FIVN - NASDAQ

[Audio Gap] Joining us today on the call are Mike Burkland, Chairman and CEO; Dan Burkland, President; and Barry

Thanks, Emily, and thanks, everyone, for joining our call this afternoon. I'm pleased to report strong first quarter results with our subscription revenue growing 20% year-over-year and total revenue exceeding the midpoint of our guidance by 3 percentage points. As a reminder, our subscription revenue, which others in the industry refer to as cloud revenue accounts for nearly 80% of our total revenue. Also, this 20% growth in subscription revenue does not include any benefit whatsoever from customers converting from on-premise to cloud since we do not have any on-premise business, and this growth is all organic, except for an immaterial amount. Adjusted EBITDA margin for the first quarter was 15% of revenue, helping drive strong LTM operating cash flow of $128 million or 14% of revenue. As you all know, we take a balanced approach to delivering top line growth and bottom line profitability. I will begin today by discussing our broader market opportunity, which continues to be propelled by 3 ongoing trends. First, the migration to cloud contact center platforms continues to be a top priority for enterprises, particularly as many on-prem solutions are being end of life. With current cloud penetration standing at approximately 25% to 30%, we believe there's a multiyear durable growth opportunity ahead. Second, enterprises are laser-focused on improving customer experience, which has become a strategic initiative aimed at driving better business outcomes. With our intelligent CX platform and our passionate experts, we are changing the game for some of the largest brands in the world and helping them reimagine their customer experience. And third, AI is revolutionizing the way brands enhance customer experience. With our AI-infused and data-driven intelligent CX platform, we're helping enterprises deliver personalized, connected and effortless experiences for their customers. These 3 trends are driving a massive market opportunity, and we are a clear market leader, given our platform, our success in marching up market and our strong international expansion. And now let me take each of those 3 growth drivers in order, starting with our platform. Five9's AI leadership has been a key reason why customers choose us. Our AI strategy is simple. We combine the power of the industry's leading engines with contextual data unique to each of our customers. We have always believed it's optimal to leverage the best engines in the industry, and the arrival of generative AI has further validated that strategy. Because of this, we believe we have established a significant lead in this market. By embracing the best engines and expanding them with contextual data, we can easily produce basic industry models. But more importantly, we can go beyond that to produce customer-specific models that are setting new standards in providing exceptional customer experience and also doing it responsibly by protecting the privacy of their data. Additionally, empowering customers with this is not just a matter of technology, it's also a matter of people. Five9's experts work hand-in-hand with our customers to gather the right data from the right sources to deliver these customer-specific models, resulting in what really matters, personalized CX and better business outcomes. We believe this strategy has allowed us to be more nimble than our competitors in adopting generative AI and using it across our platform. This has been demonstrated through our recent announcement of GenAI Studio, the industry's first tool that easily allows enterprises to combine best-in-class engines with their unique contextual data and to customize the models on an interaction-by-interaction basis, allowing for new levels of personalization. GenAI studio can be customized by integrating any piece of data that our platform accesses during the processing of an interaction. This allows customers to leverage investments they've already made in integrations in our platform, which is one of the more complex and time-consuming aspects of implementation. This enables us to supercharge their results when they attach our AI products. Feedback from customers has been overwhelmingly positive as they will begin to gain these benefits in just a few days, given the ease of use of GenAI Studio. And it's not just customers saying, we're ahead. We continue to earn awards and industry recognition from marquee analysts. And of course, nothing speaks to the success of our strategy more than numbers. For example, our AI and automation ARR bookings grew 15x year-over-year in the first quarter. And now I'd like to focus on our march-up market and international expansion. We're very excited to share that we signed our largest deal effort, a Fortune 50 financial services company, which is a testament to our continuing success in marching up market. Dan will share more details in a moment. But I just want to say, we're thrilled to add this win to our previously announced mega deals, such as the parcel delivery company, the health care conglomerate and the global health care insurance company. Additionally, as a result of this win, enterprises and the financial services industry are taking notice, and they're already pulling us into large financial services opportunities. As a reminder, our success up market is not just due to our award-winning platform but also because of our people and our partners. Our customer success model remains a key differentiator, as we have hundreds of CX experts globally at Five9, who execute repeatable large enterprise playbook that focuses on transformation, migration, implementation and ongoing optimization. Additionally, our collaboration with Premier CX partners around the world is driving our upmarket success and international expansion, as demonstrated by the following 3 examples. First, we are seeing increased momentum from large SIs. We have an ongoing initiative called [indiscernible], which enables and certifies a select group of partners to take on implementation and support services, and it is incentivizing these SIs to lead with Five9 in some of the largest global opportunities. Second, our Salesforce partnership continues to gain momentum, where we have become the first and only CCaaS partner of Salesforce to reach Summit status. This is a major step forward for our partnership. And it gives us early access to releases and APIs so that we can stay at the forefront with Salesforce. Our advanced BYOT integration for Service Cloud Voice is a great testament to this partnership. And third, our BT partnership is taking hold. As a reminder, we have a go-to-market reciprocal arrangement where they resell our Five9 solutions, and we also resell BT connectivity. This is not only improving itself in the U.K. and Ireland markets, but also in other parts of the world, where they've been instrumental in helping introduce and secure Five9 business. These are just a few examples of our partners helping pull Five9 upmarket and also helping expand our global footprint. Before I turn it over to Dan, I'd like to make a few comments on our journey as a public company. As many of you may have seen a few weeks ago on April 4, we celebrated the 10-year anniversary of Five9's IPO by ringing the opening bell at NASDAQ. It was a perfect opportunity to reflect on our journey as a public company. Over these last 10 years, we've made significant progress on multiple vectors, including the following 5 examples. We grew revenue by 10x in that 10-year period, virtually all organically. We increased EBITDA margins by 43 percentage points. We increased the number of $1 million plus ARR customers from 3 to 183. We were one of the early pioneers of cloud contact center and have become a clear market leader and the largest pure-play cloud provider in our industry. And more recently, we have been leading the AI revolution in Contact Center and CX. Today, we're changing the game for many of the largest brands in the world as we help them reimagine CX with our AI-infused data-centric platform combined with our passionate experts. In addition to reflecting on our progress, I'd like to take a moment to thank our team of Five9ers. Our success over the last decade has been driven by their teamwork, commitment and passion, and I want to personally thank every Five9er for all you do. We are still in the early stages of a massive transformation in CX, and I'm super excited about what we can achieve over the next 10 years. And with that, I will turn it over to our President and CRO, Dan Burkland. Dan, please go ahead.

Thank you, Mike, and good afternoon, everyone. I'm pleased to report that we had a record bookings quarter and our partner and channel momentum has never been better. Our market-leading platform, the expertise of our people and our relentless focus on helping customers achieve their CX business goals continue to propel us forward in this tremendous market opportunity. And now I'd like to share some examples of key wins for the quarter. As Mike mentioned, we are very excited to announce that we have contracted with one of the largest U.S. banks serving nearly 70 million customers worldwide. The bank has been using a variety of legacy systems and acquired directly as well as through M&A. I expect several years looking for a strategic partner who could help them transform and consolidate CX across their global footprint with a modern, innovative, secure and scalable CCaaS solution. A key part of this migration to Five9 will include our recently acquired ACS solution, allowing them to centralize and normalize all of their data from many different disparate systems. They chose Five9 arguably for one reason, trust. They trust that Five9 has the platform, the people and the partners to deliver an unparalleled CX solution. They purchased our full omnichannel solution, our IPAs, our WEM suite powered by Verint, an integration to over 2 dozen CRM systems, including Salesforce and ServiceNow. We anticipate this initial order will roll out and ramp over several years and will ultimately result in over $50 million in subscription ARR to Five9. The second one I'd like to highlight is a company that specializes in higher education, helping universities with recruitment, enrollment services, guidance counseling and [indiscernible] fundraising activities. They had been using another cloud vendor, which was not meeting their needs. They will be using Five9 for a full omnichannel solution for both inbound engagements and proactive outreach. Our full WEM suite powered by Verint, our Agent Assist solution for call transcripts and summaries and our performance dashboards, along with Microsoft Dynamics integration. We anticipate this initial order to result in over $3.8 million of ARR to Five9. The third example is American radiology firm specializing in outpatient diagnostic imaging centers throughout the U.S. They have been using Cisco, which lacks the deep integration and functionality with Salesforce, which they had just rolled out last year. They chose Five9 for our end-to-end functionality, our deep integration and partnership with Salesforce and our industry-leading AI and automation suite. They will start with our IVA and chatbots to intelligently route inbound inquiries to the best resources while also using transcription, call summaries, Five9 insights and analytics to identify where best to introduce even more automation and self-service applications. We anticipate this initial order to result in over $2.8 million in ARR at Five9. And now as I normally do, I'd like to share an example of an existing customer who expanded with us. This customer is in the health care industry, where they provide nonemergency transportation services to and from many hospital networks throughout the U.S. They have been our customer for nearly 3 years, and were spending approximately $2.3 million in ARR. In Q1, they expanded their operations both in number of human seats as well as adding several hundred IVA ports with additional use cases and languages. With this Q1 expansion, we anticipate that ARR will increase from approximately $2.3 million to over $6 million. So as you can see, we continue to execute very successfully on our go-to-market initiatives, including our march-up market, our international expansion and our growth of our partner ecosystem. And with that, I'll hand it over to Barry to cover the financials. Barry?

Thank you, Dan. We are pleased to report that first quarter revenue reached a record $247 million, growing 13% year-over-year and exceeding the midpoint of our guidance by 3 percentage points. Subscription revenue was the strongest driver, growing 20% year-over-year in the first quarter and now makes up nearly 80% of total revenue. Quality and Enterprise subscription revenue grew 23% year-over-year. Our new logo deployments remained robust with CCaaS setting a Q1 record, demonstrating our focus on executing against a substantial backlog of [indiscernible]. On a geographic basis, our investments in EMEA are paying dividends. EMEA subscription revenue, which represents over 40% of international subscription revenue, grew 32% year-over-year in the quarter. Our enterprise business made up 88% of LTM revenue, and our commercial business, which represented the remaining 12% grew again in the single digits on an LTM basis. Recurring revenue made up 92% of total Q1 revenue. As a reminder, recurring revenue is made up of subscription revenue and usage revenue. Usage revenue grew slower than subscription revenue. As a result, each year, we see a mix shift within recurring revenue, approximately 1 to 3 percentage points from the share coming from usage revenue to the share contributed by subscription revenue. The main reason usage revenue growth is slow because as we move up market, our larger customers often use the existing carriers for usage. Additionally, our channel partners like BT and AT&T are also carriers, and we will not take business away from them. We see the continuing mix shift away from usage to subscription as a positive long-term trend for 2 reasons. First, given that subscription revenue consistently grows faster than usage revenue over time, this mix shift reduces the usage drag on total corporate revenue growth. Second, the mix shift [indiscernible] total corporate gross margins over time, given that the subscription delivers higher gross margin than usage. Professional services made up the other 7% of total Q1 revenue. I'd like to remind you that our long-term strategy is to enable our partners to deliver these services. This will gradually result in a mix shift away from PS revenue to subscription revenue. We also see this a positive long-term trend overall because our subscription delivers higher gross margins than PS. Additionally, PS revenue continues to be more lumpy, partly due to large mega deals. Our LTM dollar-based retention rate declined slightly to 109% as anticipated, given the macro conditions over the last several quarters. We expect Q2 LTM dollar-based retention rate to be either flat or very slightly down and we continue to expect a positive inflection in the second half of the year, mainly because of customers with more than 12 months ramps. Longer term, our retention rate is expected to trend towards a high 120s by 2027 due to a higher mix of larger customers with higher retention rates and continuation of the trend towards selling more and more software, including AI and automation to our customers. First quarter adjusted gross margins were 16.8%, increasing by approximately 40 basis points year-over-year despite the lower-than-normal revenue growth and the substantial transitory investments we are making to support both our successful march upmarket and our successful international expansion. First quarter adjusted EBITDA was $37.6 million, representing a 15.2% margin, a decrease of approximately 90 basis points year-over-year, primarily driven by our strategic investments, most notably FedRAMP in India, both of which we expect to deliver significant long-term opportunities for us. First quarter non-GAAP EPS was $0.48 per diluted share, a year-over-year increase of $0.07 per diluted share. Before turning to balance sheet and cash flow, I would like to draw your attention to the progress we made on reducing stock-based compensation as a percent of revenue, which decreased from 24% 3 quarters ago to 18% in the first quarter. With regards to our balance sheet and cash flow highlights. In the first quarter, we continued our strong cash flow generation, delivering $128 million of LTM operating cash flow, equivalent to 14% of revenue. This is driven by our EBITDA and by strong DSO performance, which came in at 33 days. We have now delivered 31 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, [indiscernible] and our low DSO. As a reminder, we further strengthened our balance sheet with the issuance of new 5-year convertible notes in the amount of $747.5 million. After paying down a portion of our existing June 2025 notes, we added $330 million of net proceeds to our cash balance. We are pleased to have successfully completed the oversubscribed offering, obtaining favorable terms. We locked in a coupon of 1% and an effective fixed interest rate of 3.8%, including the cost of [indiscernible] that protect us from dilution until our stock price exceeds $122.18. We believe we are nicely positioned for many years to come. And now I'd like to finish today's prepared remarks with a discussion of our guidance for the second quarter and full year 2024. In terms of top line, we are guiding Q2 revenue to a midpoint of $244.5 million, which is in line with the commentary we gave a quarter ago during earnings call. This represents a 1% sequential decline, in line with our typical negative growth guidance [indiscernible] into Q2. For the full year, we are maintaining the midpoint of our revenue guidance at $1.055 billion. Given there's still considerable acceleration in the second half, we are being prudent and not putting through the Q1 beat to our annual guidance. Also, please note, we are not expecting any 2024 subscription revenue from the Fortune 50 financial services customer previously mentioned and only a moderate amount of PS revenue. As for the bottom line, we are guiding Q2 non-GAAP EPS to come in at a midpoint of $0.43, which is the in-line outlook we provided last quarter. For the full year, we are slightly increasing the midpoint of our non-GAAP EPS guidance from $2.16 to $2.17 (sic) [ $2.15 to $2.19 ] per diluted share, reflecting our plans to continue investing in key growth opportunities to build the [indiscernible] upmarket and internationally. Additionally, I would like to provide more color on the quarterly profile of both the top and the bottom line for the second half of 2024. We expect group revenue to increase sequentially in the third quarter and more in the fourth quarter. Given the shape of this revenue curve, we expect non-GAAP EPS to improve in the third quarter and more in the fourth quarter. 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 first quarter performance. Many of the largest contact centers in the world are making mission-critical decisions to migrate to the cloud and the strategic investments we have been making are paying dividends as customers select our trusted CX platform to leverage the power of AI and deliver the best customer experience. This is only the beginning of our journey in defining the path for the CX market, and we believe the strength of our platform, our people and our partners will pave the way for continued success. Operator, please go ahead.

[Operator Instructions] And our first question is going to come from DJ Hynes With Canaccord.

Congrats on the mega deal. That's great to see. Barry, I'm going to start with you, one of the numbers, I'm going to break the rules right up front and that's a quick follow-up as well. So the last few years when you beat Q1, you've typically raised the full year outlook as well. This year, it was a beat and reiterate what you mentioned on the call. Should we read anything into that in terms of further deterioration of demand or activity in the space? Just any comments there would be helpful.

Absolutely, DJ. Let me just frame it for you a little bit. Where do we sit in? [indiscernible] coming off a quarter. We had record first quarter in terms of logo installed, a very strong backlog that gives us great visibility. We got to talk at some point in this quarter about the inflection in the [indiscernible] that we see in the second half and why we're seeing that and the [indiscernible] from our professional services as well. So overall, we feel pretty good. At the same time, we can't ignore the fact that we are talking about a very considerable reacceleration in the second half. The first half is based on our guidance, is 11.4%. We're basically doubling that in the second half per our guidance to 20.1%. That's pretty aggressive. And we want to be prudent. And so for that reason, for prudence, we are not going to be putting through -- we didn't put through the Q1 [indiscernible].

Okay. Fair enough. And then Dan, for you, maybe a more strategic question. Like do you vision a future in which the pricing model in the CCaaS space significantly evolve away from seat-based pricing and more towards kind of transactional or interaction-driven pricing models? I mean it feels like AI has the potential to move in that direction. But I would love to get your thoughts like how the next 3, 5 years...

Yes. Thanks, DJ. We absolutely are seeing that, and we're seeing it already. As you mentioned, with many of the AI applications, they're not really tied to a seat, and they're not really correlated to a seat. They can be like as an example, even IVA at the front end. We do that per port, which we kind of equate as offsetting a seat. But there's many other applications like Insights, pulling Insights across an enterprise and getting information to make valuable decisions and those are already being tracked, things like transcription and our voice stream application. Those are all priced based on either per minute or per gigabyte or some other consumption measurements. So we're seeing that evolve and take place as we speak. But there's still software that sits in front of the agent that helps the human agent. That's the most prevalent. That will remain to be typically a seat-based model. You're absolutely right. Over time, we'll see that evolve and have more consumption based.

Our next question will come from Terry Tillman with Truist.

Congrats on the record transaction. Kind of like DJ, I'm going to have one question, but it might actually slightly be 2 parts. In terms of the AI and automation, what I'm curious about is what kind of impact is it having -- and not to be myopic, but on a seat or kind of an MRR basis per user? And then the second part is, because you have these interesting tools in the GenAI side, I think you'll have had some efforts more recently to kind of programmatically go back to the base to really have them discover these tools. And what are you seeing in terms of uptake there?

Yes. So if I look first at the question regarding the seats and how much is being impacted or how much that's being affected by AI and automation, what we're seeing is an uplift. We've talked for many quarters about the fact that our AI applications, when you start to automate interactions, we actually collect more revenue for those, whether it's a like-for-like or you're taking calls that are 100% self-served through an IVA that used to be handled through an agent. We're getting twice the revenue, think of it as per interaction, but it's really on a per seat basis, But on a per port basis. But we're collecting rather than the just north of $200 per seat for the human agent software. As we talked, we would get nearly double in the $400 range when we automate those interactions. And then you talk about the rest of the AI portfolio, that's incremental add-on revenue that we achieved. So the wallet share that we achieved from our customers as they increase the automation and move more towards AI, goes up, not down. And we're seeing our customer base from a seat perspective when they do adopt AI and automation, it's additive. It's usually giving customer added convenience, one more choice to interact with that brand, driving more and more time that an individual spend with that brand, not taking it as a cannibalization of the human seats.

And Terry, I'll pile on. Our GenAI Studio is an industry first, as I mentioned in my remarks. And again, we're going to continue to out-innovate the competition, deliver more and more AI products across our platform, and most of those are upsell opportunities to our base, as you mentioned in your question.

We'll now move on to Taylor McGinnis with UBS.

It's Seth Gilbert on for Taylor. We'd love to know maybe a little bit about the vertical seasonality, as you mentioned before, Barry, the guide still assumes a recovery to growth of about 20% for the year. So how do verticals like consumer kind of influence the second half acceleration?

Yes. It influences it moderately in the sense that we don't have this deterioration taking place like we saw in the fourth quarter of 2023 when the first time ever a subset of the consumer vertical in any consumer discretionary contracted for the first time ever, as I said. So we're going into more normal compares, and we've got an installed base that is being extremely well managed that would also help. And yes, as far as the verticals are concerned, it really comes down to the overall macro economy. And we're seeing an economy that's -- we're not macro economist, but -- we're not blind to the fact that there are challenges out there, but we've allowed for that to the best of our ability in our book.

Maybe just a quick follow-up then. Are there any verticals that are outperforming or underperforming conversely that you would call out if it's not consumer?

So if I can -- I can't speak about the end of the year, Seth, take Q1 2024, the third biggest namely consumer was expected to be somewhat weaker than it was. And that's confirmed so closely by this [indiscernible]. If I can just take a moment, this is a consumer of that economy, maybe 2/3 to a bit higher is consumer and people use cash. Occasionally, they use Bitcoin, but most of that is credit and debit card data. And we see even by month that attracts JPMorgan, the largest issue that can pick UBS as well. They've got credit cards, and you also see similar data. And so the consumer [indiscernible] somewhat weaker as expected. The rest of the vertical were similar to prior quarters, mainly slightly up in the first quarter. [indiscernible].

Our next question will come from Ryan MacWilliams with Barclays.

So despite the changes in technology and some of these new AI solutions being introduced, Five9 has now seen some of its largest deal wins over the last 2 years. So given what these technology changes, what do you think these large enterprise customers are choosing to move to the cloud now, and does this increase contact center complexity? Does that benefit Five9 given your track record of pulling these larger deals? Like are you seeing these customers want to have a one-stop shop for your one source of truth for data for all of these AI solutions?

Yes, I'll start and Dan, you can chime in. Ryan, great question. We've talked about this before. The shift to the cloud is happening for many reasons, the strategic nature of CX, the end of life of these on-premise legacy solutions, AI and the opportunities that provides these large brands to change the game and reimagine their CX, right? So yes, it's way more complex. And that helps us. That's a huge tailwind for us over the next 10 years as complexity almost always accrues to the platform players. And again, you have to have the breadth of platform to not just deliver the applications across that platform, but again, the end-to-end visibility that powers the AI. And we talked about GenAI Studio in my prepared remarks, I talked about it, it is a unique differentiator that allows us to leverage the most advanced engines, whether LLMs or small language models, whatever they are, we're engine-agnostic, but it's the combination of combining those engines, the best in the world, the best of the time, and those are going to continue to advance with contextual data. And the only way you get to all the contextual data across an enterprise and a brand is by having the platform. So this GenAI Studio is a game changer. It is putting us out ahead of our competition. And by the way, again, we don't spend a lot of time talking about competition. I'll just say this. We talked about it in my prepared remarks, the generative AI revolution validating our decision long ago to be engine-agnostic. A lot of our competitors didn't take that approach. They've built their own engines. And guess what? They're having to throw away all that investment they made and pivot and play catch up to Five9.

Moving on to Matt VanVliet with BTIG.

I wanted to check in on sort of where you're at on the FedRAMP process? And maybe more importantly, how that's helping you win new deals, both in the federal market, but also the trickle down into the state and local, maybe even higher end as well. Just kind of what you're seeing in those verticals?

Yes. Matt, we're very, very early in that process. We're aiming at the end of 2025 to be FedRAMP certified. We haven't really begun a go-to-market motion in earnest yet. We're still doing a state and local government business. We've been doing that for quite a while. But again, it's going to be another 1.5 years or so by the time we're truly in that market.

Having said that, it does help us in a go-to-market perspective where we have some of these large financial institutions and others that want to make sure that we're on a path to get that authorization in FedRAMP because they serve clients that are federal-based clients and agencies that they want to make sure we're on the path for that. So it's played a role in us securing that business. But we -- as Mike says, we haven't really gone to the market yet. We'll be in what's considered in process at the end of this year. And that process once you get it in process with a sponsor, then it's typically about a 12-month period before you get authorization to proceeding.

And I would like to add one thing because we are going, at some point, talk about -- we are watched with investment opportunities, which we're taking advantage of, and I believe this management team has demonstrated [indiscernible] in some ways to be able to pick the right investments, its clearly FedRAMP, but it's a lot of money, a lot of money. And we will give you a quarterly track on what it is. And starting now with Q1 2024, the cost was $1.9 million with 77 basis points of EBITDA.

[indiscernible] has the next question.

I know you guys talked about Q4 as a record booking, and you were expecting some of those go-live that's embedded in your guidance in the second half. So wondering, how is the go-live going? And do you have visibility into their go-live? And have you baked in any kind of conservatism in terms of in case that any go-live [indiscernible].

Yes, I'll start, and feel free to chime in, Barry, but the go-lives are going great. We turned up a record number of seats in Q1. And again, we manage that backlog of product, seats, subscriptions and other AI products included. We manage it like a pipeline. It's -- once we book that business, our PS team, our implementation team is very, very metrics-driven, and our turn-ups, we track them very closely. In fact, we just presented at our board meeting recently. So we're very -- it has -- we have great visibility on it.

And if I could just add 2 things to that. What you're asking about is very important in the sense that it's key to the dollar-based retention rate inflection. So in terms of spot rate, we give you the LTM rate, but it's been flat for the last -- the spot rate for the last 3 quarters. But it would take it up is the ramping of our bigger customers, and the go-live is so key in that. And we've got a really high stepping team every quarter, quarter in, quarter out, they at least meet, but typically beat the number of seats that they said they will bring up. And they're not dealing with wishes and hopes. It's actually they go in the back office. Now of course, customer thinks and in truth, but most of the times, the customers are pretty motivating.

Thomas Blakey with KeyBanc has the next question.

Congratulations on the mega deal. I have a 2-part question. Dan, for you, just if you could highlight one or 2 keys for winning this deal. I know you talked about trust and whatnot, but just trying to view how this could impact future wins down the road where we're seeing deals get larger and larger here. And then, Barry, for you on backlog, you mentioned that, I think, in your preamble, maybe talk about any type of cushion you might have there as it relates to the sharp uptick in growth into the second half, that would be helpful.

Great questions. So regarding the large bank, as I mentioned in the prepared remarks, the trust. But if you look at the process that they went through, they're looking at -- when you look across all of their different divisions and the global footprint that they have, they did a very thorough inspection and audit of us and our competitors. And I mean like no other. I'll say that spending days here with us at our corporate offices and inspecting not just the product, the platform but really understanding our ability to deliver and our ability to support an operation of their size and complexity. And so while we talk about product and we talk about the innovation, absolutely, those things are critically important, but they really wanted to understand how would we help them deliver the business outcomes that they were wanting to achieve and you have to demonstrate that. You can't just put up slides and talk about what you've done before or what you're going to do for them. You've got to get into the trenches. And so we have dozens -- literally dozens of people, technical folks from the bank that spent several consecutive days here on multiple occasions to really understand that and to understand, as I mentioned the partnerships, can we leverage the partners that we have. When you look at the AI and automation solutions, as we talked earlier about why are these larger organizations moving to the cloud now. A big part of it, when you look at the AI functionality is, it's cloud-to-cloud integration, you're taking data and shooting it over to hypescaler to get some underlying engine that they have and be able to get back data that can then be leveraged and utilized to deliver an experience that hasn't been realized before. And so understanding who our partners were and how we're working with them to deliver a joint solution. And the example is Google, right? That was a big factor, right? How do we leverage Google in much of the AI applications that we're going to deliver for them. So it comes down to the comprehensiveness and our ability to deliver and support for a global organization like that. As you can imagine, they have many, many systems, hundreds of different systems. They've got dozens, as I mentioned in the prepared remarks, CRM systems. They want to make sure that we've got the platform, but really the expertise wherewithal, Mike has mentioned several times about our professional services team. That team comes with experience. Many have worked on their side of the table for customers, for large financial institutions putting in and operating on the customer side, large complex solutions such as this. They just felt very comfortable that we were the right fit and had the right direction to help them for decades to come. And we mentioned -- Yes. ACS, our acquisition of ACS played a role as well. So when you look at that, that takes information, the data that's coming from all the disparate systems that they have across those divisions and brings it together, normalizes it and displays it so that the operator of the contact centers and the management that are making those strategic decisions don't need to worry about what systems are behind that. I've oftentimes been in those ACS customers and said, well, what data am I looking at? Is that coming off of a Avaya or Cisco or Genesys or Five9 if we're in the middle of a migration. And frankly, the operator doesn't know and doesn't care. So it helps us accelerate the move over. They don't have to say, well, time out. I can't let you cut over this division because it's going to skew all my reporting. And I do my payroll based on certain metrics that come out of that reporting. Well, guess what? We don't -- it doesn't matter. We can go behind the curtain and then make that transition happen, and it's invisible to the user on the floor.

And then, Tom, thanks, and to answer the second part of the question. So for that reacceleration taking now 3 quarters, not just the second half just [indiscernible]. We need $116 million extra year-over-year growth. That $116 million is bifurcated. As we've talked about in the past, we were talking about the full year between the DBRR at $64 million of that $116 million and the remaining part $52 million comes from new logo deployments that you're asking about. So the majority is the DBRR -- and that, by the way, is prior to the inflection. I'm using $110 million. The $52 million is largely in backlog, not totally, they are what we referred to in the past [indiscernible] in the next month or 2 that we still need to complement that to some extent. But largely, it's all in backlog. And we talked earlier about the expertise and competence of our professional services team.

Meta Marshall with Morgan Stanley has the next question. I think Meta might be joining us audio-only today.

Yes. Apologies. Nobody is better than frozen video. So I guess the question is, tie-into migration, obviously, as you get these longer and longer -- or larger and larger deals is a consideration. And obviously, Aceyus helped with that. I just wanted to get a sense of, is there any way to quantify like how Aceyus can shorten those migration cycles -- or -- and just on the service provider channel service integrator channel, did you use those guys to kind of help with migrations. Are there -- is the pace of those migrations kind of the same as you've seen with your own channel? Just trying to get a sense of what trends are on pace of migration.

Yes, I'll take last part of the first. Thanks, Meta. When you look at the migration, it's very much in sync, whether there's a systems integrator involved or not, they tend to help them take and offload a lot of the project management and program management and help work with the customer through a large-scale migration. But most of the actual work of the configuration and of the integration effort is done by our professional services team. Now we're in the process of enabling those SIs to get certified and really get their skill set to where ours is. We have a very, very high bar that we set for what we require and demand. And we're starting to get leverage from those. The goal is to ultimately move more and more to that off our personnel and on to theirs for obvious reasons. But that's something that it's really hard to shorten it too much. Yes, the tools help, like I said, in that last example like Aceyus. But for the most part, it's a matter of going as quickly as the customer can. We'd like to obviously move as quickly as they're able so that we can get to revenue sooner. But there's a lot of planning and oftentimes, there's a lot of changes that they're doing. And so they have to have a lot of internal meetings themselves in order to make some important decisions.

I'll move on to Jim Fish with Piper Sandler.

Nice to get the win on the board here, and I'm sure you're sick of answering the question about stagecoaches, Barry. So actually building off of that last question, you guys mentioned incentivizing these SIs to lead with Five9 through, I think you called it project pull-through. Can you just walk us through what you're changing in terms of these incentives and any go-to-market changes outside of this that you're planning on this year. And with that SI aspect, kind of how we should think about SI contribution today in terms of how much is pulling you guys in versus where you expect it could be over the next couple of years?

Yes, Fish, I'll start, and Dan, feel free to chime in, but we kicked off project pull-through, boy, close to 18 months ago. And that was really designed to lean into a lot of the SIs and other resellers that want the services revenue as part of this equation. And -- if you look at our business and you look at our -- we talked about subscription revenue and subscription revenue is the key metric that everybody should be paying attention to. And as we offload some of these services to SIs and other partners, we're not going to get that revenue. And that's why there's a disproportionate growth rate in our PS revenue and our usage revenue compared to subscription. But that is our strategy. It's part of our business model, we think is a very good thing from a margin perspective, but it's also the reason we named it project pull-through was because we know that there's an incentive on these SIs and other resellers, if they've got the services revenue in a deal, they're more likely to bring us into a deal. And we were, quite frankly, missing out on that opportunity 18 months ago. So that's why we kicked it off. It's been a very nice impact upmarket. And again, it's still somewhat early days, but they're -- we're getting third parties are doing a very good proportion of our implementations these days, especially internationally and a very good growth in our U.S. implementations as well.

Baird's Will Power has the next question.

I come back to the Fortune-50 win. Great to see that. Congratulations. I mean it sounds like professional services and your ability to execute are big pieces of that. But I'd love to get some color as to how important AI was and how focused were they on the IVAs and the capabilities you have there? And what kind of stood out in your platform on that front, perhaps versus others? And I guess kind of tied to this kind of mega deal thought process. I mean any qualitative color as to how the pipeline is building for other dolphins and whales, I guess, as you look forward?

Yes. Thanks, Will. When you look -- I'll start with that on the dolphins and whales, when you take that large bank out of the equation, the pipeline is a record. We're still at record if we take that out of the equation. Obviously, that came in, so it dropped the pipeline down pretty significantly because of the size of the deal. But otherwise, very, very healthy pipeline is driving towards that. But if you look at AI, it was very key front and center for them in their decision. In fact, if you think about it, most banks, including this one, have a lot of automation and self-service already on their legacy platforms. And it just isn't as good, right? It doesn't have the accuracy rate. When you have speech-enabled, I call it, speech-enabled IVR from 10 or 15 years ago, you can do some basic things, you can call in and do some banking by phone and check your balance and see if your checks cleared, but it's just not as robust and not what you can get in today's technology. And so a big, big, big part of it was how they would replace that with today's next-generation IVAs. And thank goodness, we have inference in that acquisition and the enhancements we've made to that platform to be able to deliver what they felt was the market-leading IVA solution for not just self-service but for -- and then when you combine -- when you take the IVA for self-service of course, but then you combine that with our Agent Assist and our ability, like I said, with that Google partnership to be able to take real-time conversational data and be able to interpret it and then fetch the right data from the right source. If you think about a large bank with dozens of CRM systems. We've got to go fetch the right data to be able to answer that customer's question. And those types of functions are way down in the weeds technically. But we came out very superior compared to our competition because of some of the things Mike said, the engine-agnostic, the speed at which we've been able to work with these other engines and then the flexibility, they actually were able to come to us and say, in this particular use case, we want to use this engine and in that particular use case, we want to use another one. And oh, by the way, in this one, we may want to build our own with just our data because it's faster at getting to the data. You don't want to go search 23 databases. But you -- if you know you have a specific use case, you want to build one that's very personalized and customer-specific so that you can get the data very quickly.

We'll now here from Scott Berg with Needham.

Everyone, a really nice quarter. Mike, you'd made a comment on the Summit Status with Salesforce. I think that's an interesting comment because they effectively partner with all your competitors in the space as well, whether they be in investments or they really partnered supposedly tightly if you're a company based in Seattle. If you're the first one on the status, I think that's kind of interesting. Help us understand a little bit more maybe what this can give you outside of an early look on technologies, et cetera. My guess is there's some other commercial opportunities. But I just would like to understand that better.

Yes, Scott. I think it's visibility. It's technology, as we mentioned in the prepared remarks, and Summit Status is very objective. It's based on business we've done together. -- frankly. So at the end of the day, that's how they measure that, and that's who gets that status and was it haven't. It's essentially a good metric to kind of guess for how much business we've done together with Salesforce, it's a big deal. It's a real big deal. It's a big deal to them, it's a big deal to us.

Moving on to Michael Turrin with Wells Fargo.

Some encouraging commentary throughout here. I want to go back to the key metrics, Barry, and what needs to happen for those to trough. It sounded like flat to slightly down in terms of retention for Q2. You've been talking about the second half move up. I mean how much do you still need to execute to get there? And maybe you and Dan can just speak through confidence, visibility, how that's progressed from when you initially framed the '24 outlook to where we currently sit?

Yes. So it's easiest to bring it into 3 buckets: new, established and PS, installed base PS. In terms of new, it's -- the backlog was largely there. It's been added to somewhat [indiscernible] 3 months. Nothing dramatic change. Also, with respect, Michael, to the inflection that we've been referring to in the dollar based retention rate, yes, it is as expected gone down 1 percentage point this last quarter. And that is simply a fact that while the spot rates have been flat for the last 3 quarters, we now dropped off one of the higher ones and we've not had a higher one than we had to compare with, and now we are down slightly. And -- but we can see now clearly that we've -- the flow we expect can't guarantee is in. And just by the way, the last time that we had an increase in the dollar based retention rate was all the way back to the second quarter of 2021. So a long time ago, really, really looking forward and hoping that the economy cooperates, because it really does tie very closely to that. So -- but that's not all. What our analysis shows is that we've got a number, not just 5, 10 but more of big companies, enterprises that came into the base starting in Q2 of 2023 that are ramping. And I'm not just talking about the health care companies and so on, a lot of them. And those mechanically will also help [indiscernible] spot rate, if you see what I mean. Then the last one is the tail breeze that we have from professional services. We will get a moderate amount from this major Fortune 50 institution finance service company and that will help as well.

Samad Samana with Jefferies has the next question.

Barry, I have a question for you. Just thinking about the monetization of AI, I think someone earlier had asked about maybe a pricing model shift. And when I think about maybe gross profit dollars per $1 of AI revenue versus maybe what you would get for core subscription, if it's obviously double the revenue, you should get more gross profit dollars that when you factor in maybe WFO as well. I guess what I'm trying to figure out is, should we think about AI being a gross profit dollar tailwind as well and maybe just on the top line? And how should we think about that flowing through maybe over the next year or 2?

Yes. So I'm going to resist the temptation to talk about it for the next year. And the reason I'm going to resist that temptation is that -- we've got 5 reasons why gross margins are going to go up. They're going to go up over time. And the biggest of those is not what you've just been referring to, that's number two. It is the fact that revenue growth against fixed and semi-fixed cost is by far away the big one. And we actually [indiscernible] but we're pretty happy with the fact that we've maintained the gross margins where we have despite somewhat [indiscernible] revenue growth currently. And so I'm not going to get into -- I don't want us to get into a corner with the revenue. But in terms of that number 2 is the upsell and the cross-sell and the attach rates from these AI and automation solutions, and they clearly, clearly have higher gross margins. And these attach rates, both in the new bookings and in the installed base are nontrivial. I'm not talking about 1%, 2% increases, it's more than that. And then just in case of with [indiscernible], you're wondering what the other items are, it's what we talked about in the prepared remarks and then the mix shift over time from both usage [indiscernible] and professional services, which had negative gross margins. Thirdly, the levers, the number 3 one. We've also got onetime investments [indiscernible] those are transitory. India is another one. The cost is there, the revenue is not there. And then we have a number of initiatives in the professional service organization because there's no need why that needs to run at a negative gross margin.

We have time for one additional question. So our final question is going to come from Peter Levine with Evercore.

This is Bill on for Peter. With the health care expansion story going from $2.3 million to $6 million of ARR, how often will this kind of increase to be the norm? Or should we think of this kind of uplift as an every now and then?

It's at that amount, I would say it's an every now and then. That's why I highlighted it. But we get our installed base customer, we talked about, I think, last quarter about the folks that are focused on our installed base, we had individuals that were wearing both hats of CSM and seller. So they were taking care of day-to-day issues with the customers and then putting their sales hat on and trying to do cross-sell, upsell. We've actually taken that team and divided it into separate individuals for each customer. So they now have a CSM that's responsible for the day to day and they have a seller that's there to upsell, cross-sell that carries bookings quota. And they're primarily focused on these applications, the cross-sell and upsell applications. And so -- that will take effect and show itself over time. But that's what typical most software companies about our size go with that mix of hunter and farmer even in the installed base. And that should contribute nicely to it. And we're seeing software being sold to our installed base at good rate and that will only increase as we roll out more and more of these.

And again, this does conclude our Q&A session. So I'll turn it back to you, Mike, for closing comments.