Five9, Inc. (NASDAQ:FIVN) Q4 2023 Earnings Call Transcript

Five9, Inc. (NASDAQ:FIVN) Q4 2023 Earnings Call Transcript February 21, 2024

Five9, Inc. beats earnings expectations. Reported EPS is $0.61, expectations were $0.48. Five9, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for joining us today. On the call are Mike Burkland, Chairman and CEO; Dan Burkland, President, and Barry Zwarenstein, CFO. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance of the company, expected ARR from certain customers, customer growth, anticipated customer benefit, company growth, enhancements to and development of our solution, market size and trends, our expectations regarding macroeconomic conditions, company market position initiatives and expectations, technology and product initiatives, including investment in R&D and other future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are simply predictions should not be unduly relied upon by investors. Actual events or results may differ materially and the company undertakes no obligation to update the information in such statements. These statements are subject to substantial risks and uncertainties that could adversely affect Five9’s future results and cause these forward-looking statements to be inaccurate, including the impact of adverse economic conditions, including macroeconomic deterioration and uncertainty, including increased inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates, lower growth rates within our installed base of customers and the other risks discussed under the caption Risk Factors and elsewhere in Five9’s Annual and Quarterly Reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck and in the Investor Relations section on Five9’s website at investors.five9.com. Lastly, a reminder that, unless otherwise indicated, financial figures discussed are non-GAAP. And now, I’d like to turn the call over to Five9’s Chairman and CEO, Mike Burkland.

Mike Burkland: Thanks, Emily, and thanks, everyone, for joining our call this afternoon. I’m pleased to share that we finished the year with strong results. Fourth quarter revenue grew 15% year-over-year and full-year revenue grew 17%. This increase continues to be primarily driven by our Enterprise business, with LTM subscription revenue growing 25% year-over-year. Adjusted EBITDA margin for the fourth quarter was 20% of revenue, helping drive a Q4 record for operating cash flow of $37 million, or 15% of revenue. As you all know, we take a balanced approach to delivering top-line growth and bottom-line profitability. Today I’d like to start off by commenting on the market opportunity ahead for Five9. We believe the market has never been better for large enterprises to move to the cloud.

We are continuing to see strong momentum upmarket with new logos, as evidenced by our Q4 record in Enterprise bookings. In addition, our pipeline continues to grow, hitting another record high. We are seeing acceleration at the top of the funnel with Enterprise’s strategic RFPs more than doubling year-over-year, which is a strong indicator of our market being at an inflection point. This market opportunity is being driven by three key ongoing trends. First, migration to cloud contact center platforms is becoming one of the highest priorities for enterprises, especially as many on-premise solutions are being end of life. With cloud penetration at approximately 20%, we believe there is a significant runway ahead. Second, Enterprises are laser-focused on improving customer experience and cloud contact centers are at the heart of enabling these businesses to reimagine their CX.

And third, enterprises are increasingly leveraging AI to empower their businesses and cloud contact centers are becoming an imperative to deliver on their AI and automation initiatives. This market remains massive and underpenetrated and we believe this is a durable, multiyear opportunity. Now I’d like to remind you of the three main growth drivers of our business: our platform, our march up market and our international expansion. I’ll start with the platform. We continue to strengthen our AI leadership in CX by infusing AI throughout our platform. We have been leveraging the power of generative AI to further expand AI-powered solutions such as Five9 chatbots and IVA. In addition, generative AI is enhancing many other offerings in our AI and automation portfolio, including AI insights and AI summaries, which are gaining meaningful traction.

For example, year-over-year bookings growth for Agent Assist which includes AI Summaries accelerated in each of the last three quarters, culminating in a 6x increase in Q4. We believe much of this rapid growth can be attributed to the value we deliver to customers with our leading generative AI capabilities and our successful Try Before You Buy program. Our leadership in AI is also being widely recognized by the industry. We are excited to report that Five9 was named a global leader in the just released 2024 Aragon Research Globe for Conversational AI. The report provides an in-depth analysis of leading contact center vendor strategy and product strengths in conversational and generative AI. Additionally, in the most recent Baird channel survey from late December, we were named as the contact center provider with the best AI solutions.

Overall, we continue to see significant momentum in this area with AI and automation making up 17% of our total ACV new logo bookings for enterprise in Q4. Additionally, AI and automation products now make up 7% of our Enterprise subscription revenue. Next, I’d like to talk about our data strategy. Data has become more important than ever in unlocking value in CX. How much data is collected, the number of data sources, the explosion of data types, and the secure and responsible use of that data are all becoming critical buying considerations for contact center decision-makers. The benefits of having a strong data strategy are clear. More personalization to create an amazing and differentiated customer experience is just the tip of the iceberg.

Richer insights for key stakeholders in the contact center, including agents, managers and operators, make for better decisions. Leveraging data with AI drives critical improvements for self-service and up-leveling every agent to deliver the optimal customer experience. Five9 is the platform where customer experience data is created, utilized and actioned. We recognized this opportunity early on with the addition of Five9 data lake. To build upon this, we recently acquired Aceyus, a leading solution to accumulate, normalize and present rich and diverse data sources. We also integrate our data with other leading data sources in order to deliver exceptional customer experiences. We see data as the key to delivering a more personalized customer experience and this continues to be an important pillar of our platform strategy.

As you can see, we significantly strengthened our platform throughout 2023 and we are continuing to make key investments to enhance our leadership position in the market. A good example is FedRAMP, which will be a multi-year investment. However, we believe it will ultimately open up a huge market opportunity, not just at the federal level, but also with the state and local governments that we believe will help us generate a meaningful new revenue stream long term. And now I’d like to focus on our march up market and international expansion. We continue to see strong momentum which Dan will touch on in a moment. As I mentioned earlier, enterprise and strategic RFPs are continuing to increase at a significant rate, which give us confidence in our ability to continue marching up market in 2024 and beyond.

Also, I want to point to one of the key reasons we have been so successful in winning and deploying some of the largest enterprise accounts. We continue to get feedback from our customers that they chose us not only for our market -leading platform, but also because of our people. Our customer success model is a key differentiator. The vendor they choose must have the experts to ensure a smooth transition to the cloud, an improved customer experience and better business outcomes. And we have hundreds of CX experts globally that focus on transformation, migration, implementation and ongoing optimization. We also collaborate with some of the best CX partners in the world who also deliver a similar best-in-class experience. Our international expansion continues to be a growth driver.

In 2023, international revenue grew 29% year-over-year. This strong growth was driven by the ongoing investments we are making, particularly in Europe. For instance, we expanded our footprint in the dock region by turning up local data centers and scaling our strong go-to-market team in that region. Also, we continued to strengthen our Porto engineering hub, increasing our headcount there by nearly 50% last year. Our success in marching up market and expanding internationally are increasingly being driven by our ever growing network of global partners and their dedication to leading with Five9. For example, we recently announced the listing of our intelligent CX platform on Google Cloud Marketplace, which simplifies the procurement of Five9 and helps Google customers retire their GCP spend commitments.

Also, we recently launched our new and enhanced Five9 University for partners, which provides comprehensive product training and certification programs to enable these partners in sales, implementation and services. As a result, in 2023, the number of global partner sales certifications tripled year-over-year and partner implementations doubled during that same period. In addition, we had 51 partners who booked more than $1 million in ACV in 2023. Before I turn it over to Dan, I’d like to say that we remain extremely optimistic about the opportunities in this massive and underpenetrated market. We have the right platform and the right team to capitalize on this long-term and durable growth opportunity. And with that, I’ll turn it over to our president and CRO, Dan Burkland.

Dan, please go ahead.

Dan Burkland: Thanks, Mike, and good afternoon, everyone. I’m pleased to report that we had a record for enterprise bookings for any Q4 adding to our strong momentum up market as we continue to expand our go-to-market and technology partnerships. We exited the year with 183 customers that generate over $1 million in ARR to Five9, representing more than 50% of our recurring revenue. In terms of large global partnerships, BT, TELUS International, IBM and Deloitte, just to name a few, continue to invest and build global practices around customer experience and have chosen to lead with Five9. And now I’d like to share some examples of key wins for the quarter. The first example is a non-profit healthcare organization based here in the U.S. They had been using Avaya which was reaching end-of-life and lacked the innovation to deliver great customer and patient experience.

We competed with the leading CCaaS providers and were chosen as the most comprehensive end-to-end solution with the best services offerings to accomplish their goals. With Five9, they will access a complete omnichannel solution deeply integrated to both Epic and ServiceNow CRMs. They will also be using our advanced IVA for both intelligent routing and self-service. Our Agent Assist for transcription and summaries, and our workflow automation to insert a whole set of conversational data into their CRMs. We’re also providing a complete WEM suite powered by Verint including WFM, QM, speech analytics and performance management. We anticipate this initial order to result in over $3.6 million in ARR to Five9. The next example is a prominent university where we are providing contact center solutions for their education, research and healthcare facilities.

They had been using Cisco, which did not meet their digital transformation initiatives, including giving the business more control over delivering exceptional experience to their students, prospective students, healthcare patients and alumni. They evaluated all of the major CCaaS players and chose Five9 for our superior end-to-end technology solutions as well as our deep vertical expertise and strong references in education and healthcare. They will be using our proven IVA and chatbots for both education and healthcare groups. They’ll be leveraging our Agent Assist to generate transcripts and summaries with deep integration to Salesforce, Epic and ServiceNow CRMs. They’ll also be using our WEM suite powered by Verint for AQM, interaction analytics and WFM for automated scheduling and forecasting.

We anticipate this initial order to result in approximately $2 million in ARR to Five9. The third example is a healthcare services network of acute care hospitals, rehabilitation, physician groups and retail pharmacies. They have been using a variety of solutions, including Cisco and Avaya, and we’re looking for a single consolidated and innovative platform in the cloud. With Five9, they will access a full omnichannel inbound and outbound solution, including proactive outreach via digital channels for appointment reminders, prescription refills and test result notifications. Likewise, patients will be able to use our IVA for scheduling appointments, refilling prescriptions and locating a nearby specialty provider. Five9 will be deeply integrated to their Epic CRM and we also included the Five9 WEM solution including QM, WFM and interaction analytics.

Once they are migrated over to Five9, they plan to add Agent Assist for agent coaching, transcriptions and call summaries. We anticipate this initial order to result in approximately $1.6 million in ARR to Five9. And now, as I normally do, I’ll share an example of a customer who has expanded their use of Five9. This customer started with Five9 several years ago as a relatively small regional bank with about 50 seats. They grew organically to about 200 seats and then merged with another bank in 2022 where we expanded and replaced the Cisco system at the other bank. This brought their annual spend to over $1 million in ARR. Then after the full rollout in Q4 of 2023, we added the final business unit, which also added our WEM suite powered by Verint and our chatbot and IVA solutions.

This customer will now generate over $1.9 million in ARR to Five9. So as we enter 2024, we feel very strongly that our go-to-market engine is hitting on all cylinders to take advantage of the massive CX transformation underway, the accelerating migration to the cloud, and the increasing adoption of AI and automation. And with that, over to Barry for the financials. Barry?

Barry Zwarenstein: Thank you, Dan. We are pleased to report fourth quarter revenue growth of 15% year-over-year. This is despite the ongoing macro headwinds on our install base, which slowed growth in our normally seasonally strong consumer vertical. By way of illustration, a number of clients in the consumer discretionary subcategory experienced for the first time since coming onto the Five9 platform, a fourth quarter sequential recurring revenue decline. In addition, we had a tough compare internationally with a separately strong new lower speeds turn-ups in the fourth quarter of 2022. Our LTM Enterprise subscription review, which now accounts for over 65% of total revenue, grew 25% year-over-year. Our Enterprise business made up 87% of LTM revenue and our Commercial business, which represents the remaining 13%, grew again in the single digits on an LTM basis.

Also, recurring revenue accounted for 92% of our total revenue in the fourth quarter and the other 8% was comprised of professional services. Our LTM dollar base retention rate remained the same as last quarter at 110%. We expect Q1 LTM dollar base retention rate to be either flat or very slightly down, and we expect a positive inflection in the latter part of the year assuming no major changes in the economy. Longer term, we continue to expect our retention rate to trend towards the high 120s by 2027 due to a higher mix of Enterprise customers, especially larger ones which have higher retention rates. Fourth quarter adjusted gross margins were 61.3%, a decrease of approximately 100 basis points year-over-year, but a quarter-over-quarter improvement of approximately 70 basis points.

Fourth quarter adjusted EBITDA was $48.3 million, representing a 20.2% margin, a decrease of approximately 200 basis points year-over-year, but a quarter-over-quarter increase of approximately 230 basis points. Fourth quarter non-GAAP EPS was $0.61 per diluted share, a year-over-year increase of $0.07 per diluted share. Now, I would like to share our average concurrent seat count for the fourth quarter which grew 19% year-over-year to 349,675 seats. This is equivalent to approximately 525,000 seats on a named seat basis, a unit of measure that some others in the industry cite. As a reminder, we will continue to provide these metrics only on an annual basis. Finally, before turning to guidance, some balance sheet and cash flow highlights. I’m pleased to report that we achieved a Q4 record for operating cash flows of $36.5 million, driven in part by continued strength in our DSO performance, which came in at 32 days.

We have now delivered 30 consecutive quarters of positive LTM operating cash flow and we remain optimistic about our potential for continuing cash flow generation given our long-term model, our substantial NOLs and our low DSO. I’d like to finish today’s prepared remarks with the discussion of our full year 2024 and the first quarter guidance. As a reminder, for the last seven out of nine years, we’ve started with prudent revenue guidance of 16% year-over-year growth. For 2024, we are doing the same by guiding to a growth of 16% year-over-year at the midpoint, or $1.055 billion in revenue, which is in line with the high-level outlook we provided last quarter. This 16% year-over-year growth is, of course, a starting point and we will update our outlook as the year progresses.

With regards to the bottom line, we are guiding 2024 non-GAAP EPS to a midpoint of $2.16 per diluted share, same as the outlook we provided for 2024 during the last earnings call. As a reminder, we plan to continue making strategic investments in innovation and go-to-market initiatives to enhance our leading position in the market. As for the first quarter, we are guiding revenue to a midpoint of $239.5 million. This represents a relatively flat sequential change, similar to last quarter’s Q1 guide, but better than the prior historical range of 1% to 4% decline. Despite the ongoing macro headwinds, we are guiding to a better quarter-over-quarter change due to the muted seasonal uptick in the fourth quarter, which we expect to result in a less seasonal downtick in the first quarter.

As for the remainder of the year, we expect a very small sequential growth in the second quarter and larger sequential increases in the second half. As a result, we anticipate slightly more than 50% of our annual revenue being generated in the second half of 2024. We expect first quarter non-GAAP EPS to come in at $0.38 per diluted share at the midpoint, a decline of $0.23 per diluted share sequentially. I would like to point out that the first quarter non-GAAP EPS is always the weakest of the year and the $0.23 per diluted share quarter-over-quarter decrease is within our historical range of prior first quarter guidance. For the remainder year, we expect non-GAAP EPS to increase to approximately $0.43 per diluted share in the second quarter and further improve in the second half.

Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count, taxes and capital expenditures. In summary, we are pleased with our fourth quarter performance. We will continue to invest strategically throughout the year to enhance our leading position by further innovating on our platform, marching up market and expanding internationally. Operator, please go ahead.

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Q&A Session

Operator: Thank you so much, Barry. We will now move into the Q&A session. [Operator Instructions] Our first question will come from Scott Berg with Needham.

Scott Berg: Hi, everyone, thanks for taking my question here. Lots of them. Why don’t I start with the fourth quarter results? Barry, your quarterly revenue tends to have variances around seat usage and implementation timeframes, and that tends to drive your outperformance, at least from a historical basis, in any one quarter on the revenue side. Q4 this year was your weakest revenue beat that I can remember in all the years covering the company. I guess, can you help us understand what was maybe different in the operations side of the business this quarter versus other quarters that have had stronger revenue outperformance? Thank you.

Barry Zwarenstein: Yes, so it comes down to that part of our business. Approximately half that is from our install base. If there are less interactions coming into the contact center, there’s going to be less demand for agents and less demand for our services. The numbers are very clear. We — externally we provided the JPMorgan Chase debit and credit card spending data, which showed low-single digit nominal growth, which means negative transaction growth, and that was the headwind that we were facing. In addition, I’d like to point out, in terms of the magnitude of the beat, Scott, we beat by 1%, which was admittedly lower than normal. We beat by 2% a year ago. The fourth quarter is very difficult to predict. Our customers have to take into account the degree of seasonality and do it in the context of a macro environment that’s a little bit soggy And by way of the illustration, if you look at the maximum and minimum beats over the last seven years, and you skip over the two COVID years because those were extraordinary, I’m going to give you four numbers, 2, 5, 4, 9.

2, 5, 4, 9 is Q1, Q2, Q3, Q4 spread between the minimum and the maximum beat in those quarters. And clearly, the variability is higher in the fourth quarter because of those factors that I was alluding to. So that really is the explanation.

Scott Berg: Thank you.

Operator: Okay. Our next question comes from Ryan MacWilliams with Barclays.

Ryan MacWilliams: Yes, it’s good to see you. How should we think about the cadence of revenue growth throughout the year? Given the 1Q guide and the 4Q — the full-year guide, it seems like there’s solid growth embedded in the second half of 2024. Anything to call out there besides seasonality? Thanks.

Barry Zwarenstein: Yes, the basic reason over there is the fact that we’ve got good visibility on the new logo side. We’ve got this considerable backlog, and we still have three or four months or so of new enterprise orders that Dan and the team will bring in what we call go-gets that will count towards revenue in 2024. So we feel pretty comfortable that we’re taking the right stance in balancing the prudence on the new logo — on the install-base side with the visibility that we have on the net new.

Mike Burkland: And Ryan, I’ll pile on just a little bit here. Our confidence in the rest of the year is really driven by what’s in the backlog. We had a record Q4 bookings for Enterprise, and we’ve had very good quarters from a booking standpoint for the last several quarters. And it’s — that’s what gives us a lot of confidence in the back half of the year.

Dan Burkland: And since Mike is piling on, I’m going to pile in as well. And that is that if you look at the guidance we gave, and we gave pretty explicit guidance, well, explicit, obviously, for Q1, but also for Q2 and the revenue. And it doesn’t take a rocket scientist to figure out that there is an acceleration coming in the second half of the year that is embedded into our guidance with our initial 16% starting point. There is one other thing that I neglected to mention earlier on, so this is not going to count against your one question, Ryan, but it’s really for Scott. We also had a tough compare in terms of international. I — we knew that going in, but in terms of the actual performance in the quarter, we had very good seat turnouts in Q4 2023, but even better ones from the first strategic account that we ever had, which was the British insurance company, plus FedEx, excuse me, the passive delivery company delivering, going up in Europe.

Starting in 2022, very strong by the fourth quarter of 2022.

Ryan MacWilliams: Appreciate the color. Unfortunately, I don’t think I’ll ever be confused for a rocket scientist, but..

Mike Burkland: Thanks, Ryan.

Operator: Okay. Our next question comes from DJ Hynes with Canaccord.

DJHynes: Hi, guys, good to see everyone. Barry, I don’t know if I’m thinking about this correctly, but maybe you can help me. So, seat count grew 19% last year. It grew 19% this year. But Enterprise subscription growth has continued to decline, right, which tells me price per seat maybe is declining, which seems at odds with everything that’s happening with AI and attach rates. Just help me unpack the discrepancy between kind of seat count growth that’s been stable and the declines in Enterprise subscription growth.

Barry Zwarenstein: Great question, DJ, and thank you. If you do the arithmetic, you’ll see that, in fact, you’re right. If you look at the recurring revenue per seat Q4 2022 to Q4 2023, it’s down by approximately 3%. The whole reason for that or the almost exclusive reason for that is usage. We have more and more of these big clients that come onto the platform with committed contracts or brought to us by the likes of BT and AT&T with — and a good example is a healthcare company. Now our second biggest customer, they don’t use our usage. They may in the future, but currently they don’t. And that’s what caused it. The goodness that comes in from AI and automation is still there, but it’s not offsetting something as big as 15% of our current revenue.

DJHynes: So ex usage pricing per seat continues to trend up. Is that the correct way to think about it.

Barry Zwarenstein: It does. There are some other dynamics, like, Latin America is growing a little bit faster and the prices there are a little bit lower. But if you’re looking at the U.S., it is pretty much in line with how it’s been growing in the past.

DJHynes: Okay, thank you, guys.

Operator: Okay. Our next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall: Great, thanks guys. Question for me, I guess, just what do you guys see as your biggest bottleneck today? Is it getting budget authorization? Is it getting organizations to realize what approach they want to take to AI? Is it professional services? Is it just kind of overall macro environment? Like, what do you think is kind of the biggest bottleneck you guys face with customers in getting them ramped?

Dan Burkland: Gosh. I don’t think there’s any single bottleneck. I think what is important to understand is the strategic nature and the mission-critical nature of what we do to come in and really help companies transform how they’re delivering customer experience to take what they’re used to, probably having 10 very independent, I’m using an example, in some cases, 10 different contact centers with 10 different operations managers running those. Just saying, hi, we’re going to consolidate this into one virtual, and we’re going to be able to distribute work throughout all of those locations and do so in a much different fashion with a lot more technology and automation and AI that wasn’t previously available. So it’s a lot of planning.

The larger you go up the stack of larger and larger companies and large enterprises, the more difficult it is for them to organize and come to agreement on how to roll things out. So always when you go up-market, you’re going to have longer lead times and longer rollouts. We’ll move as quickly as they’re capable of moving, and we have business consulting experts that actually work with them to help kind of try to speed that up. We also talked about the Aceyus acquisition to help speed that migration up, but it is a big undertaking, and so we’re very realistic on how long it takes to bring these customers up. But I don’t think they’re not getting any longer. It’s just that as we move up-market, we have to recognize that it’s a lot more effort and work, not only on our side, but really on the customer side to get to the point where they can — to where they can launch and then continue to ramp.

Meta Marshall: Great. Thanks so much.

Mike Burkland: Yes.

Operator: Okay. Our next question comes from Jim Fish with Piper Sandler.

Jim Fish: Hi guys, thanks for the question here. And Barry, appreciate the disclosure around AI revenue, finally. I think a lot of longs were looking for that one. So, speaking of that, any sense to what — how we should think about that growth rate for the year and what that 7% revenue could be to kind of get to that 2027 goal? And Dan, for you on this topic, what’s differentiating your AI Assist product versus what competitors have out there for their kind of version of it? Thanks, guys.

Dan Burkland: Sure, I’ll talk about AI, our Agent Assist product. Three components to it, there’s the real-time coaching and delivering answers, so that they can from the data sources within that company. So they can the agent can be more proficient. The fact that answering your customer question there, see AI transcription and the AI summary of the call that gives inserted into the CRM, all part of our Agent Assist solution. If you look and you’ll see others are all talking about those same capabilities. The key there is, if you’re on our platform, you need to use our Agent Assist product. The reason is you have to have the platform listening into the conversation to perform the transcription and to perform the summary of that transcription in real-time.

And if you’re doing agent coaching, you have to take that in near real-time and feed it back to the agents. So when you say what’s the difference? There’s probably not a ton of difference in what ultimately gets delivered. We all go about it slightly different in the underlying technologies, but we’re all delivering that same capability. But you can’t take a Five9 customer, Five9 contact center and use somebody else’s Agent Assist. That won’t work.

Barry Zwarenstein: So Jim, in terms of what happens at 70%, it would be easy just to say it’s growing faster, therefore it’s going to consistently increase. It’s tempting, but I’m going to resist the temptation. And the reason I’m going to resist the temptation is the following. We’ve got a massive install base, 350,000 concurrencies and we are spring-loaded to take advantage of when this economy finally and inevitably turns around. Our retention rates have been in the mid-90s. And when those transactions increase it’ll spread across that entire install base. And we are not going to be embarrassed if that overwhelms just by the sheer magnitude of the install base. The growth that we enjoy clearly demonstratively from AI and automation.

Jim Fish: Couldn’t help but try. But thanks, guys. Appreciate it.

Dan Burkland: Thanks, Fish.

Operator: Our next question comes from Taylor McGinnis with UBS.

Taylor McGinnis: Yes, hi team, can you hear me?

Mike Burkland: Yes, we can, Taylor.

Taylor McGinnis: Okay, perfect. Hello, everyone. Thanks so much for taking the question. Maybe, Barry, can you talk a little bit about the assumptions embedded in the 1Q guide or at least the visibility you have to that outlook? So it implies some flattish sequential growth, but I think historically in 1Q you guys have done closer to mid-single digits. So have we gotten to the point where some of the softer usage activity that you’ve spoken about is no longer serving as an incremental headwind? I think you mentioned the 25% subscription growth. So could — so as these large deals ramp, could we start to see an improvement in sequential growth as we move throughout the year?

Barry Zwarenstein: I’ll take the last part first. Yes, the guidance would lead you to be pretty clear in assuming that we’re going to see growth in the second half of the year. With respect to the dynamics around Q1 where you started your question with, Taylor, here, we normally would have in the past a 1% to 4% decline. The numbers are always there. We give a guide, go down 1% to 4% and then beat it each time. Now in Q4, we had a smaller uptick, so we’re going to have a smaller downtick and we’ve kept it flat. And I really would not want to comment on, in terms of — beyond that, in terms of Q1, beyond the guide that we’re given, accepting to say that we feel comfortable with what we’re given. And we’re doing it in an environment that is pretty uncertain.

I’ll make two comments on that. The –this — external data, which is a window into our own clear data that we see from our customers on a daily basis, the JPMorgan data for Q1 is actually negative debit and credit card spending. So for sure the transactions are meaningfully negative. So we’re taking that into account. And we’ve just come off of an experience where when you look at our biggest consumer, well, amongst our biggest consumer discretionary customers, in the fourth quarter, for the first time ever, since I came onto the platform, there was a sequential decrease from Q3 to Q4. Never happened before. And so we take this into account when we’re doing our guidance.

Taylor McGinnis: Perfect. Thanks so much.

Barry Zwarenstein: Thank you.

Operator: Our next question comes from Peter Levine with Evercore ISI.

Peter Levine: Thanks, guys for taking my question. Maybe, Barry, for you, on the margin front gross margins. I know you made investments over the past year to kind of modernize your infrastructure, offloading services to partners. Then just give us an update on kind of how that’s trending. And then how should we think about gross margins going forward? I know in the year it looks like it ticked down, but what’s the expectation for gross margins?

Barry Zwarenstein: Perfect. And just by the way, I’m going to ask operator to have the next question be for somebody, for Mike or Dan. So in terms of the gross margin, there’s a number of factors moving from international GCP instances to where the margins are higher. There’s the moderation in some of the investments we’ve been making, including in professional services with Fairground, that is coming as a headwind. But overall of that, over all of that is the revenue growth rate against fixed and semifixed costs. And you see that in the fourth quarter because typically the fourth — always the fourth quarter, one exception is higher because that’s a strong quarter. So we actually, and we don’t want to sound, how shall I put it, cocky or anything, we’re actually not that disappointed with our gross margins given the overall weakness in the revenue that we have been experiencing.

So to answer a question now directly in terms of where we would expect the gross margin, we have got a number of programs internally that are going to take a while to demonstrate despite to come to fruition, but they will. It’s a major focus area. We understand the importance. We’ve got levers we can pull. And then if we get a tailwind from the revenue, then you’ll see it very sharply in the gross margin improve.

Peter Levine: Any update on partners and offloading some of those pro services?

Barry Zwarenstein: Mike?

Dan Burkland: Yes. We’ve begun enabling more and more partners to take on. Obviously, on the sales side, they have the competency now to represent us, and we have thousands of people throughout the world representing Five9. We’ve also done what’s called project pull-through, and we’ve referred to it before where we’ve identified a select few partners that are willing to invest in getting certification for implementation and ongoing services of the platform. It’s very important that we have that qualification requirement because we want to make sure that those partners are upholding the very high standard that we have for ourselves and delivering record-level NPS scores. We’ve referred to them as plus 85. It’s unheard of in our industry.