solutions. So we took a very -- the benefit that we talked about earlier of having direct support relationships with our customers. Thanks to that, we were able to do a very deep inspection of our base especially on the enterprise accounts and go through each of them and not only analyze them by the industry that they're in, but actually speak to them live and get their feeling for whether their business was going to expand or contract. And what that's allowed us to do is really break it down. We found across the 19 different industries that we sell into, 50% of our business comes from the 3 top industries that I mentioned, financials, health care and business services. Those are remaining very solid. We have another 15% that come from food delivery, communications, technology and education, and they're standing to benefit as well. And only 15% come from travel and consumer discretionary. So we feel very fortunate that we've kind of been able to sidestep that negative that's happening across all industries or across all type companies like us that they do business with. It's a very small part of our share. So that's good news. But if you look at…

That's super helpful. Rowan, maybe one, just very quick one for you, if I could sneak it in. Does the current environment change the time line or expectations for a second half rollout of your AI agent assist effort?

Yes. One of the things that we've been very focused on through this COVID initiative has been -- or so through this COVID crisis has been really focus on the basics for our customers, getting them up and going, moving their agents home. So to be honest, we've had our hands full and our plate is just completely overloaded with urgently getting agents move to home. So we have -- I think customers are not -- that's not going to be very top of mind right now. That being said, we did achieve our milestone that we had set by -- we had set a milestone for ourselves by May to get 5 customers actively signed and agreeing to use our AI technology, which we've done. So we're not changing the release plan. We're still going to be launching the products that we've talked about, and those are entering the market, and we've got the 5 customers now that have agreed to and that are piloting the technology. So we've hit our milestones on that front, but I think if I have to spend my time somewhere in my field right now, it's not going to be sort of necessarily on the more fancy stuff, it's going to be on just doing the basics for our customers, and there's so much opportunity there right now that that's where we're spending our time. But I think that's going to pick back up, given the ROI savings that are available. We have a very large enterprise customer we're speaking with tomorrow. And this is a big part of what they're interested in is our side -- our AI technology. So yes, I think it's there, but not a huge focus, I'd say, for customers during this crisis.

We'll take our next question from Raimo Lenschow with Barclays.

I hope you guys staying healthy as well. The quick question on the discussions with enterprises around moving towards the cloud. In theory, this should be like one of the main events like that really triggered that, where we've been talking for a low level of adoption for cloud for a long time, but the -- now, like, in theory, everyone should see like, look, you should be in the cloud. What are you hearing in terms of, like what is strategic, where it's tactical? And what do you see in terms of enterprises' willingness to go high up in terms of seat count and should be comfortable to run in the cloud now?

Raimo, this is Rowan. We've been on -- the second part of your question, we've been on a steady increase in terms of larger and larger customers, enterprises with many thousands of seats moving onto the platform. And so we're seeing that number continue to ratchet up and seeing very good success there. On the first part of your question, remind -- sorry, can you go back to the first part of your question?

I was just seeing, like in terms of if you talk with your clients at the moment, what's the -- how much of the current discussion is strategic -- [indiscernible] strategic? Are we already in that strategic mode? Or are we still tactical?

I think, look, it's more strategic. I think there -- but there seems to me to be more of a recognition and especially as a result of this event, that, okay, cloud wasn't inevitability. Maybe we could -- maybe folks thought they could wait longer. And I think people are now starting to recognize, "Oh, no, now is the time." And I've certainly seen that messaging. Microsoft Satya said that we've seen 2 years of digital transformation happened virtually overnight. And I've seen other IT sort of leaders making the same claims. So it feels to me like this is a big change in terms of the -- it's going to drive a big change in terms of the acceptance of cloud. And potentially, an acceleration of that. Now remember, though, with contact centers, unlike, say, for example, Zoom Meetings or other cloud software, that's not an upgrade that happens overnight. So while the best metric we can give you is our pipeline, which again has doubled this -- double -- was double the size in this Q1 versus last Q1 of last year. That represents just 2x the opportunity for us to go after. And you're also seeing that, for example, with AT&T, whose cloud contact center is their lead offer. So while they have historically offered on-premises, the lead is now cloud. So I think there's a lot of signs pointing towards more acceptance of cloud as the default option and knock on wood, hopefully, we'll start to see even more acceleration of that penetration happening in cloud contact centers.

Our next question comes from Matt VanVliet with BTIG.

I guess digging in on the channel a little bit further. Obviously, getting global SIs to sort of finally make the jump and get behind the product is a huge step. Just curious if you could walk us through sort of what was happening at the end of 2019, that was really pushing those companies to get in there. And how that process has -- what I presume to be accelerated over the last couple of months and the value that they find in investing in your platform?

Yes. Matt, this is Dan. Happy to take that one. As you may recall from previous earnings calls. We've mentioned the Deloitte partnership that we've had for several years. And so it came in twofold. One was the market, further upmarket in enterprises were starting to turn to the global SIs and say, help us with digital transformation, help us make this migration to the cloud and help us assess the market and then bring the players to bear. And the second was our investment. So we took a concerted effort to say, wow, we've been very successful with a very small team working with Deloitte. Imagine what we could do if we really double down in with EY, Slalom, Accenture and others, and did the same thing. And those relationships take time to develop. They've got to build a practice and really get -- hone their skills to be able to go-to-market and help their clients. And we've helped invest in those relationships. And so that Q1 performance that we have not seen, the same -- was greater than what we had seen over the last entire year was partly due to those relationships maturing. And so we're starting to see a regular run of business come from the others. It had been primarily Deloitte prior to a few months ago. And now it's been all 5 or 6 of them hitting on all cylinders and doing deals. So it's really helped us build the momentum. I don't see that changing at all in a negative direction whatsoever. In fact, if anything, we should see increased momentum, especially for what Rowan just mentioned. As more companies come out of this and start realizing they've got to build for business continuity and really build a way to be able to have the flexibility of their workforce to work from anywhere. This one was a work from home thing. A natural disaster could just mean displacing agents and sending them to other locations. Having that flexibility of the cloud is key. And our SI partners are certainly leaning in and helping us position that with large enterprises. So all good on that front.

Our next question comes from Alex Kurtz with KeyBanc Capital Markets.

Yes. I hope everyone is safe and healthy. So Ron, I just want to go back to some of the earlier commentary on how you think about the current quarter and the second half and the give and take here. So I think there was maybe some presumption that this work from home environment that we're in, this surge in need for additional customer service resources would have -- would it create some uptick in seats with some of your larger customers? And maybe you can help kind of better frame that out for us, right, because I think there may be a view that now that everyone is going to work from home, you're not constrained by real estate anymore. And more people can be employed, and that means more seats per customer. And then, I guess, weigh that against the retail and travel sectors. And maybe which ones were kind of -- one was a headwind maybe, and one was a tailwind is sort of how it played out in the remaining 2020 guidance.

Sure. So we definitely are seeing an uptick from the work from home and the awareness of cloud as a sort of the great option for that. And I feel, and this is anecdotal, but we're seeing, as Dan mentioned, quite a bit of strength in our commercial segment, which indicates to me that you're seeing smaller businesses who perhaps didn't place as much, who maybe they relied on more retail presence. And now they've recognized that to keep operating their business, they need to have agents working from home to continue to service their customers. So we're seeing surprising strength from our commercial segment. On the enterprise segment, definitely, we've seen in health care and in parts of the financial services space, we've seen adding -- folks adding more and more seats. So that could be an indication of their business as being relatively stronger or of their need to service their business in a fundamentally different way with contact center agents. So we definitely are seeing that. There have been, as we mentioned, and this is sort of what drove the overall guide for the full year. We did also see reductions and payment term extensions. And so a bit hard to balance it all out. I think for Q1 and Q2, it feels like it's a slight positive for us, and it's reflected in the Q2 guide, and it's reflected in the Q1 performance. For the back half, we're being prudent. So fundamentally, I think we're in a place where we're very confident in our strategy. We're very confident in the approach. We're also very confident that this latest macro environment has created more awareness of the need for cloud, and that's being reflected in our bookings. But we're being cautious for that full year guide around not getting ahead of our skis on that. And just -- that's what we've always done. We've always been prudent there. As we get more visibility into it, we'll continue to drive the business and make the right changes. So that's where I think we are right now.

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

Great. A couple for me, guys. Just, Rowan, maybe to follow-up on that last question, maybe from just a slightly different angle. But if I look at a large enterprise that was premise with a legacy solution, and they were forced in this crisis to move to work from home model. I guess just two questions. Using a customer like that as an example, do you have any sense of how -- what percent of those seats you think ultimately will stay at home? And second, in that transition from being a centralized location with the premise solution to work from home, what did you observe in terms of the opportunity to pick off customers like that, maybe at an accelerated pace? I mean, you've been displacing premise for a while. But what is that ultimate discussion with that customer trying to get home from a legacy premise solution look like from your vantage point?

Yes. Let me start with the first one. Well, actually, let me back up and just say, what we've seen with on-premises and the work from home move is that if the business already had their environment set up and configured in such a way to make it easy for agents to work from home, those folks were able to transition. And I've seen reports in the news media about on-premises vendors saying they have moved hundreds of thousands of agents for their customers' home and so on and so forth. So I think it's not -- it's absolutely possible to take an on-premises environment and set up work. But it is not easy, and that's the key that I think is -- to keep in mind here because you, as an enterprise, then have to manage all of the infrastructure for your agents. First and foremost, you think about the client, if the on-premises agent was already using a soft client, that's one of the hurdles. So that's okay. But in many cases, on-premise agents are actually using physical desk phones. This makes it much harder. It makes it much harder because now you'd have to either switch them to a soft phone or move the hard phone home, much more difficult, requires additional hardware at home to handle the special VPN connections for hardware-based voice over IP telephone. So -- and then you've got the VPN infrastructure and the security edge, which gets harder and harder, the bigger you get. You need to maintain a very, very robust security infrastructure to allow those agents to connect them into your network. So let's just say it's not easy to make that happen for at-home agents. Now that doesn't mean it impossible, it's just not easy. So I think if…

Our next question comes from Scott Berg with Needham.

Congrats on a good quarter. I guess, I wanted to focus on the incremental investments that Rowan called out. And Barry, I think you said was about a $3 million incremental expense for the bulk of the rest of the year. I guess, the question there is, can you give us a little bit more color on what those additional kind of areas investment are? And then secondly, why make the investment today? I think you're specifically calling it out, which means to me, probably seeing something that's an opportunity that might be unique versus embedding this into the guidance just three months ago for the year?

Okay. Yes. Thanks, Scott. So the vast majority of that investment was actually made in Q1 and the beginning of Q2. So it was essentially mostly headcount, and it was staffing up for things like AT&T, our channel organization, where we're seeing progress, our sales organization, where we -- Dan talked about the 3 pillars of that transformation he's been making. So on the enterprise side, bringing in new enterprise sales reps. So the vast majority of the hiring was happening as the -- as we saw the momentum in Q1. And for a bunch of those hires, we actually had the start date set to April 1. So that -- the vast majority of the $3 million has already happened. As we saw the COVID pandemic unfold, we dramatically ratchet it back. And so we're not in a place right now where we're sort of continuing to open tons of new reps and do all kinds of hiring. It slowed to a trickle since this thing unfolded. But we will see the full year -- it's actually the full year effect of the vast majority of that hiring adds up to almost $3 million, and that's what we're seeing in the numbers. Does that make sense?

It does.

We'll take our next question from Will Power with Baird.

Okay. Great. Yes. I want to actually circle back on AT&T. It seems like it could be a really significant opportunity over time. I recognize it will take some time to ramp up. I know this could, might in some respects, be a better question for them. But I'd love to get your perspective. I guess, what I'm trying to understand is, what really kind of set you apart from the previous cloud contact center solutions, I think they were offering? What was more unique? Or what kind of, I guess, want the deal for you, so to speak, on that front? And then, b, I mean, how do we get a sense for confidence of how broadly this will be pushed within AT&T's different units across SMB, enterprise, et cetera?

Yes. I think you're absolutely right. It's a significant opportunity for us, and it's a huge validation of our technology and innovation. But one of the things AT&T gave us feedback on was our ability to execute, just ran circles around everybody else. And I think that came as part of our go-to-market organization, our professional services organization. Andy Dignan is a guy that works for Dan. He works and Dan -- so Dan hired him to run his channels in PS org. Andy and his team just ran circles around the competition when it came to execution. And so I think that's one of the areas, ability to execute, speed is -- was a big part of it, in addition to having what I believe is the best technology in the marketplace. It's not just about that. It's ability to executing. And frankly, Dan has done an amazing job of hiring up a team of people that have worked in the service provider space before. So as you staff up a channel organization, working with service providers is very different than working with other types of resellers and channel partners. It's a very specific skill set and understanding. As you mentioned, it takes a little longer because when you're driving these very large-scaled partners, like service providers, it just takes a while. But once they get rolling, they can be absolutely massive. And so we're super excited about it. And Dan and his team, along with Andy, have done a phenomenal job. So thanks, Will, for the question.

And that's all the time we have for questions today. I'd like to turn it back to management for additional or closing remarks.

Well, thanks, operator, and thanks to everyone for joining us today, and trust you're all staying safe and healthy. In closing, look, I'm really pleased with our strong first quarter performance. And our number one priority right now is to take care of our employees so that we can continue to serve our customers to the best of our abilities. And while we're taking a prudent stance on the impacts of the macro on our business in the second half, we wanted, today, to make sure that we gave you incremental transparency into the business. I think Dan and Barry have done a great job of giving you some of the underlying metrics around bookings and orders and the strength that we're seeing there. Longer term, the fundamentals of our business are strong, and we are going to continue to execute in the disciplined way that we always have at Five9. So with that, I'd just like to say stay safe and stay healthy. Thank you all very, very much.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.