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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to Five9’s Second Quarter 2019 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, Operator. Good afternoon, everyone and thank you for joining us on today’s conference call to discuss Five9’s second quarter 2019 results. Today’s call is being hosted by Rowan Trollope, CEO; Dan Burkland, President; 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 risk factors that could cause the forward-looking statements to be inaccurate 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 from the non-GAAP information provided by other companies in our industry.
The full reconciliation of 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 website.
Now, I’d like to turn the call over to Five9’s CEO, Rowan Trollope.
Thank you, Lisa, and thanks to all of you for joining our call this afternoon. We delivered strong second quarter results with $77.4 million in revenue, up 27% year-over-year. Our adjusted EBITDA margin was 18.6%, an increase of 2.7 percentage points year-over-year. Terrific results from the company, demonstrating the strength of our business model.
Now our Enterprise business is driving the top-line with subscriptions growing at 36% LTM. This Enterprise growth is most pronounced with our largest customers, paying more than $1 million in annually recurring revenues that now make up over a quarter of our LTM revenue and are the fastest growing part of our business, with a CAGR in the 50s over the last three years.
I’ll now turn the call over to our President, Dan Burkland to talk about the great bookings quarter we just completed. Dan.
Thank you, Rowan. Our Q2 enterprise bookings grew strongly year-over-year and reached an all-time record by far for any quarter. Our pipeline also reached another all-time high. This quarter we continue to see larger and larger deals coming in and more than 60% of deals were influenced by our ecosystem of partners, and now I’d like to share some key enterprise wins for the quarter.
The first example is a pharmaceutical company that serves patients during clinical trials for life saving treatment. They were unable to deliver an optimal customer experience due to several limiting factors and reliability concerns, of their then cloud based solutions. They were having service interruptions, had limited integration with the custom CRM and had a very basic workforce management solution with no intraday reporting, which made staff forecasting very difficult.
They also couldn’t support the call peaks, which were over 1,500 concurrent calls. Five9 delivered the best solution to each of these pain points with the end to end solution offering, including Five9 WFO powered by Verint for workforce management, quality management and performance management. This initial order is anticipated to result in nearly $1.5 million in annual recurring revenue to Five9.
The second example, I’d like to share with you is a financial services company in the automotive sector which takes calls and inquiries from dealerships to consumers. They were using a premises based aspects system, which had become unreliable and have limited integration to sales force. They were experiencing excessive downtime which was directly impacting their revenue.
Aspect attempted to migrate the customer to their own cloud solution, but discovered that it could not scale beyond 1000 agents. With Five9’s up time, reliability, scalability and simplicity of administering the system, we are implementing a complete end-to-end solution to deliver exceptional customer experience. This initial order is anticipated to result in over $2.5 million in annual recurring revenue to Five9.
The third example is as a dentistry company providing orthodontic solutions direct to consumers globally. Their existing solution did not have an elegant way of doing true blending for inbound and outbound calling, nor an easy way to accomplish omnichannel routing with sales force. They also experienced difficulties with international dialing, identifying country of origin for digital channels and a manual process for resetting skills.
Solving these challenges, along with finding a partner who would provide them with the consultation and ongoing high touch optimization led them directly to Five9. This initial order is anticipated to result in over $2.7 million in annual recurring revenue to Five9.
And now as we usually do, I’ll share a significant expansion of an installed base enterprise customer. This is one of the fastest growing insurance brokers offering quotes for medical, auto, home and life insurance, who had been a sizeable customer of Five9 since 2016.
Since their initial Five9 deployment, the customer has added three additional business units, with the most recent department, bringing their contact center C-total to nearly 2000. With this add on order of over 1.2 million, it now brings their anticipated annual recurring revenue to $3.4 million to Five9 across multiple US location.
As you can see, we continue to execute out market with larger customers, while also helping expand our footprint and offerings within our growing customer base.
With that, I’ll turn it back to you Rowan.
Thanks Dan. Terrific example! So now I’d like to turn to some comments on our business and share with you why I believe that Five9 is set to enjoy many years of 30s level enterprise growth, and I’d like to share with you, the three key pillars that I see driving that grow.
The first pillar is the market, which with the TAM of over $24 billion is massive. To start with the fact that the transition to the cloud of this big market is in its early innings, at under 15% penetration.
Next, we are through the evangelical phase of the cloud, notably demonstrated by Gartner’s decision recently to discontinue the Magic Quadrant for on-premises contact center vendors and finally the priority of the contact center is on the rise as company leaders all over the world recognize that transforming their customer service experience is a necessity. This transformation, that fundamentally repositions the contact center from a cost center into a business differentiator that is worthy of investment, so that’s the market.
The second pillar is our product. So first Five9 and our product has consistently been included by Gartner and their Magic Quadrant as an industry leader, and that’s a result of over a decade of experience and investment, working with increasingly larger customers, building out a hardened and versatile platform with a very, very large surface area of capabilities.
This iterative scaling of the product is not something that can be easily replicated by aspiring new market entrants. Next, to further strengthen our product, we have meaningful expanded our engineering leadership and are increasing our investment in R&D. Our new leaders are Jonathan Rosenberg, our CTO and Head of AI, and Dave Pickering, our Head of Engineering.
And on July 15 we announced Anand Chandrasekaran formally from Facebook as our EVP of Product Management. So beyond leadership, we’ve been hiring and training more engineers and scaling our team faster than ever before, resulting in a substantial increase in throughput and innovation.
So that team has been hard at work and over the last quarter we’ve been building out a new software delivery engine, leveraging a blend of our own robust cloud infrastructure, and increasingly public cloud from both Amazon and Google.
This new engine that we’re building is built on the latest PaaS technologies that stand for ‘Platform As A Service,’ some of these only recently available, which enabled us to continue to press our advantage and stay ahead of other cloud contact center vendors who rely on architectures, built before this latest wave of technology advancement was available.
Next our team has been demonstrating industry technology leadership, most recently leading a collaboration with Google, Cisco, Comcast and Free Switch on a standards body submission to drive the industry forward. With this patent pending technology, we’re aiming to make it dramatically easier for consumers to reach an agent by bringing voice calls right from the web browser, all the way to the contact center, without the phone in the middle. Accelerating web RTC adoption and improving customer experience.
Finally on the AI front, we’ve shared the treasure trove of data we have access to, with 5 billion minutes a customer conversations going through our platform annually. Our AI roadmap has now been validated by our largest and most advanced customers and we have begun implementation, hiring, coding and performing AI model evaluation and performance tuning.
So now while its early days in this market, we are certainly leading the way and as we mentioned in the last quarter, we were featured on stage at Google Next as part of their partnership with sales force, a demo that was only possible due to the new delivery engine that I mentioned earlier, so that’s product.
The third pillar is our go-to-market engine, and our result here convincingly demonstrate that our team lead by Dan Burkland is one of the back in the industry and we are making progress in this team on multiple fronts. First, the sales team continues to grow and scale. The average tenure of our leadership team continues to increase and is now nearly six years, and we’re rapidly adding capacity to our field sales people, which we call sales directors.
Next, we announced this quarter, the strategic decision to meaningfully and rapidly step-up our channel development, opening up a new avenue of long-term domestic and international growth. We announced new leadership and we have new partnerships.
On the leadership front we hired a Vice President and General Manager of International Sales based in London; second, a Vice President of Global Channel; and third, a new Vice President of Professional Services.
So each of these new hires formerly held leadership positions at large contact center technology companies, and will be reporting to Andy Dignan, our SCP of Global Channels and Services. Who most recently let go-to-Market Globally with the collaboration business at Cisco.
On the partnership front we continue to gain traction with system integrators like Deloitte, Accenture, E&Y, Flolyn [ph] and IBM, adding people dedicated to the SI channel and these SIs are becoming a meaningful portion of our revenue as they are often brought in to help enterprises with their digital transformation strategy.
Now earlier this quarter at Microsoft inspire event, we announced a brand new partnership with Microsoft teams UC, and we met with their partners and global sales organization to develop a joint go-to-market strategy.
So we are building a tightly integrated contact center solution with Microsoft, which gives their partner a huge opportunity to make further progress in UC and enter into the cloud contact center market. On the CRM front, we continue to have an excellent partnership with Microsoft dynamics CRM.
Finally the anchor of our go-to-market machine is our customer success and professional services organization. The contact center is at the heart of the customer service technology landscape and is tied into many, many business systems. The customer’s need help managing that complexity and to help them on that journey, we built one of the largest and most highly rated customer success and professional services organization in the industry.
Now these teams deliver rapid, differentiated and onsite enterprise implementation, with the high touch experience that customers really need. These engagements along with our rock solid platform, build trust with our customers, which in turn is what drives our DBRR, which on a blended basis was again 107% in Q2.
So this large, experienced, long tenor team of seasoned, customer facing expert is a key ingredient in the secret sauce that makes Five9 so successful. We believe no one else in the industry has anywhere near this level of customer facing expertise, and we believe it will take years to begin to replicate.
In conclusion, the stars have clearly aligned for Five9. All three pillars for success are in place. The market is heating up, we have the right product at the right time and a leading go-to-market machine and most importantly a fantastic team of employees, who by the way voted Five9 as one of the top 25 Cloud Companies to work for.
So to expand on our financial performance and guidance, I’ll now turn the call over to our CFO, Barry Zwarenstein. But before I do so, I want to take a moment to acknowledge Barry who was recently honored at the 2019 Bay Area CFO of the Year for Small and Medium Public Companies. Take it away Barry.
Thank you, Rowan. Before going into specific, a reminded that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliations of GAAP to non-GAAP results are included in the appendix to our Investor Presentation on our website.
We are very pleased with our performance with both top and bottom line results exceeding our expectations. Revenue grew 27% year-over-year and 4% sequentially, driven primarily by enterprise business, which now makes up 79% of LTM revenue.
Enterprise subscription revenue continued its multi-year performance of growing in the 30s, positing growth of 36% on an LTM basis, and this enterprise business is highly profitable, generating at 6:1 LTV to CAG ratio on a truncated 5 year basis.
Our commercial business, which represents the other 21% of LTM revenue grew in the single digits. We expect continued single digit commercial revenue growth, now that we have left the easier 2017 compact. Recurring revenue accounted for 92% of our revenue, the other 8% of our revenue was comprised of professional services.
Second quarter adjusted gross margin were 65%, an increase of approximately 120 basis points, year-over-year. Second quarter adjusted-EBITDA was $14.4 million, representing an 18.6% margin, an increase of approximately 270 basis points year-over-year, demonstrating the profitability of our business model. Second quarter non-GAAP net income was $12.3 million a year-over-year increase of $5.4 million.
Finally before turning to guidance, some balance sheet and cash flow highlight.
DSO for the second quarter was 30 day. Our operating cash flow for the second quarter was $6.8 million, a year-over-year improvement of $1.1 million. We are optimistic about our potential for continuing cash generation given our long term model, our substantial NOL and low DSOs.
I’d like to finish today’s prepared remarks with a brief discussion of our expectations for the full year and the third quarter 2019. For 2019 we expect revenuer to be in the range of $312.5 million to $314.5 million. GAAP net loss is expected to be in the range of $12 million to $10 million or $0.20 to $0.16 per basic share.
Non-GAAP net income is expected to be in the range of $44.7 million to $46.7 million with $0.70 to $0.73 per diluted share.
Consistent with our previous discussion, this bottom line guidance reflects expected increases in various growth initiatives, particularly in R&D and in go-to-markets, to go after this massive market opportunity that is coming towards us.
For the third quarter 2019 we expect revenue in the range of $78 million to $79 million. GAAP net loss is expected to be in the range of $6.3 million to $5.3 million or $0.10 to $0.09 per basic share.
Non GAAP net income is expected to be in the range of $8.8 million to $9.8 million or $0.14 to $0.15 per diluted share. Note that a number of new hires were back end loaded in the second quarter, and therefore we expect meaningful uptick in R&D and in sales and marketing expense in the third quarter of 2019.
Nonetheless, in the fourth quarter, we expect to gain be reporting 20% plus adjusted EBITDA margin. For modeling purposes, we would like to provide the following additional information. For calculating EPS, we expect our diluted shares to be $64.5 million and basic shares to be $61.5 million for the third quarter 2019, and $64.2 million and $61.1 million respectively for the full year 2019. We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $75,000 for the third quarter 2019 and $130,000 for the full year 2019.
Our capital expenditures for the third quarter of 2019 are expected to total approximately $6.5 million to $7.5 million. For the full year 2019 we expect to continue capital expenditures to be between $20 million and $24 million.
In summary, we are pleased with our second quarter performance, driven by the strong revenue growth and excellent unit economics. The importance of customer engagement continues to be a key driver and the Five9 team continues to execute extremely well against this massive opportunity.
Operator, please go ahead.
Thank you. [Operator Instructions]. We’ll take our first question from Terry Tillman with SunTrust Robinson Humphrey. Please go ahead.
Hey, good afternoon, Can you hear me okay?
Yes Terry we can. Thanks.
Okay now, thank you. And Rowan, I really like that statement or the pronouncement you made about the 30% plus growth in enterprise over a long term basis and I wanted to you know focus on that in terms of – you could see obvious a lot more than we can see. Maybe you could just give us some of the competent kind of foundational element on that statement of 30% plus growth on the enterprise side, as it relates to maybe the quality of the hires, as it really to sales reps or how much you’ve expanded it, in terms of that gives you great sales coverage. So just some more on what we can see on the outside which is just the sales team and the go-to-market overall. Where is this confidence coming from. Thank you.
Thanks Terry. It starts with the market really and the sense – the fact is that, this market is huge right. Customer interactions are absolutely exploding. If you look at Gartner’s data, that shows that over the five year period that we are in, ending by 2022, the interactions in the contact center are going up by 3.5x. And you have that that’s sort of under pending the fact that, contact center is emerging as a strategic priority for businesses all over the world, and that was reflected most recently in Morgan Stanley’s Analysis where they looked at Cloud buying patterns and the fact that customer experience was the top priority for CIO’s and other CEO levels.
And then you have the fact that we’ve essentially gotten through the evangelism phase on the Cloud. So in other words, customers need to upgrade, it’s becoming an increasing strategic priority for their business and they are convinced that the cloud is the way to go.
You know Gardner, I think I pointed out in the call, but Gardner doesn’t even have a Magic Quadrant for on-premises contact centers. So that’s the first thing, $24 billion market, cloud penetration is beginning.
The second thing is really about execution and scale, right. We have proven that we can executive on the sales front. We’ve proven we can executive on the product front. We’ve got the product that’s winning in the market today and scale. So that growth you're seeing driven today by – in the top line is really coming from that enterprise business. We're signing larger and larger deals; we’re now highlighting those million dollar deals for you guys.
And so we are seeing that traction, we're seeing the proven execution, and frankly in this market right now from a competition perspective, it's really a duopoly. I mean us and any contactor at the head of this market, and that’s of course in the Gartner report, but we see it in our win loss and we see them in the market. And while there is you know noise in the market with new entrance and so on, none of them have a beachhead and we're definitely not seeing them in the market. So therefore sort of my conclusion is that this 30s level of growth in the subscription of enterprise business is going to be durable over a long period of time.
Okay, thanks for that. and I give want to follow- up to kind of focusing again on kind of go-to-market is also, as you look at kind of what you've assembled so far, kind of year-to-date, how do you and Dan feel about like the sales capacity you have that compete against your target this year and really even going into next year and how much do you know these emerging global SI relationships playing that as well. Thank you and congrats.
Yeah, I’ll turn it to Dan, but just the intro is look, we are super happy with the hires we’ve made. You know we’ve had a very stable team when very low attrition rates. The leadership team has been on average around for six years and if you look at the new hires that we just announced, the running channel and international Dan and I and the team met with them.
These are extremely high quality candidates. We are attracting the top talent in the industry into these leadership roles and frankly getting into channel and international is going to be a big growth opportunity for the company and so attracting people who have done that before and have those relationships is absolutely huge. Dan?
Yeah, just to add to that. Well said Rowan, when you look at us bolstering the leadership team with those additional adds, you know we are preparing ourselves to now go from $300 million to $1 billion and in order to do so we’re going to rely on global channels, the prominent partnerships, but also continuing to really go to market with the best talent.
And so bringing in expertise, we’ve got a great management team that as Rowan said has been here for six years plus, but we’re adding to that in the areas of international channels, working with SIs and being able to leverage those relationships that they’ve had in their past. And so folks that come in with the experience of having been there and done that from the $300 million on up is very important to continue our scale.
Thanks Terry.
We’ll take our next question from Meta Marshall with Morgan Stanley. Please go ahead.
Great, thanks guys. I wanted to see and congratulations on the quarter. Just if you could kind of speak a little bit more about kind of the SI channel and you know you had mentioned that being an important kind of relationship to ramp, but just how long you think it will take for those partners to kind of get those businesses running, what type of investment it will take from your part just to kind of maximize that channel. And then second, you know just any update on kind of some of the trials that are taking place on the AI front, would be helpful? That’s if from me. Thanks.
Sure, thanks Meta. Great question! Along the SI front, let me be clear, that has – it’s not how long will it take to get traction and get that going. We’ve had partnerships for several years, the one large one, the global one is Deloitte that we’ve had a partnership for about four years now, and we saw what occurred there and how much they were able to generate for us.
They get hired along with the other SIs that we mentioned earlier, [inaudible], IBM, EY and Accenture and others. They are being brought into these larger enterprises to help them with their digital transformations strategy and how they should go about moving to the cloud in particular, and so we get access with them as part of that larger project and get brought in by them.
You know I think we mentioned in the last quarter call that Deloitte’s been generating and is now generating you know well into the double digit millions of dollars of revenue for us, and we’re now replicating that same model across those other partners that I just mentioned and we’ve applied resources and dedicated resources to working with them. So it’s just another way for us to expand our footprint, expander reach, and get access up market. So that’s been working extremely well for us and it’s very strategic.
You asked the second part of your question was with regards to AI, I’ll turn it to Rowan to let him answer that piece.
Yes, so Meta that’s going well. We’ve gotten a lot of great input from our customers who have helped us really clarify exactly where they wanted to focus and that’s around Agent Assist. So that’s the concept of the real time AI recommendations and predictions that are sharing with a live agent, you know on an actual call or messaging threat. And so we’ve actually now narrowed in on the definition of the product and a road map, we’ve also recently signed up four of our largest customers to become Beta customers on this, so it’s currently in development and you know it will be included and one of our upcoming releases, probably in 2020.
Great! Thank you, guys.
We’ll take our next question from Raimo Lenschow with Barclays. Please go ahead.
Hey, congress for me as well, that’s amazing! The first question is, as you think about the $300 million have gone to a $1 billion, a big part of like a typical company build out there would be international and you touched on it a little bit, but I just wanted to find out more like, are they kind of from the mental differences to this market. I know your building it out, but I guess because you’ve seen a lot of adoption in the U.S., but slightly less internationally and so I just try to understand that.
And then Barry, congrats on that win. On that note, can you talk a little bit on the gross margins because Q2 65% is I think has the biggest, the highest number I’ve seen ever in my model. Just a couple of comments on the strength there? Thank you.
Yeah, thanks Raimo, I’ll talk about the international. The traction we are seeing there is not a function of the market and so much as it is just our investment and the fact that we talked about in the past that you know it’s a huge market in the U.S. and we’ve really been focused there. But as we’ve started to expand internationally we see tremendous opportunity. That’s why we just hired a new General Manager for that business.
Structurally there are some differences in Europe, the service providers. Obviously it’s a much more fragmented market, the U.S. is much more consolidated. The service providers are much more important in Europe and so we’ll have a different approach there, but fundamentally it’s a massive opportunity in Europe for us to get started on.
The person that we hired has actually built the contact center business for another, for the market leader and so we have brought in someone who has that expertise, has the relationships and it is a really important dynamic there that you have the relationships and that you are on the ground in the country. So it’s a big move for us, it will require ongoing investment and that’s something that you know we’ll be making over time, but we think we can make the investment as the business scales.
And Raimo with respect to the gross margin, yeah 65 was one of our highest. Actually in Q4 of 2018 we were 65.1, but we are actually proud or happier with this quarter, simply because it’s very revenue dependent, Q4 is a strong revenue quarter, Q2 is our toughest revenue quarter and yet we managed to come within spitting distance of the all-time record.
The biggest driver for that is our subscription business, which should not surprise you. You know that is after all of that recurring revenue 92% of the total, 73% of the total and this is what we’ve been talking about Raimo for quite some time. It’s a simple mechanics of the subscription revenue driven by the enterprise, for the LTM, 36% growth rate, growing faster than our cost to subscription revenue and that a was taken, those margins from the 60 years ago, solidly now into the 70s and a steady way with a durable growth that Rowan talked about into the 80s over time.
Perfect! Well done, congrats!
We’ll take our next question from Sterling Auty with J.P. Morgan. Please go ahead.
Hey guys, this is Sahil on for Sterling. Congratulations on the quarter! So a couple of questions. How would you say the contribution of new worse existing customers was in the quarter, and we saw a couple of changes in management ranks. So are all the positions filled now or are there any other changes that you might expect soon?
Its overall on the management ranks, no other changes. We have – we hired our last executive level reporting to me and that was Anand Chandrasekaran from Facebook who worked on the Messenger platform there and now Dan has hired the key set of leaders to drive channels in international, Dan.
Yeah, and to answer your question about new business versus existing, when I mentioned the bookings, net new bookings for enterprise was an all-time high by far. We don’t disclose bookings as you know, but that was clearly the case. And we continue to get expansions, land and expand opportunities from our base. That’s most, well reflected in our dollar-based retention rates, which again we’re at 107% on an LTM basis.
So, very healthy business from both new and existing, and yeah, the leadership team on the go-to-market has just gotten larger and more robust and with better experience. So you know I’ve never been as optimistic about the management team that we’ve assembled here on the go-to-market side to be able to take us to the next level.
Great! Thank you.
Our next question will come from Scott Berg with Needham & Company. Please go ahead.
Hi, everyone. Congrats on a good quarter. I guess two brief ones from me. First of all, Dan on the contribution from partners, you mentioned it was 60% plus in the quarter. I think that’s better than the historical trend or better than 55%. But what’s the right mix of that going forward with the kind of these new partnership initiatives?
Yeah, I mean we have such a plethora of partners that crossover many different industries and some are you know directly tied and complementary integrations to ours, like Salesforce and Oracle and the other CRM providers.
Some are go-to-market partners that are more on the, you know bringing us into opportunities and expanding our reach, so they are so different. Some are technology, some are you know ISV partners that do an add-on to the solution, some are true resellers of the solution, so it kind of runs the gamut. What we do is, we look at those and say where is there a partner involved, and that percentage is I think at a very ideal and healthy mark.
Sure, we have our own marketing efforts and our own ability to go reach and find new customers and find prospects, but we also rely on that partner ecosystem to find them for us. And that brings our cost of acquisition down, especially as we continue to not only build trust within those partners, but also build referenceability within the customers that they have referred us to, and once we get those references speaking highly, you know those partners want more and more to recommend Five9 because they trust we’re going to deliver for them.
It’s oftentimes the reputation that’s on the line, it’s fair, you know word that’s on the line and they want to know that who they recommend is somebody they can trust.
Got it, helpful. And then my follow-up is for Barry. The percentage of revenues coming from -- non-recurring was a percent in the quarter. I think that’s a little bit higher than the historical trend that I believe is closer to 5%, not looking at my model at the moment. But with the even larger movement up market with some of these really large million dollar plus contracts, are you just finding that you need some more services work there to maybe shift that mix slightly or should that maybe trend back toward the 5% you are thinking about?
Yeah. So Scott, the trend has been upwards. When we went public five years ago, it was 3%. Most recently it was 7%, now it’s 8%. The trend is definitely to continue. I see Dan sitting next to me, we’re not on video, but he is nodding his head vigorously, and he has been successful in bringing value to those implementations.
We are talking about something that’s mission critical, and people want to be sure that the six step implementation process that the team has, that go inside for every enterprise implementation is promptly appreciated and remunerated. Dan, do you want to add anything to that?
Sure, and if you look at our ability to directly go in and provide these implementations with a very high-touch model, Gartner recognizes that as one of our key strengths and differentiators.
Enterprise customers require and expect that you’re going to come in and very, very acutely do your research to figure out and design, deep discovery, do your design, your testing, your training and turning them up and then optimizing the system, all those services are so key to getting the customer off on the right foot and having them be able to truly take advantage and accomplish the business needs with the solution. There’s nothing more important than that to service this business, and we’re seeing that more and more as we move further up market.
And I just want to add one last thing Scott, and this is really going back to the earlier question on gross margin. I didn’t mention at the time because it’s not as material, but it’s a gentle tell breeze and that many years ago we used to have triple-digit negative margins, and as a result of the improved pricing from Dan and the percentage of the ATV that goes to the one-time, those have now steadily improved and now for the first time it was a negative in the teens, and I believe we can confidently talk about that eventually getting to breakeven and positive with a resulting overall corporate benefit.
Got it! Super helpful. Congrats on the nice quarter. Thanks again, guys.
Thanks, Scott.
Our next question will come from Matt Van Vliet with Stifel. Please go ahead.
Yes, thanks for taking my question. I guess as you look at some of the discussions around the partners and how they can really sort of broaden your reach within customers by offering a better solution and help with the digital transformations. Curious, how you’re thinking about maybe the total wallet share that you currently have with your existing customers, and what that long-term opportunity might look like over the next three to five years?
Yeah. So we’ve been seeing a fairly steady rise in our average revenue per user over time, over the time that we’ve been public and that’s something that we see continuing. You know we’ve been very successful at selling more as we move up market, the appetite to buy more in this space is higher, so we end up in a really good place as we get these larger and larger customers, and so specifically you know our partnership with Verint has been going very well, where we sell Five9 WFO powered by Verint.
We also increasingly see, and this is where I think the channel comes in and notably the SIs, but the desire of our larger enterprise customers to spend more time integrating the contact center deeply in with their CRM platform is there, and so that drives services revenue, it drives technology revenue, I mean things like MuleSoft and so on are certainly part of that story, workflow, automation and so on. So there’s just a tremendous amount of touch points, and we see – I can’t probably directly answer your question on Wallet Share, but I can say that the overall wallet and pie is growing and it’s growing fairly rapidly and our access to it, and frankly our buyers influence over it is also growing.
Thanks. And then Barry as a follow-up, there was a mention earlier about using more of the public cloud resources out there. Obviously, it seems like it’s probably for some incremental services, but overall, just curious on how that might impact gross margins in the long run. If that doesn’t continue to be a larger mix of the infrastructure used overall?
Yeah, so Matt, frankly our motivation on the public cloud under way is not done for margin improvement. We understand that other companies have benefited from it. We’re doing it much more for the nimbleness and the access to the various platform-as-a-service advances that we can bring to bear. So, we haven’t been assuming anything material, but it’s certainly something that could be positive.
Great! Thank you.
Our next question will come from Jeff Van Rhee with Craig-Hallum Capital Group. Please go ahead.
Great! Hey guys, this is Rudy on for Jeff. So, a couple from me. So a lot of color on partners, I like it. With the partners, with respect to the actual deployment and implementations, what percent of total deals, what percent of the overall implementations are being done by the partners?
And then secondly, a lot of people have some concerns with attrition in sales force, I think you answered this earlier, but I might have missed it. Can you just comment on any changes you’ve seen in the pace of attrition in the sales force as well? Thank you.
Thanks. Sure, thanks Rudy. This is Dan; happy to take that. First, looking at implementations by partners. I’ve been very cautious. While we’re signing up some large global companies that are willing to make the investments necessary to be able to put in the quality implementation and have it result in success on the customer side, it’s something that we’re very cautious about.
We’ve seen folks in the cloud, in our space that have had cloud offerings that have pushed out that responsibility to the channels prematurely and the channel wasn’t prepared and ready to be able to go as deep and as thorough as we can ourselves.
So, as we’re signing up and enabling and going deeper with some of these larger partners, we are very cautious and requiring them to, you know allow them to do OJT over the shoulder shadowing of our people to ensure that they, (a) take the time to invest the right resources and the time and energy to be able to do the same quality that we could deliver ourselves and then for us to monitor and over the shoulder on their first implementations, and only then will we actually relinquish and allow them to go the full route.
There is very few doing that. We have some that are committed to doing that and we’ll get them trained up over the next several quarters. But again, I’m going to be very cautious because I want to make sure our quality does not degrade whatsoever, that’s been a key, key part of our success.
As far as attrition on the sales front, we have extremely low attrition in the industry. I would put it up against anybody and especially the case for voluntary attrition. So, like any organization, our size is growing, you are going to have some folks leave from time to time, but typically it’s either a mutual decision or it’s one where we’ve kind of pushed them out the door to move on, so been extremely low across the board and that goes for the last four, five years.
Great, Got it! And then just one last quick one, if I could, kind of landscape. Have you guys been seeing inside communication players, any increase in the frequency that you guys are seeing them in deals?
You know I mentioned earlier, this market is really a duopoly at this point. We share our win rates and it is really in contact and Five9 tends to be in all these big deals. So we really haven’t seen any significant, we haven’t seen any real material shift in the competitive landscape on that front.
We’ll take our next question from David Hynes with Canaccord. Please go ahead.
Hey, thanks guys. Nice quarter. So the question earlier was asked on public cloud as it relates to the financials. Maybe Rowan if you could talk on, you know you hit on them, a new software delivery engine in your prepared remarks. Just curious how does that leverage public cloud? I mean should we think of it as more for international opportunities, what does it do for the product, any additional color there would be helpful?
Yeah, no it’s actually – so it’s our engine and technology architecture for our future development is going to be public cloud based or is public cloud based, and it’s not exclusively for international expansion, although that’s certainly one benefit. It’s more about acceleration and leveraging the massive amount of services that are available in the public cloud today.
You know five years ago if you were to build a SaaS service, you know you would have to deploy a bunch of – it was not necessarily clean cut case to go public cloud, because you could leverage open source in your own data center and potentially get better economics. Now that’s really increasingly not the case as Google and Amazon and Microsoft have flushed out their past layers and so that’s providing us with leverage on our R&D. It’s all about leverage really.
We talked about increasing the spend in R&D, but all of the new capabilities that we are driving, we’re really driving toward public cloud. So our AI offer we talked about earlier will be launched on public cloud, and many of the new offers that we are bringing to market will be public cloud sort of hosted.
Now, we continue to leverage our own cloud infrastructure that we host in our own data centers and colors around the world, and there is some benefit there around leveraging the investment we’ve made as well as the network that we’ve built up and so on, but our future development and platform is really public cloud oriented.
Yeah, okay. And then a follow-up, as you get further into these pilots with AI and the Agent Assist Technologies, you know how are you thinking about price exploration? You know have you figured out what customers may be willing to pay, and any color you could share with us there?
Too soon to tell. We’ll keep you posted though on pricing.
Okay, very good. Thanks guys. A nice quarter.
Thanks.
We’ll take our next question from Brent Bracelin with KeyBanc Capital Markets. Please go ahead.
Hey Brent, are you there?
Caller, please check your mute function.
With no response we’ll move to our next caller, Jonathan Kees with Summit Insights Group. Please go ahead.
Great! I’m off mute and I want to congratulate – add my kudos and congratulations for the quarter and to Barry. I have a couple of topics I would like to ask about, this should go pretty quickly.
One, regarding the Press Release and also the commentary during the call about the partnership with Microsoft and the go-to-market and product collaboration, just curious, does this mean that they are going to be selling your product to their customers or is it still going be mainly Five9. And how much is - taking a step back, how much of a needle mover is that, first off?
Yeah, great question Jonathan, this is Dan. It’s a little premature to know the impact of the needle if you will, if it’s going to move the needle and how much, but it is a two-way partnership. They will be partnering very closely with us and helping introduce us into their partner and their go-to-market channels to be able to provide Five9 as a contact center solution to go on top of the team’s products that those channels already sell.
So one of the dilemmas is their channels are out selling Microsoft teams, it’s without contact center, it doesn’t have contact centers. That hinders your ability to get into certain enterprises that do want to do a full reset, as well as going into their existing customer base that uses teams and being able to provide contact center. So we see them bringing us more incremental than the other way around. And then, the other question?
Yeah, it sounds like a lot of great potential there. The other thing I want to ask about is, regarding the new hire from Facebook, I guess Rowan, you have pretty fairly predictable in most of our hiring executives, seasoned executives with specific expertise to come over to Five9 and work on that, continue that expertise work.
Just curious, this senior hire that you brought in, has replaced an existing exec you have in product management, which is a product management and development in contact center. This person who is coming has messaging and e-commerce background.
Rowan just curious if you can share some light in terms of your product development roadmap that’s beyond AI and AWS and you know bringing in for these features, you’ve talked about that acknowledging it, so just any new stuff there. Thank you.
I hope you’re not tired, because I’m going to keep going. So look, Anand worked at Facebook on the Messenger for business platform, and the Messenger for business platform was really targeted at businesses that wanted to engage with their customers through the Facebook Messenger platform, and that’s obviously a huge drop for businesses and so many, many large businesses in the U.S. were engaging with Facebook on that front and Anand was at the front end of that.
So, you know I’ll speak for Anand here, but the idea here is that customer interactions are exploding across all of the new channels. That’s what’s driving the CX really up to the top of the priority stack as Morgan Stanley reported recently that customer interactions are on the rise. So, Gartner says they’re going to go up 3.5x in the next four years over a five-year period that ends in 2022.
Customers want to incorporate those new channels into their contact centers and we felt that bringing Anand in gave us an incredible perspective, because he was at the vanguard of messaging for business in Facebook, and so he’s got a powerful vision of the contact center, given his time at Facebook, and he had a chance to interact with a lot of enterprise contact centers and ISVs who are building technology in that space.
And so when Anand and I first met, he really explained his vision and around the enterprise contact center business as a huge area of future growth and technology innovation, that’s what he was seeing from his lens over there. And from our perspective, we got to have someone who reflected the next generation of preferences of users in terms of how they want to call in and how they want to connect or get help through messaging and so forth and so that really helps us paint a vision.
I think Anand is going to help us paint a vision for the future, and take us into the future of the contact center, so very, very excited about him joining.
It sounds like he can really help out. Great, thank you so much. Good luck, guys.
Thanks Jonathan.
Thank you.
And there are no further questions at this time. I’d like to turn the call back over to management for any additional or closing remarks.
Thanks operator. So in closing, I’m pleased with our strong first half performance. We are making excellent progress on our strategic priorities, led by our increased investments in product innovation and go to market, and we have a fantastic team in place. So there’s tremendous opportunity here for Five9 and we look forward to sharing our ongoing progress at our upcoming Analyst Day in New York on November 12th, so please join us there.
With that, we’d like to thank everyone and wish you a good day. Thank you, operator.
This does conclude today’s conference. Thank you for your participation. You may now disconnect.