Q3 2024 Earnings Summary
- Strong subscription revenue growth, with Five9 delivering 20% subscription revenue growth in Q3, up from 17% last quarter, demonstrating growth momentum in its core business that constitutes 80% of total revenue.
- Leadership in AI-powered customer experience, as Five9 is helping some of the largest brands in the world implement AI solutions, expanding their total addressable market with the AI opportunity and benefiting from AI adoption trends in CX.
- Record enterprise new logo turnups and growing backlog, indicating strong demand and future revenue growth potential, as Five9 achieved a record number of enterprise new logo turnups in Q3, while the backlog has increased.
- Cautious Q4 Guidance Due to Macro Headwinds: Management expressed concerns about consumer spending trends impacting Q4 revenue. They noted declines in credit and debit card data from major banks and are not expecting the typical seasonal uplift in revenue for the holiday season. This conservative outlook may indicate potential revenue softness ahead.
- Subscription Revenue Growth at Lower End of Target Range: The company reported a subscription revenue growth of 20% year-over-year, which is at the lower end of their long-term target range of 20% to 30%. This may suggest challenges in accelerating growth to the higher end of the range amid market competition and evolving industry dynamics.
- Short-term Gross Margin Pressure from India Data Center Investment: The recent opening of the India data center, while strategic for future growth, is currently impacting gross margins due to upfront costs with little immediate revenue contribution. Management acknowledged that this investment is a burden in the short term until utilization improves.
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Subscription Revenue Growth Outlook
Q: Will subscription revenue growth remain in the 20-30% range?
A: CEO Michael Burkland expressed excitement about Five9's long-term potential to drive subscription revenue growth in the 20% to 30% range. In Q3, they delivered 20% subscription revenue growth, up from 17% last quarter. He emphasized that subscription revenue is about 80% of their revenue mix and the best indicator of their business. Despite AI distractions, he remains very bullish on the massive TAM they are pursuing, expanded by AI opportunities. -
AI Impact on Business
Q: How is AI adoption affecting Five9 and its customers?
A: AI is front and center in customer experience today. Five9 is helping large brands AI-enable their customer experience, which is working really well. Some customers justify decisions around CCaaS using AI ROI and labor arbitrage, while others add AI to enhance existing offerings. The company sees opportunities in automation and self-service, with AI driving some of the highest ROI values. They are focusing on enabling their sales team with an AI-centric approach and adjusting implementation to deliver AI value faster. -
Macro Environment and Retail Headwinds
Q: What is the impact of macro conditions on consumer retail segments?
A: In Q3, Five9 saw a slightly better environment than expected in most verticals. For Q4, they are cautiously considering data showing year-over-year declines in consumer spending from major banks. They have prudently taken that into account in their guidance and are not planning for the typical holiday season spike. -
Competitive Landscape in AI
Q: Are point solutions and CRM vendors increasing competition in AI?
A: Five9 is competing mainly against point solutions in AI, especially within their customer base. With new customers, they compete against key CCaaS competitors. They feel strongly about their natively built AI portfolio. CRM vendors like ServiceNow and Salesforce are partners, and while they see some competition, it's primarily from point solutions. -
Acqueon Acquisition Contribution
Q: How is Acqueon contributing to revenue guidance?
A: Acqueon, acquired in August, contributed slightly less than 1% of revenue in Q3. For Q4 and into 2025, Five9 is not breaking out Acqueon's contribution separately due to co-mingled revenues from prior partnerships. The numbers are not material enough to warrant separate reporting. -
Status of Delayed Deals
Q: Have previously stalled large deals progressed?
A: Five9 had a better Q3 than Q2, even with a couple of medium-large deals pushing into Q4. The good news is those deals closed in October, fairly early in the month. They continue to execute on their core deal flow, focusing on the bread and butter of their business. -
Pricing Pressure and Competitiveness
Q: Are you facing more pricing pressure from competitors?
A: Five9 is not seeing increased pricing pressure or more competitors at the table. They have held strong on pricing, and with AI applications, they are seeing MRR per seat go up. Customers are making decisions based on roadmaps and AI leadership, not just price. -
India Data Center Impact
Q: What opportunities arise from the India data center opening?
A: Five9 has opened data centers in India to meet local presence requirements of some large customers. They aim to fill capacity with current backlog and then build go-to-market resources to accelerate further. While it's an exciting development, currently it represents a burden to bear with expenditures ahead of revenue, which will improve over time. -
Partnership with Verint and Competitors
Q: How is your partnership with Verint affected by their deal with RingCentral?
A: Five9 continues to have a strong partnership with Verint, being their number one partner and winning their Partner of the Year award again. They understand Verint partners with multiple CCaaS providers, including RingCentral. Five9 has no issues with this, seeing it as positive for the industry. They have launched cloud-to-cloud integration with Verint's cloud portfolio and are building a strong pipeline together.