Five9 (NASDAQ:FIVN) Q2 2020 Earnings Call

0:00 Thank you for joining us. On today's call are Rowan Trollope, CEO, Dan Berkman, President, and Barry Zornstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, industry trends, company initiatives, and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions, should not be unduly relied upon by investors, actual events or results may differ materially, and the company undertakes no obligation to update the information in such statements.

0:52 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 COVID-19 pandemic. The 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 as to why we use non-GAAP financial measures and information regarding the reconciliation of our non-GAAP to 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 on Five9's website at investors.five9.com.

1:43 and now I'd like to turn the call over to Five9 CEO, Rowan Trollope. Thank you, Lisa, and thanks everyone for joining our call this afternoon. I couldn't be happier with our second quarter results with revenue at $99.8 million accelerating to 29% year-over-year growth and 5% sequential growth. Both year-over-year growth and sequential growth are Q2 records for Five9. Enterprise subscription revenue grew 33% on an LTM basis. On the bottom line, adjusted EBITDA margin was 18.3%, one of our strongest Q2 showings. I also want to highlight that we are experiencing booking strength on all fronts for both commercial and enterprise and for both new logos and install base.

2:29 With Q2 being our most challenging seasonal quarter and our teams contending with the COVID disruptions, these are truly exceptional results. I'll go into more detail shortly, but there are four factors driving our performance. First, there are two trends that have been building for some time. The shift from on-premises to cloud and the importance of digital transformation, both of which COVID-19 is potentially accelerating. Second, our increased go-to-market investments are clearly paying dividends, most notably with systems integrators and AT&T. Third, our enhanced and expanded engineering leadership and the increased investments we've armed them with is resulting in faster and more product innovation. And finally, fourth, Transcending all of this, our team is executing like clockwork.

3:14 My thanks go out to all the Five9 partners and especially the entire Five9 team who just keep on delivering. We truly have an amazing team. Whatever happens with the macro environment, we'll strive to continue delivering this superb execution. Now I'll share some details on each of those four drivers, starting with recent market dynamics in the contact center space. As I mentioned earlier, we believe the migration of on-premises to the cloud is steady, if not accelerating, due to COVID-19. So customers now recognize the critical nature of business continuity plans for their contact centers. And there's an increased appreciation for the fact that cloud solutions can address these needs far better than on-premises solutions. In addition, in the current environment, customer service and customer retention have become even more critical. Contact center engagements are moving to the forefront of customer experience. COVID-19 has effectively converted jobs from brick and mortar retail sales and service people to contact center agents, making contact centers the new front door for many businesses.

4:18 We've also heard from enterprise customers that they see this as an opportunity to disperse their agents geographically for risk management purposes and to access a wider talent pool. While we don't know the extent to which companies will shift back to the way things were, there are indications that COVID-19 has permanently changed the way that we work and that customers will continue to implement the work-from-home model to some degree. Five9 has consistently proven we deliver on this and we're well-positioned to take advantage of this trend. Next, let me provide an update on our go-to-market initiatives and highlight a key factor in our success, which is our clockwork-like execution. This execution has played a massive role in driving our strong Q2 results and pipeline.

5:03 While we still feel the effects of the pandemic on many aspects of our lives, I'm particularly proud of our management team and our entire workforce for their relentless effort to maintain the high standards and reliability that Five9 is known for, even while being 100% remote. Our financial guidance and today's earnings press release, and which Barry will touch on shortly, is indicative of our business being fully operational and on track. I'm pleased with the progress we've made on each of our go-to-market initiatives, including our new enterprise coverage model and our strategic shift with commercial. But let me focus today on the partner front. Our partners have been very key to the results you see today, and our investments on that front are paying off big time. I'm happy to report that not only were bookings from global SIs more in Q2 all of 2019 combined, but also represented an all-time record as we continue to strengthen our partnerships with Deloitte, IBM, Slalom, EY, and Accenture.

6:06 This momentum validates the number of large enterprises embarking on digital transformation and cloud migration projects. In addition, our master agents and resellers continue to execute for us with an increase of 53% year-over-year in bookings, and strong pipeline growth. Now, I'd like to share some terrific news with you. I am very, very pleased to announce a strategic partnership with CDW, one of the largest technology providers in the U.S. The CDW team is really great to work with and they've got a dedicated contact center team supporting hundreds of CDW sales reps. I couldn't be happier to be increasing our investment with CDW and I look forward to working more with the team there.

6:53 Finally, I am thrilled with the progress of our AT&T partnership as our key initiatives are taking shape with sales and implementations progressing, an accelerated pipeline, training of several hundred go-to-market personnel, and the advancement of our OEM integrations and customizations. As we've stated, we look forward to this contributing nicely to our 2021 revenue and momentum. So that's go-to-market. Now let me turn to products. We've continued to make considerable progress here, which I can illustrate with a few concrete examples. First, our summer release is being rolled out right now to very positive initial feedback. This release delivers 139 new features, including over 20 features for global voice and a major up-leveling of our support for digital channels, including deep integration into an omni-channel agent console, supervisor interface, as well as CRM, workforce optimization, and reporting integrations.

7:51 This allows our customers to be where their customers are and choose how they would like to engage without compromising on the rigor of running a contact center. Next, we announced four new packaged workflow automation applications powered by Wendoo, our no-code platform. These packages cover operational dashboards and social listening and also emphasized proactive communication through digital channels, building on our up-leveling there. We're especially proud of the fact that our teams made them available within 90 days after our acquisition. So these apps are showing excellent early traction. Finally, on our AI initiatives, we launched Five9 Virtual Assistant, a best-in-class IBA, interactive voice assistant, that leverages conversational AI to automate manual tasks and answer common questions in the contact center.

8:44 Our virtual assistant provides a natural conversational response to customer inquiries quickly and efficiently, resolving common issues. We leveraged our Wendoo technology and strategic partnerships with Google and others to accomplish this. Additionally, we received commitments from 10 customers to implement our Agent Assist product, and about half of them are expected to go live with production traffic this month. We also have our chatbot integrations with intelligent routing and escalation to an agent now in general availability. These product launches and enhancements, our added reseller partners, and increased systems integrator alliances are helping us win more and even bigger enterprise customers.

9:30 In conclusion, as the migration of premises to cloud and digital transformation accelerates, 59 is in an extremely strong position, especially given our proven execution track record, even in these extremely challenging times. Given this favorable market trend and the proven ability to execute, we believe we can maintain 30s-level enterprise subscription growth. Now I'd like to turn the call over to our president, Dan Berkland. Dan, go ahead. Thank you, Roland. Once again, we continue to execute upmarket with larger and more complex enterprises. Our Q2 bookings set an all-time record. Our pipeline continues to grow to an all-time high and is again 2x what it was a year ago.

10:16 And our ecosystem of partners continues to influence over 60% of our deals. In terms of sales hiring, while we did slow the pace during the initial brunt of the pandemic, We've since resumed pretty aggressive hiring once it became clear that we have a special opportunity to increase our share in such a strong market. And now as we normally do, I'd like to share some examples of key wins for the quarter. The first is a Fortune 1000 company and one of the largest mortgage lenders in the U.S. They were using a cloud solution that did not deliver the functionality, compliance requirements, nor the reliability they needed. Cloud9 was able to deliver an end-to-end solution along with PCI level 1 compliance and TCPA compliance for their collections department as well as improved reliability.

11:05 While they are US-based, Five9 is providing a global solution to over 1,000 agents worldwide. They also are leveraging the Five9 WFO solution powered by Verint for quality management and workforce management. We anticipate this initial order will result in approximately $2.3 million and annual recurring revenue to Five9. And now I'm excited to share with you two of our largest deals in our history. The first is a logistics company that helps state governments and managed healthcare organizations with transportation services. They had been using an Avaya system which did not give them the automation and the operational efficiencies they desired. They looked at the leading cloud solutions and selected Five9, including our recently announced IVA solution powered by Google to fully automate the bookings process for transportation.

11:57 Also with Five9 workflow automation, we are able to trigger automatic booking confirmations, send SMS reminders, give status of rides, as well as provide follow-up surveys. Five9 WFO is also being used for workforce management, performance management and gamification. With over 2,000 concurrent agents, we anticipate this initial order to result in approximately $4.8 million in annual recurring revenue to 5.9. Just two weeks after closing that business, we won our largest ever initial order, which was a retail servicing company that works with some of the largest brands in the world. They had been using Cisco, which lacked the integration requirements to multiple CRMs, including Salesforce, Oracle, and Zendesk.

12:46 In addition to Five9, they considered Amazon and Genesis. Five9 was selected for the robust omnichannel solution, along with the full WFO suite, including speech and desktop analytics, workforce management, and performance management. They also purchased video engagement and our visual customer feedback survey application, enabling them to deliver unparalleled customer experiences. We anticipate this initial order to result in approximately $5.9 million in annual recurring revenue to Five9. And now, as we normally do, I'd like to share an example of an existing customer expanding the relationship with Five9. Due to COVID, a leading apparel brand who had been a Five9 customer for over five years needed to convert their storefront from over 400 retail outlets to one virtual online e-commerce website.

13:38 In doing so, they expanded Their contact center to accommodate the additional traffic that comes with processing online transactions and all the associated follow-up questions and inquiries. They added several hundred seats along with WFM to more than double their current spend with Five9, bringing their total anticipated spend with us to over $1.5 million. So as you can see, we continue to win and successfully execute on delivering upmarket for larger, more complex, and more demanding enterprises. It 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.

14:25 So with that, I'll hand it over to you, Barry. Thank you, Darren. Before going into specifics, a reminder that, unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconsiderations from GAAP are included in the appendix of our investor presentation on our website. We had a very strong quarter, with both top and bottom line results far exceeding our expectations. As Roland mentioned earlier, revenue grew 29% year-over-year and 5% quarter-over-quarter, both all-time highs for Q2 as a public company. The strong growth was driven primarily by enterprise business, Thank you for joining us.

15:37 In the Q2 revenue guidance that we discussed during our last earnings call, we expected higher than normal reserves due to COVID-driven payment extensions. Specifically, we forecasted receiving $3 million in requests for extension and estimated that 1.5 million, or 50%, would be reserved against revenue. We ultimately received a meaningfully larger amount of $4.7 million in payment extension requests due to COVID-related challenges. However, a large majority of the customers became current on their accounts, resulting in reserves of $800,000, which represented only 17% of their requests.

16:24 With $800,000 was a headwind of approximately one percentage point on the Q2 and many more. As you would expect, we continue to see some industries disproportionately impacted by COVID-19. For instance, customers in travel and hospitality have been reducing seats as expected, but consumer discretionary have been mixed with some customers increasing while others decreasing seats. The best performing industry continues to be communications, Education, and Technology. Our three largest industries, financial, healthcare, and business services, continue to grow steadily. Recurring revenue accounted for 92% of our revenue.

17:12 The other 8% of our revenue was comprised of professional services. LTN BBRR increased to 105% from 103% last quarter. As a reminder, Our continued success in winning larger and larger enterprise customers is expected to continue to cause fluctuations as they come onto the platform at different times and ramp at different rates. Second quarter adjusted growth margins were 65.7%, an increase of approximately 70 basis points year over year. Second quarter adjusted EBITDA was $18.3 million, representing an 18.3% margin.

17:58 This is a decrease of approximately 30 basis points year-over-year. Second quarter non-gap net income was $14.1 million, or 21 cents per diluted share. With regards to the balance sheet and cash flow highlights, VSO remained at 34 days in Q2, a performance we are very happy with given the COVID-related liquidity strains. Second quarter operating cash flow were the key to a record of $14.8 million, and we remain optimistic about our potential for continuing cash flow generation, given our long-term model, our substantial NRLs, and our low DSOs. I'd like to finish today's prepared remarks with a brief discussion of our expectation for the third quarter and full year 2020. In terms of the top line, we are guiding third quarter revenue to a midpoint of $101 million, which represents a 1% sequential increase and a 21% year-over-year growth.

19:01 For 2020, we are raising the midpoint of our annual revenue guidance from $382 million to $400 million which represents an increase in year-over-year growth rate from 16% to 22%. Both our Q3 and our annual revenue guidance closely follow the pattern that we were established over the years with prudence to allow for the difficulty forecast seasonality in the second half and the ongoing macro uncertainty. As for the bottom line, we are guiding third quarter long gap net income to a midpoint of $12.1 million, which represents a $2 million quarter-over-quarter decrease that is relatively in line with the sequential decline that we have guided to every Q3 for the past six years.

19:55 The Q2 decline is primarily driven by our back-end loaded hiring in key strategic areas, particularly in go-to-market and in R&D, as well as reduced net interest income driven by the low-rate environment and by slightly higher coupons on the newly issued convertible bonds. Despite these increased expenses, we are raising the midpoint of our annual non-debt net income guidance from $49.8 million to $53.7 million. In terms of gap net loss, we are guiding to a midpoint of $18.4 million in Q3 and $55.4 million in 2020, which affects the amortization of our newly issued convertible bonds and a partial repurchase of our existing convert, as well as a loss on extinguishment of our existing convert as detailed in our GAAP to non-GAAP reconciliation.

20:59 Finally, here are the customer estimates for modeling purposes. For calculating earnings per share, we expect our diluted shares to be 69.1 million and basic shares to be 64.9 million for the third quarter of 2020 and 68.1 and 64.2 million respectively for the full year 2020. We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $100,000 for the third quarter of 2020 and $320,000 for the full year 2020 which excludes the 2.9 million valuation allowance tax benefits associated with our virtual observer acquisition in the second quarter. Our capital expenditures for the third quarter of 2020 are expected to total approximately $5 to $6 million.

21:51 For the full year, We expect our capital expenditures to be between $23 and $25 million. In conclusion, we are very pleased with our second quarter performance. We continue to execute against the massive opportunity and remain nimble in order to navigate effectively through this uncertain macroeconomic environment while investing in key areas to capitalize on accelerating market drivers. Operator, please go ahead. Apologies, sir. I had myself on mute. And ladies and gentlemen, if you do have any questions, please signal by pressing star 1 on your telephone keypad.

22:39 And if you just make sure that your mute function is turned off to allow us to receive that signal. Once again, at this time, any questions, please press star 1. All right. Our first question is going to come from Sterling Audi with J.P. Morgan. Thanks for taking my questions. This is Jack Nader. I think our first question really is on the large deals. I think, you know, Barry, you mentioned you were expecting some potential disruption due to COVID, but signing two of the largest initial deals in the company's history certainly doesn't sound disruptive. So were these deals actually that were maybe part of the pipeline and they were pulled forward because of the conditions out there?

23:32 Yeah, this is Dan. Thanks for the question. Yeah, both of those deals were ones that we've been working for some time and that were in the pipeline already prior to COVID. Absolutely. I think just a quick follow-up. I mean, did the environment have an effect of accelerating these decisions because they just needed the deployments to get up and running faster with a cloud deployment? It's hard to say. Were they afforded more time to really focus in on this and pull the trigger, so to speak, earlier than they would have otherwise? I think one of the two certainly could have had that into effect. But again, as we've talked about with organizations this size, the rollout schedule and the ramping up of those seats is important.

24:23 a several-month or several-quarter process in and of itself. So not a whole lot of acceleration due to COVID. It's just simply the – in these cases, it was digital transformation and really driving their behavior to move to the cloud, which they had embarked on, you know, I think in one case over a year ago, and the other one was about nine months ago that they began those sales processes. Understood. Okay. Thanks for those answers. Okay. And moving on to the next question we have from Meta Marshall with Morgan Stanley. Great. Thanks and congrats, guys. Just wanted to – a couple of questions for me. Just understanding maybe on a like same store or like same reseller partner, so basically trying to get a sense of, If you saw that same acceleration in partners like Deloitte, or was the acceleration mostly due to the addition of new partners?

25:27 And then the second would be, you know, any investments that are needing to take place in professional services to kind of handle this accelerated volume of new deals? Thanks. Yeah, that's a great question, and it really Fortunately, it's been across the board. I mean, when you look at our existing partners, and I think as Rowan mentioned in the outset, the SIs once again had a quarter that was larger than the entire 2019 year combined. So you could say, yes, Deloitte, if you consider the IBM, Slalom, EY, and Accenture business newer, it's newer than Deloitte, but not brand new partners to us. But they're all contributing, which is great. They've all recognized the the impetus to move to the cloud as well as digital transformation projects and more and more enterprises are hiring them to help them with that effort.

26:18 So the SIs are certainly helping hit on all cylinders. We're seeing increased pipeline from AT&T and others and it just feels that it's happening across the board. And Mita, on your second question, this is Rowan. Yes, there are incremental investments needed in professional services and we'll be making those but not out of the Thank you. All right. Next, it looks like from Canaccord, we have David Hines. Hey, thanks, guys. Congrats on the quarter. One of the topics that comes up in some of my customer conversations is just how much of the change we're seeing in the industry is structural.

27:14 I'd be curious, from your perspective, from your customer conversations, for those that have lots of bodies in a traditional contact center, what are you hearing in terms of what the back-to-work model is going to look like in a post-COVID world? yeah we've um so I have some anecdotal on that and you know there's been others some other studies that have been done on this I think it sums up as we're not going to go back to the way things were we're not totally sure exactly how much of a shift it'll represent by customer and I think it really depends on the on the customer type so we've heard everything from one customer in Salt Lake City who just recently signed up with us about 500 agents who said that they were going to leave those agents working from home three or four days a week.

28:02 And it affected their real estate build-out of their new contact center because they said, look, if we're only going to have our agents in a couple days a week or one day a week, we can stagger them out and save on real estate costs. And we've heard everything from that, which is sort of somewhat kind of balanced in the middle, to 80% of my agents will stay working from home, and this is a brand-new model for us, and then on to some of the more conservative industries who have said, no, we'll probably see most of our agents go back to the office. So we're not sure how that's all going to play out at the end, David. But certainly we think it benefits cloud. Just any incremental work from home benefits cloud because it's just so much easier.

28:47 And we'll just have to continue to stay close to our customers and see what they need us to do. And candidly, the other thing I think I would point out is In a 100% work-from-home model, or even if you're just leveraging it in a small way, there are new capabilities needed to manage a contact center. And frankly, you have to bring in more technology to operate that way. So you'll get some savings on real estate, obviously, but you will need to deploy more technology. So we've had increased interest in our virtual observer system. That's going to be an increasingly important component of any work from home solution. We're well set up for this transition, however big it is. Dan, maybe a follow-up for you. What are you seeing in terms of sales cycles inside of the AT&T channel?

29:41 Inside the AT&T channel, you know, not that different, really. They bring us into opportunities. We anticipate that they're likely to condense slightly because they have an existing contract in place with AT&T, but they still want to go through the rigor of evaluating the solutions, understanding the capabilities, and going through their process. We do see them providing quite a bit of lead flow in the commercial space, and so naturally those are a shorter sales cycle. Nothing too significantly different, but certainly we're seeing a buildup in the pipeline, and that's extremely healthy, and we're excited about what's in front of us. Okay, congrats on the momentum. Thanks. Thank you. All right, moving on to the next question, we have Michael Turin with Wells Fargo Securities.

30:30 Hey there. Thanks. Good afternoon. Maybe with the guidance raised here to start off, maybe just remind us what you typically see in terms of the shape of second half activity and seasonality. Is there anything you've seen or observed that would lead you to believe that that shape could play out somewhat differently this year given some of the macro changes and various puts and takes and either make that seasonality more or less pronounced than in prior years? Yeah, I'll take this one if you don't mind, Rowan and Dan. So typically in the past, The H1 and H2 split had been either 48-52 or 47-53% of the total year's revenue. This year, we don't really know for sure because we have a compounded complexity of not just seasonality. We know there's going to be seasonality, but we don't know the extent, but also the macro environment.

31:31 at this stage are assuming something similar to prior years because if you look at the guidance that was given for Q3, that is very similar to the guidance we've given in prior years, 21% year-over-year growth, which is within the range of the 17, at the end of the range of 17 to 23% In fact, most of the time it's been like 21 is the highest, so very strong guidance for Q3. Q4, with being further out and being more seasonally effective than Q3, we've been a tad more cautious at this stage and have 13% year-over-year growth, which is reflective of that macro uncertainty and the seasonality uncertainty.

32:23 We're in line of what we've done over the past years, which has been 13% to 17%. Appreciate the color there. And then just a quick follow-on. The retention rate looks like it picked up nicely here, even with all the moving pieces. Any additional comments here you can add around some of the key factors driving that? Yeah. So the improvement is mainly, as you would expect, on our enterprise side. And we've seen a number of our larger customers – One or two in particular that have benefited from COVID that have ramped appreciably. And we saw that improvement in our spot rate going from Q1 to Q2. And that manifested itself in the corporate wide rate.

33:11 Great. Thank you. You're welcome. And the next question will come from Scott Berg with Needham. Hi everyone, congrats on a great quarter and thanks for taking my questions. Dan, I wanted to see if you can expand upon the CDW partnership in terms of maybe how they're selling your product. Is it a 5-9 label product or something that's white labeled like maybe through AT&T? And then as you look through these new sales channels over the next couple of years, How much of their bookings do you think, I guess what percentage of bookings do you expect these partners to contribute, say maybe three to five years down the road? I know you've given the data points on influence percentage of deals historically, but this is kind of a different angle when they're selling themselves.

34:02 Thank you. Yeah, thanks, Scott. And it definitely is a different angle because when we talk about 60%, we're talking about, you know, all of our partners, including, you know, master agent, resellers, SIs. and our CRM and other ISV partners, even our technology partners that just may be in a deal endorsing us. When it comes to CDW, very excited. They're a huge global technology provider. Now, this is not a white-label scenario like AT&T is for us. We're added to the portfolio, but we're one of their very first cloud-based solutions. So they may have a half a dozen other that they can bring to the table, but most of them are the legacy on-premises systems, and now they have a market-leading cloud solution. So we look at it very promising, and the pipeline's already building rapidly, and it's really because of two factors. One is they have hundreds of sellers out throughout the world that sell all sorts of technologies, but they have a contact center overlay team that specializes just in contact center.

35:09 We've been highly educating and training them as we signed on and as they signed us on and got them going. We've already seen our first deals and looking forward to big things ahead. Hard to say when you talk about the three to five year. Boy, I wish I had that crystal ball. But I can tell you, you know, we're extremely bullish on the market making this transition to cloud. And the fact that we're, you know, by estimates anywhere from 15%, give or take, penetrated, the opportunity is huge. So companies like TDW and AT&T that can walk us into more enterprises only bodes well for us. So we're excited about that. from a follow-up perspective, Rowan, you talked about some of the new product releases this summer, and I think we've all been waiting to understand what the impact of some of your new AI initiatives will look like.

36:05 But how do you think about pricing impact with the new product going forward? Obviously, some of the new feature functionality enhancements are just built into the general price, but new modules obviously will expand that over time. Do you think some of the new products that you've released here this year are you're looking Thank you. Thanks, Scott. We're definitely thinking about them as incremental to our existing products, so we're pricing all of these as add-ons, particularly the IVA that we just announced and launched. There is established pricing for IVAs in the market already, so I think we can probably close your got a closer approximation of that.

36:53 From an agent assist perspective, we've got our first five. We've got a handful of these customers actually in production now and taking live calls. So we're starting to see the real results and being able to measure their expansion of suits that they see the technology is valuable. So I think the jury is still out on what kind of pricing that will drive. As I think, Scott, we've talked before, there's one or two other companies out there talking about this kind of technology so there's some established market pricing that we've shared before. I'd hesitate to put any kind of number on an ASP uplift yet until we get a little more experience but now what's great is we now have products out there both sort of selling the IVA and in production systems and testing for our customers on the agent assist side so I think we'll pretty quickly start to see some results and And moving on, it looks like we have Matt Van Vliet from BTIG.

38:21 Hi, guys. Thanks for taking the question. I wanted to maybe dig in a little bit on the tempo of sales and pipeline build both through the quarter and then through July. Maybe just walk us through kind of what the initial reaction was for a lot of your customers and potential customers as they sent all their employees home in March and April and then maybe throughout the quarter had a little more clarity in terms of the longevity that this was going to persist through much of the year and how that impacted both deals getting closed, but then also pipeline build up to today. Yeah, Matt, sure. Great point. Initially, you're exactly right.

39:08 There was an immediate panic of hunker down Shutter the Business, and a lot of our customers suffered for a few weeks or at least days. And what we saw following that in April and May was a lot of the organizations really figuring out how to change their business and pivot to more of an e-commerce, web-based solution, whatever their products and services were. And I think it took time for consumers, too, to go from that immediate paralysis to, oh, okay, we've got to figure out how to continue living our lives and What we found was more of our customers then, they took one of two paths. Either they shrunk slightly and went into kind of a hold mode, or they pivoted and like I talked about in the example earlier, they had to figure out how do we go from a retail business to an online e-commerce business.

40:03 many of those that we thought would naturally suffer when you look at retail. And frankly, their overall revenues have suffered, but the percentage and the amount of business they're doing through their contact center has gone through the roof. So in many cases, we've seen many of those adding hundreds of seats and lots of traffic into the business. And as Rowan mentioned earlier, a lot of them will likely retain a portion of that yet to be seen. So as far as closing business, I had anticipated that we would get down to crunch time near the end of the quarter for large businesses and they would say, well, too much uncertainty, let's not place the order for millions of dollars of commitment. for Contact Center, and I thought we'd have some pushes, and we didn't.

40:49 Certainly, we had a couple that always pushed. They pushed, and we had a couple that accelerated, so we kind of had an offsetting factor there as far as the enterprise business. But as far as looking at moving forward, the pipeline continues to grow, as do our bookings. We haven't seen a change to that momentum, as you said, as we move into Q3. So we're very bullish. As I mentioned, we're continuing to hire against that increased demand, if you will, and against that increase in pipeline that comes from, I'll say, two different factors. The first factor being the two items that Rowan mentioned, which is the market, right? Digital transformation and movement to the cloud could accelerate the timing of companies saying, let's embark on that process.

41:43 It's no longer a question of if they're going to move to the cloud, it's a question of when. And I think more businesses now are saying, okay, let's take a look at this because of what's occurred. And because of that move to the work-from-home and the uncertainty of what percentage. The combination and the uncertainty lends itself very well for the cloud. We give the flexibility of, hey, you can work shifts that rotate. You can put some people at home, some people in the office. You can have the Small office, home office, or remote office. And the fact that companies are now recognizing they can draw on talent from not just within a 30-mile radius of a contact center, but anywhere in the world and still leverage that talent. So that's exciting for them as well.

42:31 And then as we move into Q3 and beyond, we're seeing a strong momentum. The second factor is really the partnerships. As the channels become more and more feet on the street representing 5.9, we're naturally seeing more demand and increasing pipeline, and we're staffing accordingly. Great. And then I'm curious if you saw much in terms of maybe non-traditional business that kind of the environment invoked a change for larger enterprises, whether that's Standing up something like internal employee experience, hotlines or contact centers, or even areas that have been traditionally direct selling needing to have a more formalized process.

43:17 I know you mentioned the retailer that kind of stood up a more complex contact center, but curious if you saw much in terms of something completely net new that might be a longer-term driver for you as kind of a new use case. I think I'll answer kind of the end of that first. I think the best new use case, because more companies – we've had technology that would allow work from home for more than a decade. And a lot of companies were reluctant to do that because they felt that they would lose control and visibility of those agents, right? They wanted to have them in a brick-and-mortar center where they could walk up and down the halls and, you know – Listen in on their calls, manage their behavior, really understand what was going on.

44:05 They felt a lack of control when they moved from home. And what they found was the technologies are now available to observe your agents. If you think about it today, I can not only observe and monitor the voice call of the agent, I can now monitor and record their desktop session and see what they're doing on the desktop, where their browser is going, even in between calls. and with technologies like video meetings like Zoom provides, you can now peer in and use the camera to observe the environment of where that agent is to make sure they're in an environment that's suitable for being a contact center agent. So the flexibility I think is one and That lends itself to cloud being, oh, this is an option. We want to have that flexibility.

44:51 And I think the second one is business continuity. When you really look at companies that say, we went through a very painful process to move our agents home if they were on a premises-based solution. And that's because with most of the premises-based solutions, if that's sitting within that office building that you're evacuating, Somebody's got to manage and maintain that set of servers and manage that hardware. And you've got to also figure out how to give agents from home, do they have a hard phone at home? Do they now convert to a soft phone? Do they have the right security to access that system that's sitting in the office that they used to be tethered to right within the local area network? Now they've got to be tethered to it from afar. And so there were a lot of difficulties. We have some customers that still had a combination of cloud and with Five9 and their premises-based solution.

45:42 And they struggled with, wow, it was really easy with Five9. It wasn't so easy with the other premises-based solution. So I think that's a new use case that we'll see moving forward that might accelerate things. All right, great. Thank you. Yep. Ladies and gentlemen, we would ask if you could just limit yourself to one question, and then for any follow-ups, move yourselves back into the queue. Next, from Craig Hallam, we'll hear from Jeff Henry. Thanks for taking my questions, guys. I guess just if I'm going to try to stick to one here, the work-from-home shift and certainly premise has proven vulnerable over time to the cloud for a lot of reasons. And I think, and you were just touching on it, but maybe just expand a bit further in terms of the relative impact on bookings, win rates, sales cycles.

46:37 in terms of, I guess, is premise increasingly vulnerable based on its inflexibility or inability to accommodate the work from home? How well did they move home, and have you seen that reflect in actual substantive win rates in the pipe or in the in-market? Yeah, I'll take a bit of that and let Dan comment as well if he wants to add anything, Jeff. So we have seen it... Land with customers. So you mentioned prem sort of showing the gaps and the cracks in the solution when it comes to work from home. And while it is possible to move your contact center to a work from home model, if you have a premises-based solution, it's not easy.

47:23 And that's what customers definitely saw. One example is an insurance company that we serve, and we're in one division and not in another. And the division that was sort of evaluating cloud had to go through that painful process of setting up VPNs and soft clients on their agents' desktops and so on and so forth and recognizing that that's not easy for them to do. They talked to their peers who were on the cloud and who basically said, you know, like, well, what migration to home? Like, we didn't really have to do anything. We just sent the agents home with their computers, and that was that. So I think that recognition is definitely seeping in, and it's just one more straw on the camel's back, if you will, that sort of is going to eventually break, is beginning to now break that back of that camel, of the premises camel. That's what's happening.

48:14 And this is one more of those things. Of course, there's many others. It's not just that configuration of the agents, though. I would also say, look, if you're maintaining your own infrastructure, you know, that means you've got your own data centers, you've got your own IT staff. They have to configure those. They have to scale them. You might have to be ordering more hardware, plugging it in with a company like Five9 or any other cloud solution. You don't have to worry about any of that. So it's just much less of a headache, much less management, far less to go wrong. The other thing that we noticed during COVID, and this definitely drove some of the deals, was the need for companies to scale up or down really quickly. Of course, this is another well-known benefit of cloud. We had some customers come onto the platform with tens of thousands of lines in days. That would be virtually impossible for those customers to configure an on-premises solution in that amount of time. It's not impossible.

49:11 And then also scale down. Some of our customers in affected industries, while there weren't that many of them, we were lucky in that sense, they didn't have to continue to eat the cost of that additional on-premises hardware and bandwidth and everything else. So I think that... Again, my view is it's another straw on the back, and that back is breaking now. That's how I view it. Dan, anything to add? Yeah, just one thing to add. I think a lot of companies were afraid and have now been forced to do the work from home and recognized, and the light went on for a week, we can get productivity out of work and home agents. And they just didn't want to believe before. There was a risk factor there that I think they've solved in many cases.

49:56 And it's for all the reasons we've talked about, but also what Gardner has indicated to us is you not only can draw on a broader workforce, but you can draw on a more educated workforce and a higher level of agent. And what they've indicated is oftentimes that you can pay those agents less for the convenience of allowing them to work from home and have flexible hours. So a lot of agents, if they can have flexible hours... Some of them are doing that for that reason, and it allows you to open up the workforce to special needs, people with disabilities, people that were otherwise limited or challenged by being able to go into a formal contact center every day.

50:44 And so we're seeing that open up as well, and companies are recognizing that opportunity. Helpful. Thank you. And then, ladies and gentlemen, moving on from Summit Insights Group, we have Jonathan Keyes as the next question. Great. Thanks for taking my question, and, yeah, congrats on the quarter. I guess I'll make my question to be about the regions where you've seen the openings happen. And I know you're more domestically focused, but you have Summit International. Just curious, in those areas, you know, even domestically, like, you know, in a tri-state New Jersey, New York area, where they've been opening up. Have you seen a deceleration in that demand? Have you seen it going back to more normalized levels in terms of growth versus the pre-COVID spike and everyone hunkering down saying we need to work from home and do this ASAP?

51:48 Leave it at that. No. Yeah, thanks. We really haven't seen it slow down. Pipelines and many more. I don't think as we open up that's going to really change our business. Got it. Thanks.

52:33 Yeah. And moving on, next question will come from Will Power with Baird. Hey, guys. Thanks for taking the question. This is actually Charlie Ehrlich on for Will. I wanted to ask about the AT&T partnership. It sounds like some really good early signs. Just wondering, you know, In terms of the speed with which the pipeline is built so far, how is that tracked relative to your expectations at the onset of that partnership, and has that speed of the pipeline build changed the thinking around the timing and the magnitude of any potential meaningful revenue contribution? Dan, do you want to talk about that one? Yeah, we couldn't be more excited about the momentum we're seeing with AT&T.

53:21 They're building up a pipeline and the beauty there is they've got so many sellers and teams that we've trained and they're bringing us deals of all sizes. So this should help us both with the enterprise business as well as our commercial business. And yeah, like we talked about before, that's just starting and so the pipeline's building up and we'll start to have more of a significant impact to the to the revenue numbers in 2021 rather than maybe at the very end of 2020, but most likely 2021. It's all going great and exceeding our expectations. And on the product side, we're continuing to integrate very tightly with the other offers that AT&T has. As you know, they have the RingCentral UC offering.

54:07 It's critical that that integration be done as well as the OEM portions of and our product being able to be white-labeled as an AT&T product. And that's going extremely well also. Great, thanks, and congrats on the course. Thank you. Thank you. Moving on, ladies and gentlemen, from Stevens, we have Ryan McWilliams. Great, thanks for taking the question. So from our checks, it seems like the offshore contact centers are even further behind the cloud adoption curve than U.S. contact centers. Have you seen cloud demand from these type of contact centers or from business process outsourcers change as a result of COVID? Yeah, not significantly.

54:56 I say that and then I turn to one that if you look at the one example there that we provided, they take business clients from many clients in the retail space and other space, and they had a need for flexibility in the solution. And, you know, for years the BPOs had been stuck on Avaya and Cisco and other premise solutions that just didn't give them the flexibility. And so I think there's some change there. It's just those guys can't move. They don't move very fast. So to say has there been a big shift, no. Has there been – continued interest in moving their solutions to the cloud. Absolutely.

55:42 So there's a shift there that's been happening, but I wouldn't say it's too dramatically different because of COVID. It's been going on for two, three years now. If I could just add there a little bit, Dan, if you don't mind, more boldly speaking, because we all know there's more than half of the contact center agents are bold, and we We've been making quite a considerable number of investments in order to be able, over time, to take advantage of that, including moving to the public cloud, increased hiring in Europe, more partners and the like, because this is a focus area for us. All right.

56:30 Next, we'll move on to Terry Tillman, who's with Truist. Hey guys, thanks for taking the question. This is David Ungar filling in for Terry Toman tonight. Can you guys talk a little bit about the massive market opportunity dynamics that you mentioned related to retail sales personnel increasingly being displaced by contact center agents and your strategy to win in this evolving trend? Thanks. Yeah, absolutely. I'll cover that. David, thanks for jumping on today. You know, think about what we've seen with some of our customers who are in the retail space. with the COVID transition is a big acceleration in their e-commerce business and a shift essentially of the way that customers are engaging with them from walking into a store to calling into a contact center.

57:20 Often, of course, that starts with a website e-commerce interaction, but will perhaps involve an SMS or messaging engagement with the customer, some sort of a digital channel first usually but then often you know those customers may have challenges and instead of being able to talk to a brick-and-mortar retail employee they the only option for them really is to go to the business directly and that is of course the contact center so you could see that the analogies here it's a sort of a like-for-like transition of brick-and-mortar retail sellers and brick-and-mortar retail service people into contact centers so in the retail space that's what we've been seeing and and how, you know, I don't think that the huge, and you've seen that on a macro level anyways with e-commerce sort of spiking with COVID.

58:14 And the question is, from a macro perspective, as retail, you know, as we go back to retail stores opening, are you going to see all of that e-commerce transition sort of evaporate as people go back, race back to run into retail stores? and my perspective is I don't think that's going to happen. I think certainly retail is going to continue to be massive but the shift to the convenience of online, I think once people start to see that with various brands, it can introduce permanent shifts and that's what we are seeing with our customers. So we'll have to see how that plays out as folks go back to opening their retail shops and so on. But my perspective is this is a sort of a one-way function. It's going to increase e-commerce, decrease sort of traditional brick and mortar in a variety of industries, and it won't go back.

59:04 It may go back somewhat, but it will just have essentially come down to, wow, that just accelerated the e-commerce transition, and we serve to benefit from that because in that world where you're moving into e-commerce, contact center becomes the virtual front door to your business, and hence contact center becomes much more critical as an infrastructure piece to support your customers. Thanks a lot for that great detail. Sure, thanks, David. The Fast Track program, I don't know if you guys provide any metrics as well as the business, and I'm just curious if you've invested in salespeople or reorganizing these salespeople to kind of target that opportunity.

59:50 Yeah, this is David. Yeah, I can talk to that. The fast-track program was really just a notification out to the marketplace that says, hey, if you've got an urgent need, an emergency to get contact center agents to home, we can do that, and we'll do it for you in, you know, under two days. It was just a mention to the marketplace so that they knew they could make this transition quickly because a lot of companies assume that, hey, this is a, you know, two- or three-month transition to implement a new solution, and normally it is. because we want to take time and do it right and do the collaborative planning and design. But by all means, this was one where it was just more of a notification. We had a couple, you know, under a handful of customers that took advantage of that. We had a couple of COVID hotlines for the cities of, I think, Detroit, New York, and Orlando.

1:00:40 We turned up the SBA hotline for the small business loans. But that was not a sales effort. It was just a making sure that the marketplace acknowledged and knew that we could do that if they needed us. Thank you. Ladies and gentlemen, that is all the time we have for questions today. Once again, we do thank you for participating, but at this time I'd like to turn the floor back to management for any additional or closing remarks. Well, thank you. Thanks everyone for joining the call today and with a terrific quarter for Five9, and we're clearly seeing the benefits of the execution focus we've had as a company. I'd like to thank all of our employees who have done a terrific job getting us here, and also just thank all of the partners that have really been helping to accelerate the business. It's going to be a continuing trend for us, and we thank you very much.

1:01:39 Thank you. Operator, that's it. Of course, sir. Once again, ladies and gentlemen, that does conclude our call for today. We thank you again for joining us and you may now disconnect.