Five9 (NASDAQ:FIVN) Q1 2020 Earnings Call

0:00 Please stand by. Good day, and welcome to the Five Nines 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 Lockinen. Please go ahead, ma'am. Thank you for joining us today on today's conference call. Our Rowan Chollop CEO, Dan Barklin, and Barry Zorenstein, 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 Security Litigation Reform Act of 1995.

0:52 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 Five-Nine'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 Five-Nine'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.

1:52 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.

2:43 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.

3:35 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 a hitch. With Five9, the agent only needs a computer, a headset, and an internet connection. Customers now recognize the critical nature of business continuity plans for their contact centers, and there's dramatically increased appreciation for the fact that cloud solutions can address these needs far better than on-premise solutions. We believe that through this experience, cloud adoption will accelerate as companies seriously consider shifting to a more flexible model, allowing agents to work from home, realizing benefits such as providing agents with more flexibility and better quality of life, which in turn improves customer experience, expanded coverage with remote agents across different time zones and meaningful real estate cost savings from reduction of office space.

4:48 For enterprise customers, sales and implementations are continuing despite COVID-19. Almost overnight, meeting on video with tools like Zoom is now the expected way to interact, build relationships, and conduct business with customers of all sizes. With respect to enterprise implementations, our native cloud platform allows us to complete all work remotely. Now, while on the subject of implementations, I'm particularly pleased with our FastTrack program which was launched in April in response to COVID-19 demand. This program enables accelerated onboarding with a 48-hour turnaround. Although in some cases, we've gotten emergency response hotlines running in as little as three hours.

5:33 The FastTrack program also features affordable monthly pricing and flexible contracts to accommodate the current uncertain business conditions. I'd like to turn now to expense control. In January and February, as business was strong and above plan, we stepped up our hiring in some areas, most notably in sales. However, as it became evident in March how serious the situation was becoming, we stopped all travel and postponed events. In addition, we slowed hiring during the course of the current quarter and will continue to do so based upon our tried and true, disciplined approach of managing expenses. which is to have evidence of revenue increases before increasing fixed costs.

6:21 That said, we want to emerge from this crisis with our leadership position further enhanced, and so we've made and are making incremental investments in key strategic areas, most notably channel, strengthening our WFO capability, and expanding into the public cloud. Adan and Barry will be providing additional comments on the effects of COVID-19 in a few moments. So let me turn now to sharing progress on some of our key initiatives. As you know, we've been intent on significantly expanding our channel presence. Our new leadership team has decades of experience and deep relationships with channel partners domestically and internationally. We've also made the associated investments in areas such as marketing, training and systems for channel expansion and enablement. Now the timing here was good as we've been seeing channel interest in CCaaS dramatically increase as the understanding of the importance of having a cloud offering has really sunk in.

7:24 Let me illustrate the progress we're making with some data points. First, we did more business with global SIs in Q1 than in all of 2019 combined. Second, over the past two years, Our channel business through master agents and resellers has more than doubled. So far this year, we have trained more than 2,000 people from our channel partners as compared to just a few hundred a year ago. So as you can see, we are making concrete progress on this channel investment. And that progress is best demonstrated by a brand new strategic partnership we are sharing today. I am thrilled to announce that we have entered into an exclusive agreement with AT&T Business in which the Five9 platform will underpin its new AT&T Cloud Contact Center.

8:18 The AT&T Cloud Contact Center launched today and we are committed to help AT&T Business customers rapidly and cost-effectively transform their customer experience through a superior omni-channel solution. You will have seen our joint press release with Zoom issued a short while ago, announcing the launch of an agent expert consultation experience. This solution seamlessly enables contact center agents to identify Zoom users who are subject matter experts and engage with them one-on-one or connect them to a customer. As a result, agents are equipped to answer questions more quickly and accurately with the goal of resolving customer issues the first time every time. We would also like to mention that Eric Yuan, CEO and founder of Zoom, and myself will be hosting a webinar on Tuesday, May 12th at 11 o'clock a.m.

9:10 Pacific Standard Time where you can learn our thoughts on how COVID-19 will change the future of our work environment and accelerate the adoption of cloud communications. I'm incredibly proud of the progress and momentum with our partnership organization and the world-class companies like AT&T and Zoom and more who have chosen Five9. Before sharing my final takeaways, I'd like to return to where I opened and talk about our team. I couldn't be prouder of what we've accomplished. Here are two examples out of many of how our team has stepped up. As you know, reliability is critical in a contact center. Your platform can have all the features in the world, but if the system is down, none of that matters. It's so important that reliability is quite literally the name of our company, Five9. Delivering a service with that kind of uptime is no small feat, and it's something that makes a huge difference to our customers.

10:10 I'm pleased to report that in Q1, we achieved the highest uptime in the history of the company, despite transitioning to work from home and onboarding record numbers of customers and agents. And for all those customers we onboarded, Our PS and CS teams continue to receive unparalleled net promoter scores, reflecting the reliability, attention, professionalism, and dedication these teams have delivered, no matter the external conditions. Now, while on the subject of our team, I want to mention that we're paying a COVID-19 relief bonus totaling $1.8 million to employees at the senior director level and below. I feel this is entirely warranted Given the dedication and support in these very trying personal times for all.

11:00 I'll leave you now with these final takeaways. As I mentioned before, we are maintaining a vigilant focus on balanced growth and continuing our disciplined approach of managing expenses. We're proceeding with the utmost prudence until we have a better sense of the puts and takes affecting our business. Remember that we operate in a duopoly, in a huge market at the beginning of a transition to cloud. This transition of legacy on-premises systems to the cloud only stands to accelerate given the crucial need for business continuity and the benefits associated with agents working from home. While Five9 is not immune to macroeconomic impacts, the contact center is mission critical to business operations and customer retention. which gives an advantage in any environment and especially one in which more and more interactions are done online rather than in person.

12:00 At Five9 we've attracted some of the best talent in the industry who are aligned on the values and the vision of our company. We've built a world-class management team that has managed through downturns before and has demonstrated a long-term track record of value creation. With our teams and our leadership in place, I'm confident we've got the right folks to navigate 5-9 through these unprecedented times and support our long-term growth strategy. Now, I'd like to turn the call over to our president, Dan Berkland. Dan? 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 four quarters.

12:50 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 turn-ups 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.

13:42 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 5.9 which now gives them complete visibility and control while also giving them a comprehensive omni-channel solution including chat, email, and deep integration to their CRM. We anticipate this initial order to result in over 2.6 million in annual recurring revenue to Five9.

14:27 The next example is a children's hospital health system, which was using an on-premises legacy system from Cisco. They launched a digital transformation project, including a modernization of their contact centers. After evaluating various cloud contact center solutions, they chose Five9 due to our deep Salesforce integration, comprehensive WFO suite powered by Virtual Observer, as well as the ability to create custom workflows to improve communication and outreach to the parents of the children being treated. We anticipate this initial order to result in over $1 million in annual recurring revenue to Five9. Another key win for the quarter is a global imaging and electronics company. They were using Avaya nearing its end of life along with a legacy premises-based WFO solution from NICE and required a significant upgrade or replacement of both.

15:19 They looked at several cloud options, immediately eliminated two of them as they did not have the staff, budget, or luxury of time to build much of the functionality themselves. And they chose 5.9 for the full omni-channel solution, WFO suite with QM, screen recording, and speech analytics powered by Verint, and a deep integration with Oracle Sales Cloud CRM, and our ability to customize it with our world-class professional services team. We anticipate this initial order to result in over $2.6 million in annual recurring revenue to Five9. And now, as we typically do, I'll share an example of an existing customer expansion. It's a Fortune 100 healthcare provider who has been a Five9 customer since 2014 for their in-home care and telemedicine divisions.

16:08 They launched a project to modernize three additional business units. They chose Five9 not only for the flexibility and innovation they could achieve with our solutions, including chat, SMS, and Salesforce integration, but also due to the high-tech services model and experience they had with Five9 in their other business units. We anticipate this add-on order to increase their annual spend with Five9 from approximately $1 million to $1.8 million. As you can see, we continue to win and successfully execute on delivering upmarket for larger, more complex, and more demanding enterprises. This is a testament to our product and engineering teams, as well as our customer first culture from our go-to-market teams, who are always looking to provide services and programs to help our clients deliver great customer experiences.

16:56 With that, I'll hand it over to you, Barry. Thank you, Dan. Before going into specifics, A reminder that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliations 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 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%.

17:50 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 a 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.

18:45 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 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 was 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 are substantial NOLs and are low DSOs.

19:34 Now to guidance. Rather than reading you the guidance numbers in the press release as I normally do, I will instead explain how we arrived at our guidance. Essentially, we have two guidance environments. The first is the current quarter, which is partially elapsed and is taking place in a well-understood macroeconomic environment. The other is, of course, the second half. In coming up with the second half guidance, we had to be cautious, not because of any inherent weakness in our business, but because of the extreme uncertainty about the second half macroeconomic conditions. These uncertainties are only partially mitigated by the following four advantages we enjoy in terms of predictability and visibility, namely that Almost all of our revenue is recurring.

20:30 Secondly, almost all of the recurring revenue in the near term is from existing customers. Thirdly, we have high visibility into these existing customers through our direct relationships. And finally, we have minimal customer concentration. With this background, I will now turn specifically to second quarter revenue guidance. To prepare the revenue guidance for this quarter, we did the following. First, we spoke directly with customers that account for over 90% of our recurring revenue and determined their specific near-term expansion and contraction plans. Additionally, to date, we have agreed to extend payment terms for subscription revenues totaling $2.2 million for 51 customers.

21:17 And based upon current trends and ongoing discussions with customers, we estimate that payment extensions will increase to approximately $3 million in total by June 30th. Of these payment extensions, we are assuming that customers owing half the total will not be able to meet their revised terms, and therefore, we will need to reserve $1.5 million against second quarter revenue. Based upon our analysis and considering that the second quarter is seasonally our most challenging quarter, We are guiding revenue to come in at $91 million at the midpoint. This represents a 4% sequential decline and 18% year-over-year growth, closely following the pattern we have established over the last several years.

22:11 Turning now to the second quarter bottom line guidance, we are guiding to a midpoint gap net loss of $16.2 million and a non-gap net income of $10.3 million. I would like to remind you that for each of the last five years, we have guided to a sequential decline in second quarter gap and non-gap net income. This reflects that the second quarter is, as I mentioned, our seasonally toughest quarter. This year, we are guiding to a lower sequential decline than we would have normally guided, despite the $1.5 million reserve I mentioned a few moments ago. This is primarily due to COVID-driven net expense savings mostly from T&E and events.

22:57 Please refer to our gap to non-gap net income reconciliation for the details of the items making up the difference. Turning now to the second half. For this projection, we assumed an L-shaped recovery and took the following steps. First, we again projected expansions and contractions. However, customer input for the second half was of limited use since our customers themselves are unsure of the second half seasonality and the COVID impacts. So instead, we went top-down, customer by customer, for all of our larger customers and made projections, taking into account the business sector they operate in and a continuation of the historical seasonal uptick that takes place in the second half.

23:47 Additionally, we are assuming that our customers under financial duress who are requesting payment extensions in the current quarter will not snap back, which will lower the second half revenue by an additional $3 million. On top of the $1.5 million we are forecasting to reserve in the second quarter. Also, we have assumed that we would have incremental requests for concessions of various forms totaling $1 million in the second half, bringing the total revenue reduction estimate for the second half to $4 million, and to $5.5 million for the last three quarters. On the new logo side, Dan and the team scrubbed the forecast especially hard, taking into account factors such as customer distraction, budget constraints and project delays, largely offset by acceleration in work-from-home scenarios.

24:41 Net-net, as Dan mentioned earlier, pipeline has strengthened and is at another all-time high. We estimated only a small positive impact from the new logos to our second half revenue given implementation and ramp cycles. As a result of this data, we believe it is prudent for now to keep our annual 2020 revenue guidance at $382 million, or 16% year-over-year midpoint growth, the same level as our prior guidance. With respect to net income, we took the following steps. We reduced our bottom line by $5.5 million for subscription revenue that we estimate will be lost from customers unable to honor their payment plans or who obtain other concessions.

25:30 Second, we further reduced bottom line by $3 million for the key strategic investments Rowan talked about earlier that we believe will position us to emerge even stronger from this crisis. Interest income is projected to decline by $1.7 million for the next three quarters due to recent rate reductions. Lastly, we will foot these by $1.9 million from expense savings and by flowing through the $1.1 million non-GAAP net income beat in Q1 to the annual guidance. In summary, the net reductions above for the last three quarters total $7.2 million against our prior guidance. Taking into account this reduction and various other items detailed in our gap to non-gap reconciliation, we're guiding to a 2020 midpoint gap net loss and a non-gap net income of $43.9 million and $49.8 million, respectively.

26:34 A concluding comment on our guidance. Those of you who have been following 5.9 for some time know full well that we've always been prudent with our guidance, primarily to allow for the difficult to forecast second half seasonality. To the best of our ability, we have firmly maintained this prudent approach when developing the current guidance, especially given now that there's a huge added uncertainty surrounding the second half macroeconomic environment. Finally, here are the customer estimates for modeling purposes. For calculating EPS, We expect our diluted shares to be 67.4 million and our basic shares to be 62.5 million for the second quarter of 2020 and 67.5 million and 62.9 million respectively for the full year 2020.

27:26 We expect our taxes, which relate mainly to foreign subsidiaries, to be approximately $90,000 for the second quarter of 2020 and $365,000 for the full year 2020. Our capital expenditures for the second quarter of 2020 are expected to total approximately $8 to $9 million, somewhat higher than normal, as it includes spending for our public cloud infrastructure. For the full year 2020, we expect capital expenditures to be between $22 and $25 million, lower than our prior guidance of $30 to $33 million, as our San Ramon headquarters build-out is more likely to take place at the beginning of next year. In conclusion, We remain prudent and vigilant as we navigate through these uncertain times. As Rowan mentioned, we are laser focused on continuing our tried and true disciplined approach of managing expenses, which is to have evidence of revenue increases before increasing fixed costs. At the same time, we will continue investing in key strategic priorities to emerge from this crisis even stronger.

28:34 Operator, please go ahead. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question. Again, that is star 1 to ask a question. We'll take our first question from Sterling Audie with JP Morgan. Yeah, thanks. Hi, guys. Here's our hopes for everyone staying healthy through this quarantine situation. In the surge in enterprise business that you talked about, can you give us a sense what portion of that perhaps could be temporary?

29:20 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? Thanks, Erling. I'll turn to Dan for that one. Yeah, hey, certainly. Thanks, and that's a great question. You know, 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 two to three month type of cycle that we expect them to stay online. And again, that was only a handful of opportunities.

30:21 So Q1 was very, very strong as we mentioned from the bookings perspective and we executed very well through the 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. Got it. Thank you. Thanks, Darlene. Our next question comes from Terry Tillman with SunTrust Robinson Humphrey. Yeah, thanks for taking my question and I 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.

31:06 But with AT&T, maybe just the background on do they have a contact center strategy in the past with their customers? 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 one 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 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, you know, 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.

32:12 So it's a huge, huge opportunity. AT&T is absolutely one of the market leaders here. They also have a UCAS offer that's powered by RingCentral. And so, you know, that will be sitting right alongside that as the CCAS offer from AT&T. So very exciting for 5.9. Thanks, Terry. And we'll take our next question from Maida Marshall with Morgan Stanley. Great. Thanks. Just a couple 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 sales cycles post-COVID? Do you see them shortening, that people are more aware, or too early to tell? Thanks.

33:11 Barry, you want to go to the first part? Sure. Could you repeat that first part of the question? I didn't hear it because I'm on a cell phone. So just on usage as a percentage of revenue and whether there was any spike there that raised your mind a little. Perfect. No, 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 they only speak so many hours a day and so it stays reasonably constant.

34:02 And Rowan? And then Mita. Yeah, Mita, I'll answer the first one. Thank you so much for having me. you know customers are still operating especially in the enterprise you know we've seen and frankly even in our in our commercial segment businesses are continuing to do business with us and to sign big deals and that happened you know 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.

35:09 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 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're giving you the guidance there. For the back half, we're being prudent in the guidance, and we're not anticipating specifically cell cycles lengthening particularly.

35:54 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. 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. Got it, thanks. We'll take our next question from David Hines with Canaccord. Hey, thanks guys. Maybe dig in on the sales motion a bit and maybe this is for Dan. Dan, how would you characterize the mix Thank you very much. talked about some industries that are vulnerable or that are being impacted negatively from the COVID crisis, you know, along the lines of travel, hospitality, retail.

37:03 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, you know, natures like healthcare, 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, you know, 50% of our business comes from the three top industries that I mentioned, financials, healthcare, and business services.

37:56 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 the... The mix there, you know, net new. We continue to, as Roman just mentioned a few moments ago, we continue to execute well. Surprisingly, our SMB, our commercial business, is thriving and booking new business as well as install-based business through this. And that was actually a bit of a surprise to me as we entered into the lockdown.

38:51 I figured it would be much more difficult for us to bring on new customers and we've proven otherwise in that segment. So things look solid. I mean, if you look across our go-to-market strategic initiatives, we are in three areas. If you look at what we've done there, we've broken out our enterprise group into segments within the enterprise team. Our strategic team is executing extremely well and continues to exceed expectations. We mentioned the pipeline being double what it was a year ago at this time. Our commercial leadership change that we made last year has proven to really take hold and we're exceeding expectations there as well. And then really our channels and the partnerships is probably the one factor that's hitting on also under some of the new partnerships that were mentioned earlier.

39:39 and then just the pipeline that they're bringing to us both in those new channel partners as well as the global SIs doing more in Q1 than they had done the entire year of 2019 and that momentum is continuing. So all goodness and hitting on all things from a go-to-market perspective. 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 timeline or expectations for a second half rollout of Your AI agent assist effort. Yeah, one of the things that we've been very focused on through this COVID initiative has been, or through this COVID crisis, has been really focused 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 plates just completely overloaded with urgently getting agents moved to home.

40:35 So we haven't, I think customers are not, that's not, are 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 five 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 talked about, and those are entering the market, and we've got the five 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.

41:20 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 sidekick technology, our AI technology. So, yeah, I think it's there but not a huge focus, I'd say, for customers during this crisis. Yep, of course. Makes perfect sense. Thank you, guys. Thanks, David. Thanks. We'll take our next question from Remo Lenschau with Barclays. Hey, thanks for taking my question. I hope you guys are 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.

42:14 like you know like that really triggered that where we've been talking for low level of adoption for cloud for a long time but the now you know like in theory everyone should see like look you know you should be in the cloud what are you hearing in terms of like you know you know what is strategic versus where it's tactical and what do you see in terms of enterprises willingness to go higher up in terms of seat count and to be comfortable to run in the cloud now? Thanks, Remo. 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, you know, 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, sorry, can you go back to the first part of your question?

43:08 I was just seeing in terms of if you talk with clients at the moment, how much of the current discussion is tactical versus strategic? Are we already in that strategic mode or are we still tactical? I think, look, it's more strategic. I think there seems to me to be more of a recognition and especially as a result of this event that, okay, cloud was an 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 two years of digital transformation happen virtually overnight. And I've seen other IT sort of leaders making the same claim.

43:57 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, is double this with 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.

44:56 And, you know, knock on wood, hopefully we'll start to see even more acceleration of that penetration happening in cloud contact centers. Perfect. Thank you. Our next question comes from Matt Van Ville with BTIG. Hi, guys. Thanks for taking my question. 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. I'm 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 months and the value that they find in investing in your platform.

45:52 Yeah, hey 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 up market 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 markets. and 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 doubled down and worked with EY, Slalom, Accenture and others and did the same thing. And those relationships take time to develop. They got to build a practice and really hone their skills to be able to go to market and help their clients. And we've helped invest in those relationships.

46:41 And so That Q1 performance that we had not seen, you know, 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. You know, it had been primarily Deloitte prior to a few months ago. And now it's been all, you know, five or six 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 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.

47:32 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 larger enterprises. So all good on that front. All right. Thank you. Hope everyone stays healthy and safe. Thank you. Our next question comes from Alex Kurtz with KeyBake Capital Markets. Yeah. Thanks for taking the question and 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, you know, 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, you know, environment that we're in, this surge in need for additional customer service resources would have created some uptick in seats with some of your larger customers.

48:38 and maybe you can help kind of better, you know, frame that out for us, right? Because I think there may be a view that, you know, now that everyone's 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, you know, One was the head one, maybe, and one was the tail one is sort of how it played out in the remaining 2020 guidance. Sure. So we definitely are seeing an uptick from, you know, the work from home and the awareness of cloud as a sort of a great option for that. And I feel, and this is anecdotal, but, you know, we're seeing, as Dan mentioned, you know, quite a bit of strength in our commercial segments.

49:30 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 healthcare and in parts of the financial services space, we've seen 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 fundamentally a different way with contact center agents. So we definitely are seeing that.

50:15 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, you know, not getting ahead of our skis on that.

51:05 And just that's what we've always done. We've always been prudent there. As we get more visibility into it, you know, 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 Ree with Craig Hallam. Great, thanks. A couple from you 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 a work-from-home model, I guess just two questions, using a customer like that as an example, do you have any sense of 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?

52:07 I mean, you've been displacing premise for a while, but what does that ultimate discussion with that customer trying to get home from a legacy premise solution look like from your vantage point? Yeah, 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 Thank you for joining us. Thank you for joining us today.

53:25 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 telephones. 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 into your network. Let's just say it's not easy to make that happen for at-home agents. Now, that doesn't mean it's impossible, it's just not easy. So I think if you were just in a position as an on-prem customer and you said, the only thing I need to do is move my agents home, that wouldn't necessarily be enough to say, okay, fine, I'm going to throw out this whole on-prem thing and just go with the cloud. However, if you are already considering the cloud or if you talk to anyone else in the industry about how easy it is to make this transition happen, you would pretty quickly conclude, oh gosh, it's way easier to do if I move to the cloud because then all that stuff gets handled by the cloud vendor and the security is built in and the ease of connection is all handled and all that kind of stuff. And so we've just done a great job.

54:40 Now, for example, we saw customers in our pipeline who were already considering cloud who when they had to stand up response hotlines, for example, for COVID, decided to go with us. So they short-circuited the process and they accelerated the deals and set up, you know, dozens or hundreds of agents before sort of signing the bigger contract with us. We have other large enterprises who we've won, you know, parts of the business. And, you know, today we, this morning, Dan and I were on a call with one of those companies or our sales team, and they had basically said, you know, part of the company asked the other part, this large enterprise who were already using Five9, hey, what's that experience been like getting your agents set up to work from home. And the answer was, well, the agents went home and they logged in and that was it.

55:29 It was like no complexity at all. So I think that's a factor. Now, in terms of the percentage of agents that might stay working from home, that is a very good question. Frankly, I believe that's going to be a new trend. I think that this isn't going to go away. One of our largest customers is actually a gig economy contact center BPO called NextRep. They have thousands of agents working from home. They get flexible hours. They can work, you know, they have the ability to schedule and pick blocks of time when they're going to actually log in and take calls, and they can be assigned to a given customer. So I think that work-from-home agents, not only, I think that that's going to, I think a percentage of them are going to stay home. I think it's better, and I think, frankly, when you look at the real estate that typically exists for contact center agents, they tend to be very large rooms with, you and I just don't see that being the way forward, at least not for the next couple of years until we have a vaccine. And so therefore I think this is gonna be here to stay and I think it's gonna make a change.

56:33 It's gonna change the way that people think about how to build a contact center. And frankly, I think there are so many benefits of work from home that those are gonna be hard to ignore and it's gonna be therefore a trend and that's gonna be a further driver of cloud adoption. So it's a great question. I think it's a big part of the backing of our strategy that says we're on the right path here. Yeah, great. Glad everybody's doing well. Thanks for taking my questions. Thanks, guys. Our next question comes from Scott Burr with Needham. Hi, everyone. Congrats on a good quarter, and thanks for taking my question. I guess I wanted to focus on the incremental investments that Rowan called out, and Barry, I think you said was Thank you, Scott.

57:50 The vast majority of that investment was actually made in Q1, in 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, you know, Dan talked about the three pillars of that transformation he's been making. So on the enterprise side, you know, bringing in new enterprise sales reps. So the vast majority of the hiring was happening as we saw the momentum in Q1. And for a bunch of those hires, we actually had the start date set to April 1st. So the vast majority of the 3 million has already happened. As we saw the COVID pandemic unfold, we dramatically ratcheted back.

58:38 And so we're not in a place right now where we're sort of continuing to open tons of new racks and do all kinds of hiring. It's slowed to a trickle since this thing unfolded, but we will see the full year. Essentially, 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. Thank you. Thanks, Scott. We'll take our next question. We'll take our next question from Will Power with Baird. Okay, great. Thanks. Yeah, I'm going to actually circle back on AT&T. It seems like it could be a really significant opportunity over time.

59:26 I recognize it'll take some time to ramp up. I know this might in some respects be a better question 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, won the deal for you, so to speak, on that front, A? And then, B, how do we get a sense and confidence of how broadly this will be pushed within AT&T's different units across S&B, Enterprise, et cetera? Thanks. Yeah, I think you're absolutely right. It's a significant opportunity for us, and it's a huge validation of our technology and innovation.

1:00:15 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 in Dan's org. 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 was a big part of it. In addition to having, you know, what I believe is the best technology in the marketplace. It's not just about that, it's ability to execute. And frankly, Dan's 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.

1:01:37 So thanks, Will, for the question. Thanks. 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 impact 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.

1:02:45 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.