FIVN - NASDAQ

Thank you for joining us today. Certain statements made during the course of this conference call that are not historical facts including those regarding the future financial performance and cash position of the company, expected improvement in financial and related metrics, expected ARR from certain customers, our proposed acquisition of Acqueon, certain expected revenue mix shifts, customer growth, anticipated customer benefits from our solution including from AI, the extent of the anticipated TAM expansion and our ability to take advantage of any such expansion, company growth, enhancements to in 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 or results 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 continuing 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 that can be found in the Investor Relations section on Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today, November 7, 2024, and may no longer be accurate at the time of replay. 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.

Thanks, Emily, and thanks, everyone, for joining our call this afternoon. We are very pleased with our third quarter results, which exceeded our guidance across all key metrics. Importantly, subscription revenue growth accelerated to 20% year-over-year and total revenue growth accelerated to 15%. Adjusted EBITDA margin was 20% of revenue, helping drive record quarterly operating cash flow of $41 million or 16% of revenue. I'm energized by the momentum we're seeing with our AI products. When I meet with customers, the focus of the discussion often quickly turns to leveraging the power of AI to transform their CX and this is clearly demonstrated by AI products making up over 20% of our enterprise new logo ACV bookings in Q3. Furthermore, over the last 4 quarters, the average ARR of new logo deals that included AI were over 5x larger than deals without AI, and AI has been attached to 100% of our 1 million-plus ARR new logo deals. This AI momentum is also reflected in our installed base, where AI bookings grew over 50% year-over-year in Q3. Our Five9 Genius AI suite of solutions is helping some of the world's largest brands to transform their CX with AI. With the acceleration of AI, CX is changing right before our eyes, and we call this the new CX. This new CX is delivered by our AI-powered platform that stays aware and engaged throughout the entire customer journey, delivering value in many ways we previously could only imagine. Our next-generation IVA, which we're launching next week called Five9 AI agents is a new paradigm for how consumers engage with brands. Interacting across both voice and digital, Five9 AI agents identify, authenticate, drive intent, inject knowledge, apply reason, take actions completely independently and without the need for a human. Five9 AI engines are designed to achieve unprecedented levels of comprehension, capability and autonomy using generative AI. This allows them to deliver great customer experience while also reducing the volume of interactions that need to be routed to human agents. With these AI agents plus AI empowered human agents, Five9 is delivering the new CX designed to result in higher customer satisfaction scores, happier employees and improved efficiency for organizations around the world. Five9 is helping some of the largest brands in the world delivered the new CX, with our AI-powered intelligent CX platform our Five9 Genius AI suite and our trusted AI experts. With these 3 components as the foundation, we recently rolled out our AI Blueprint program where our AI experts work with each of our customers to develop their own unique blueprint to transform their CX using AI. For example, one of the world's largest hotel franchises increased first contact resolution by 50% after implementing our self-service AI applications for their loyalty points program. Another example is a global automobile manufacturer, leveraging Five9 AI to handle the recall process. They struggle with the massive influx of traffic that comes from such an event. Rather than attempting to flex up their agent count, they used our IVA self-service to not only handle the additional traffic with ease, but also to achieve an impressive 53% first contact resolution. With Five9 Genius AI and our AI Blueprint program, our customers are able to transform their CX with the power of AI. Also, with our AI consumption-based pricing model, customers have the ability to test improve adoption rates and effectiveness for AI use cases. In summary, I feel great about our leadership position in AI, and we remain enthusiastic about the continued large AI market opportunity ahead. Now turning to other business highlights. In August, we closed our acquisition of Acqueon. This acquisition marks a significant milestone in our strategy to elevate customer experience by further strengthening our intelligent CX platform. With Acqueon, we now offer best-in-class AI-powered omnichannel and journey orchestration for inbound and proactive outbound use cases across marketing, sales, e-commerce and customer service. Our expanded capabilities across digital, SMS, e-mail and social channels are designed to unlock adjacencies and new revenue streams, particularly in sales and revenue recovery. This includes further expansion into the health care vertical with our Epic integration. We're excited about how Acqueon is strengthening the value proposition of Five9 and expanding our market opportunity. I'm also pleased to announce that A.J. Awatramani has joined Five9 as our Chief Product Officer. With over 25 years of product experience and a proven track record of driving software innovation at companies such as Adobe, Marketo and Oracle, Ajay will lead Five9's product strategy as we expand our AI and CX offerings. In addition, we have several other recent highlights. We were once again named a leader in the Gartner Magic Quadrant for CCaaS. We hosted our first ever Five9 AI day. We launched a new vertical initiative targeting AI and health care. We launched a new series called Killer digital experiences. We opened our India data center and received our certification from the Indian Department of Telecommunications, and Five9 was named #16 in the 2024, Fortune Best Places to Work list in the large technology category. In summary, we are pleased with our momentum and success in delivering AI-powered CX. We believe the opportunity ahead for Five9 is stronger than ever and we remain optimistic about driving long-term durable subscription revenue growth in the 20% to 30% range. I also want to thank all of our employees who bring passion and purpose to Five9 every day. Before moving on to our customer wins, I wanted to give you a quick update. Dan Burkland is taking on a new role for us as AVP of go-to-market strategy, focused on key partners and customers as well as other external facing evangelism for Five9. Our sales organization, led by our recently announced EVP of Sales, will now solely report to Andy Dignan, our COO. So Andy is joining us today to talk about our Q3 customer wins. Andy, over to you.

Thank you, Mike, and hello, everyone. We had a solid quarter with bookings improving sequentially and coming in ahead of our forecast. We had several key wins, which I'll discuss in a moment. As we stated last quarter, in an effort to maximize market coverage and improve execution, we took several steps. These included the appointment of a new EVP of sales, realignment of resources across each of our sales segments and hiring of personnel to focus on AI and key vertical markets, including health care, financial services and retail. I'm pleased with the energy and focused execution by the team, and I'm encouraged to see healthy growth in the pipeline. We also continue to make strategic investments with select go-to-market partners as well as key ISV technology partners, including strategic partners like Salesforce, Verint and ServiceNow. As we normally do, I will share some key examples of wins for the quarter. The first example is a global wireless carrier who is experiencing challenges regarding its consumers to proactively inform them of various offerings, including mobile device upgrade and other upsell services. They were using an on-premise system that was not achieving desired connection rates and results. [indiscernible] Five9 for our proactive omnichannel solution, which we acquired from Acqueon. This includes the ability to execute campaigns with AI-powered predictive intelligence to determine the best times and best channels to reach each customer based on historical behaviors, demographics and customer preferences. They look to significantly increase revenue along with customer retention rates. We anticipate this initial order to result in over $4 million in ARR to Five9. The second example is a global manufacturer of technology for automotive, trucking and heavy equipment industries. They have been using a premise-based solution, which is very limited. After an extensive RFP process, they chose Five9 for a full omnichannel solution. Front-ended with our IVA, including voice, chat, e-mail and SMS while integrating to Salesforce CRM and Microsoft Teams. In addition, Five9 is providing them with an easy migration of their premise-based variant solutions to the more modern Verint cloud services platform from Five9. We anticipate this initial order to result in over 1.6 million in ARR to Five9. The third example is a premier online consumer lending platform. They have been challenged with an on-premises solution with very limited flexibility for both inbound and outbound interactions. They chose Five9 for several reasons. First, it gave them inbound flexibility with IVAs, chatbots and intelligent call routing. Second, the AI suite of products, which are present throughout the customer journey to provide more accurate and personalized services. Third, the convenience of being able to leverage these AI applications on a consumption basis. And finally, our leading proactive outbound solution, combining voice with enhanced digital outreach. Five9 will help deliver significant improvements to the loan application process and ongoing support to its borrowers. We anticipate this initial order to result in over $1 million in ARR to Five9. And now as we normally do, I'll share an example of a customer who has expanded its use of Five9. The primary health care systems provider has been a Five9 customer since 2020 and has been extensively using our IVR, VCC and WM Suite powered by Verint for WFM, QM and speech analytics. As they expand and add new health care organizations, they view Five9 ACS analytics to be critical and helping them aggregate and normalize data from these new organizations and just valuable data from several platforms and deliver real-time dashboards to run their operations more effectively. With this add-on order, we anticipate the ARR to Five9 will now be approximately $1 million. And now I'd like to turn it over to Barry to take you through the financials. Barry?

Thank you, Andy. Q3 year-over-year revenue growth accelerated to 15%, reaching a record of $264.2 million. Acqueon made up less than 1% of revenue in the third quarter. Q3 year-over-year subscription revenue growth accelerated to 20%, made up nearly 80% of total revenue. We focus on subscription revenue for several reasons. First, we believe subscription revenue is the most accurate indicator of how our business is doing. More specifically, it's a metric that reflects the growth in a number of customers on our platform as well as the increase in the number of products purchased. Second, as we have mentioned in the past, the 2 other review streams, namely telecom usage and PS, are not good indicators of the momentum in our business because by design, and as I will elaborate in a moment, we are not focused on driving growth in either. Third, subscription revenue has gross margins that are meaningfully higher than those of usage and PS. Lastly, subscription revenue is a metric that is directly comparable to metrics provided by others in our industry. The continued strong subscription revenue growth is a result of further penetration of the large enterprise market with our market-leading AI pallet intelligent CX platform. The subscription revenue growth was particularly strong in 3 key areas: First, enterprise new logo turnups from the backlog, which reached a Q3 record. Second, $1 million-plus ARR customers who represented approximately 56% of subscription revenue in the third quarter grew 29%. Third, AI revenue, which grew 40% year-over-year in the quarter, in part due to Agent Assist, which enjoyed 158% year-over-year growth. Turning now to the other 2 revenue streams. Telecom usage revenue made up 13% of Q3 revenue, declining year-over-year in the low single digits. These declines in usage revenue continue to be primarily driven by our merger market with larger customers opting to provide their own telephony. This results in a consistent annual revenue mix of between 1 to 3 percentage points from usage to subscription. We see this continuing mix shift as a positive long-term trend for both corporate revenue growth and gross margins. Professional services made up the remaining 7% of revenue. We expect the percent of total revenue from professional services to remain in and around this level and possibly decline over the longer term as we continue to enable our partners to take on more implementations. Enterprise revenue from subscription usage and fees combined made up 88% of LTM revenue. Our commercial business, which represented the remaining 12% grew again in the single digits on an LTM basis. Our LTM dollar-based retention rate remained flat sequentially at 108%. Third quarter adjusted gross margin was 61.8%, up 1.3 percentage points sequentially and 1.2 percentage points year-over-year. The 3 biggest drivers for the year-over-year improvement were the increase in revenue, with scaling against fixed and semi-fixed costs, the rough impact and the mix shift from usage to subscription. Third quarter adjusted EBITDA margin was 19.8%, up 3.2 percentage points sequentially and 1.9 percentage points year-over-year, driven by the improved gross margin and tight expense control. We are pleased with our margin trajectory and expect further improvements, although with inevitable ebbs and flows. Stock-based compensation as a percent of revenue was 15%, down 8 percentage points year-over-year. Share dilution year-over-year was 2% on a fully diluted basis. Our GAAP net loss was $4.5 million. Included in the non-GAAP net loss was a $9.6 million, onetime charge for the roof, and a $4.8 million onetime tax benefit from the acquisition of Acqueon. Excluding these onetime items, our GAAP net income would have been slightly better than breakeven. We are pleased with our GAAP bottom line and the EPS trajectory and expect further improvements, though with inevitable ebbs and flows. Third quarter non-GAAP EPS was $0.67 per diluted share, up $0.15 from Q3 2023. With regards to cash flow, in Q3, we continued our strong cash flow generation delivering $130 million of LTM operating cash flow equivalent to 13% of revenue. This was driven by adjusted EBITDA and by our strong DSO performance, which came in at 33 days. As an aside, our third quarter operating cash flow was a record $41 million. And now I'd like to discuss our guidance for the remainder of 2024 as well as provide high-level commentary regarding 2025. For Q4, we are guiding revenue to a midpoint of $267.5 million, a raise to our prior implied Q4 guidance. This guidance assumes ongoing muted seasonality. Accordingly, for 2024, we are raising the midpoint of our revenue guidance from $1.015 billion to $1.031 billion. As for the bottom line, we are guiding fourth quarter non-GAAP EPS to a midpoint of $0.70 per diluted share, which is also raised to our prior implied Q4 guidance, and we continue to expect EBITDA margin to exceed 20% in the fourth quarter. For the full year, we are raising the midpoint of our non-GAAP EPS guidance from $2.27 to $2.37 per diluted share. I would now like to provide some preliminary high-level commentary on our current thinking for 2025. At this time, we are being prudent and therefore, feel comfortable with the current Street consensus of $1.130 billion for 2025 and see potential upside if the macro conditions improve materially. We anticipate revenue follow our typical pattern with slightly more than 50% of our revenue in the second half even with the expectation that seasonality will be muted again next year. In terms of non-GAAP EPS, we believe we will surpass the current street consensus of $2.52 per diluted share for the full year in 2025, and we expect increases in adjusted EBITDA margin for the full year in 2025. In addition, I would like to provide an outlook on the quarterly profile of our bottom line. If you look at our historical financials, non-GAAP EPS is typically amongst the lowest of the year in the first quarter, and we expect this to be the case again in 2025. Therefore, we anticipate non-GAAP EPS in Q1 '25 to be in the 40s per diluted share. We expect bottom line to improve slightly in the second quarter and more immediately in the second half, especially 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 as well as LTM enterprise subscription revenue. Before concluding, I would like to mention that we will be updating our long-term model and also hold a Financial Analyst Day in the first half of next year. We will be sending out a save a day notification in due course. In summary, as a leader in AI for CX, we continue to invest in initiatives, which we believe position us to deliver durable long-term subscription revenue growth between 20% and 30%. We also see significant opportunities for margin expansion, progress towards GAAP profitability and improved free cash flow over time. Operator, please go ahead.

[Operator Instructions]. We will hear first from David Hynes with Canaccord.

Congrats on the quarter. Nice results. I'll let others ask about the booking environment. I want to zoom in a little bit on AI. I'm curious for some of your early adopters of AI functionality, what's the narrative from those guys today? Are they content working with what they have? Are they looking to go deeper with AI? Are they pulling back on agent seat counts? Just trying to get an early sense for trends as AI adoption matures in the space?

Yes. DJ, I'll start and let Andy chime in. But look, we talked about it before. AI is front and center in CX today. We've talked about the TAM expansion for us when it comes to AI. We're helping some of the largest brands in the world. Really AI enable their customer experience, and it's working really, really well. We're seeing some companies justify the decision around CCaaS using the AI ROI and the labor arbitrage, but we're also seeing a lot of customers that are truly just adding AI and making it and it's an additive part of their technical offering, if you will. And it's really important to understand that. Yes, we do see opportunities, our customers see opportunities for automation and self-service. But they're also using AI for so many other things to enhance the agents that are delivering live human agent support, if you will. But again, if that automation turns out to be a big number, we're a winner in terms of that TAM expansion, we're providing software for customer interactions, whether or not they're human-assisted or AI-driven or AI-assisted. So we're a beneficiary in either case.

Yes. Thanks, Mike. The only thing I would add would be, yes, obviously, IVA was where we kind of got out of the gate in terms of our AI bookings growth. You heard us talk about the Agent Assist bookings growth. And certainly, our -- with our Genius AI products launching, we just have -- our product and engineering teams are delivering innovation at a fast pace, that's more skewed to sell. And so we're excited about the uplift there.

Moving on to Michael Turrin with Wells Fargo.

Mike, at the end of your prepared remarks, you mentioned long-term subscription revenue growth of 20% to 30%. You're sort of towards the lower end of that this quarter and can appreciate, we've been working through a lot of changes in the underlying environment. But just wondering, are you signaling that's a trough? Is that more of a normalized assumption as we roll forward? Just kind of walk us through what you're seeing today versus the aspirational target and what gets you or keeps you in that range?

Yes, Michael. We do -- we're very excited about the long-term potential to drive subscription revenue growth in that 20% to 30% range in as you said. I mean we delivered 20% subscription revenue in this third quarter. They just finished up from 17% last quarter. It is the key metric. I want to make sure everybody pays very close attention to that metric. And again, it's not because it's growing faster, it's really the best indicator of our business. It's about 80% of our revenue mix. So it's the vast majority of our revenue, and it is the best indicator for customers coming on to our platform and them purchasing more and more products from us. So it's really important to stay focused on that subscription revenue number. And again, we remain very bullish in this massive TAM that we're going after. Yes, AI has been kind of a bit of a distraction factor and a tailwind and other things as well in our market. But let's not lose sight of the fact that we're going after a very large TAM, which expanded with this AI opportunity. So we're just really excited about the future.

Moving on to Meta Marshall with Morgan Stanley.

Great. Maybe a question for me of -- just what are you seeing in terms of -- I know there was kind of some positive last quarter on needing to see kind of immediate ROI with investments. And so, have you been able to either see that kind of step down or demonstrate that quicker or kind of give people an entry point that makes that a little bit easier to kind of get to that initial ROI? And then just on the completion rates, I know you kind of noted some of those on the virtual side, but just any kind of changes you're seeing with customers and kind of completion rates?

Yes, Meta, I'll start with that, and again, Andy, feel free to chime in. But again, we did talk about some of the distraction factors of AI, right? And the fact that every CEO on the planet, quite frankly, is telling their CIO to go out and figure out AI as the highest priority. And Again, I think, personally, my view is this is a transitory distraction. And AI is here forever. We know that. It's real. But at the same time, I think there's a learning curve, a steep learning curve, that a lot of companies and people are going through when it comes to AI. And I think we're going to get through that learning curve pretty quickly here. Everybody is focused on it. And I would say, look, Andy talked about the bookings. I mean we had a sequential increase in our bookings. Again, one quarter doesn't make a trend, but we're encouraged by what we see in terms of decision making. And again, I think in a healthy macro past AI distraction, I'm very optimistic about CCaaS decisions and AI decisions being made at a healthy clip.

And the only thing I would add would be, to your point, it's all about ROI. The good thing is AI drives some of the highest ROI values, right? And so a lot of the things that we're doing is a lot of enablement of our sales team to have a very AI-centric approach and what this comes down to a lot of times is these very large enterprises that are going to have to go through multiyear implementations to migrate from on-prem to cloud. And so some of the things that we're also doing within our implementation team is making sure that we adjust so that you can get value out of AI kind of on the front end and throughout the implementation, without having to wait until the end. And so between enabling our teams to really put together those ROIs and show the value of AI and then again, making sure that we deliver AI sort of time to value much faster for our customers. That will continue to help us kind of get through this, to Mike's point, this transitory issue.

Our next question will come from Will Power with Baird.

Okay. Great. Maybe start with you, Barry, just thinking about consumer retail, some of the exposure headwinds you've had there. I wonder if you could just kind of update us what you kind of saw through the Q3 period. And what your expectations and visibility are into Q4 as we head into this holiday season, presumably baked into guidance, but just kind of what the latest trend lines are?

Absolutely. So in the third quarter, we actually saw overall in all the verticals, except in one education, which is not one of the big verticals for us, a slightly better environment than we had originally thought. And as we look into Q4, and this is indeed baked into the guidance, is that we pay deep respect to the credit and debit card data from JPMorgan and Bank of America. Other banks are available, but we can only take so many and they are showing sequential declines, year-over-year declines nominally, even more so -- if we take into account inflation. And so we've prudently taken that into account when we set the Q4 guidance. And time will tell. At the moment, we're not planning that hockey stick that we typically would see in earlier years this year for the time being.

Okay. And if I could maybe just fit in one more, a bit of a follow-up on AI and some of the comments in the prepared remarks. I mean, I think you indicated you had 50% AI bookings growth in your existing customer base, I think that's probably up to small numbers. I know this has been one of the big opportunities, right? It feels like a lot of the adoption been new customers. Maybe just talk about what's helping drive some improvement there, the go-to-market changes? And what else is on the horizon to really kind of upsell that customer ratio.

Yes. Thanks, Will. So yes, some of the things that we've done, I think we mentioned it in Q1 is, we made changes with our customer success organization. We took our single AM role, split it up into that CSM and AD basically, that hunter and the nurture role. And so we're seeing a lot of encouraging signs of our account directors, aligning with our customers, putting together very strong account plans. And most importantly, we really trained the teams and enable them to focus on what the customer's business value is and what the requirements are [indiscernible] company objectives, I think previously, it was just about, hey, here's SKUs, do you want to buy them. This is more aligned what's your company objectives. And so a lot of anecdotal feedback from our customers is they love this approach, they love the alignment. And at the end of the day, again, we're just trying to drive that ROI value. And Mike mentioned the AI Blueprint, that's another thing that we've launched essentially helping our customers build a customized blueprint for how they take advantage of and deliver high business outcomes and kind of a road map of what are the solutions and products that we have towards that. So just kicking that off. But essentially, a lot of good change coming from our go-to-market changes.

Arjun Bhatia with William Blair has the next question.

Congrats on the nice quarter here. I heard, I think in your prepared remarks and in the presentation that enterprise new logo turnups were a record in Q3. Can you just maybe touch a little bit on what's driving that? Because I think we've been talking about that for a few quarters now? And then I would love to hear what else is in the pipeline as you look at kind of the remainder of the year and how that incremental revenue might trend from what you're implementing?

Yes. So I'll start, feel free to chime in, guys. But again, the backlog has been continually growing over time as we book more and more business, right? And I think it's important for everybody to understand that. Yes, we had a record number of turnups from new logos from that backlog, but at the same time, our backlog has increased, and that's a good sign for us, right? That really gets down to driving future growth in our business. So we're pleased with what we're seeing. And again, Andy, over the years, and his professional services team has -- they've built a machine for turning up customers, large, medium and small at a very predictable rate. So it's great to see.

Our next question will come from Ryan MacWilliams with Barclays.

One for Barry and one for Mike. Barry, just how should we think about the Acqueon contribution to the 4Q revenue guide? And then is it fair to streamline that for the rest of next year? And then for Mike, AI agents, this seems like a shift from agent assist to like a more proactive approach in terms of like working alongside the customer and potentially doing more outbound or like more expansive use cases. So I guess, how do you think that can really help your existing customers? And then how does that look like from a pricing or addition to a contract value standpoint for Five9?

Thanks, Ryan. A very good question, and thank you for asking it. We want to be really crystal clear. AI agents are really the next generation of IVA and DVA. So, we've talked about that, right? Intelligent Virtual Agent, which is essentially a voice bot right, a virtual agent. This is just the next generation of that as well as our digital virtual agent, DVA. So this is not in the agent assist category. It's in the self-service front-end part of the AI cycle, if you will. And it really just allows those IVAs or DVAs to do more. And it gets into the fact that them being -- having the ability to reason and actually be more autonomous. So it just levels up the amount of interactions that we can truly self-serve with our technology. So that's the easiest way to think about it, Barry.

And Ryan, thank you for that question. With respect to -- let me start with Q3. As I said in the prepared remarks, some people might have missed it. Acqueon, which closed in August contributed slightly less than 1% of the revenue for the quarter, the Five9 total reported revenue. With respect to Q4 and on into 2025, we are not going to be giving the explicit breakout. Why? It's because we've been partners, close partners with Acqueon over the last, say, 18, 24 months, some really big deals. For example, the Q1 Big Bank deal that was obviously on our paper, but on Acqueon business. The deal that Andy talked about for this quarter, which is also on joint paper, but our paper essentially. And so we have a co-mingling over here of the 2 companies. And it's a fools error to go and say, "well, this portion is the turbulent to Five9's work. This portion is attributable to Acqueon indigenous people." It's just a fools error to try and do that. And so since the numbers anyway are not that material, we're not going to go down that path.

And we'll now hear from Terry Tillman with Truist.

Great. This is Bobby Dee on for Terry. I wanted to double-click on the India data center opening and receiving some important certifications for operating in that market. How are you all sizing up the opportunity there? And what are the unlocks associated with that announcement?

Yes. No, exciting. An outlet for us. We've been building that for quite some time. The initial investment really started with some of our very large customers, a couple of our megadeal customers who had requirements in India to have kind of that local presence. And so we started down this path and built the data centers, launched them. We've been building, leading up to building a healthy pipeline to go start to fill up that data center. And so really, the goal is to kind of fill it up with the current backlog and then essentially move into building some go-to-market resources around how do we continue to accelerate that further. But again, really important milestone. There's a lot of, obviously, contact center opportunity in India. And again, customers have been asking for this for quite some time for us.

And I'm just going to jump in, if you don't mind. So I'm not going to go where you think I'm going to go. So Bobby, I just want to mention one thing though, when we look at gross margins, which we are on a mission to improve, and we've already shown a very nice sequential and year-over-year improvement. The India thing is nontrivial because as Andy mentioned, it's sitting there with a bonus of expenditures with very little current revenue will come. But in the meantime, it's a burden to bear, which will ameliorate over time, for sure.

Mizuho, Siti Panigrahi, has the next question.

Great. First of all, congratulations on your new executive hire chief product officer and EVP, sales. Great hires. Look, I want to ask a question about AI, that the question we are getting is a lot of investments right now going into start-ups on AI. And of course, you talked about some of the momentum in the AI within your installed base. I'm wondering, what are you hearing from your customer, those who are going for AI solution from Five9 versus some of them going after some of these start-ups to the AI, where you see the direct use cases on the customer experience side. How do you differentiate yourself? And what do you see the challenges and opportunity there?

Yes. No, great question. So we've talked about this before, essentially, right? If you look at where we sit is that power of the platform, right? And so when you look at the AI products that we're delivering, specifically the new AI Genius product suite, they're really purpose-built to take care -- to take advantage of that platform. So essentially, the front end, being able to have all the interaction data, merge that data up with and normalize that data to essentially give that full personalized experience. Yes. We're definitely seeing customers that are doing bake-offs essentially of these point solutions as well as us. We're having good success in those instances. And there's also times where if a customer does already has an existing solution that maybe they purchased or were engaged before we came in. We provide our voice stream integration, right, as we talked about before, to be able to allow them to integrate. And again, we monetize that on a consumption basis. And so Again, at the end of the day, if we focus on the right use cases for the customer, we believe the platform wins in the end. But ultimately, if there's solutions out there and partners of ours that want to integrate to our platform, again, we're all about delivering that business outcome. So we're seeing a little bit of both.

We'll now hear from Jim Fish with Piper Sandler.

This is Quinton on for Jim Fish. Maybe piggybacking a little bit on that last question. You talked about in those AI bake-offs, you are seeing some more of these point solutions. In terms of the mix, is it increasingly more and more you're competing against the point solutions and the CRM vendors? Or is it predominantly still CCaaS vendors that you're competing against for AI specifically? And then Barry, just quickly for you, as you look to 2025, how are you thinking about the mix between new and expansion here? Do you need a material kind of improvement in underlying NRR to hit the midpoint? Or are we baking in kind of flat from here?

Yes, good question. I would say it's still more of the point solutions, especially in our base, obviously, new customers were competing against our key competitors in their portfolio. We feel strongly about our natively built portfolio and how we put that together. And so that's been the majority of it. The CRMs, obviously, large lead flow for us, great relationship with them. You heard me talk about doubling down on go-to-market and engineering investments with ServiceNow and Salesforce. They're going to have their space where they win, and we're going to continue to be partners there. But at this point, it's mainly the point solutions that we're competing against.

And Quinton, I say your light is still on. In terms of the split between the 2, we haven't given those comments yet. I wouldn't see major changes in the dollar-based retention rate, but we're just not -- given the initial commentary, and we want as contenders over that for the time being.

And our next question will come from Samad Samana with Jefferies.

Billy Fitzsimmons on for Samad. Barry, maybe expanding on some of the prior questions. During last quarter's call, one of the factors cited that led to the guidance change was that some large deals may be stalled and maybe CIOs were citing constrained budgets at the time. First, was there -- is there any kind of change since last quarter? I know you kind of commented on that, but also second, can you walk us through how maybe some of those particular deals cited last quarter progressed in the third quarter. Did most of those deals now close? Are there still conversations or customers still on hold? And then how is that kind of reflected in the prelim commentary for 2025?

So happy to talk about this, Billy. So look, we had a better quarter in Q3 than we did in Q2. And that was actually in spite of a couple of very large deals -- I shouldn't say very large, medium large deals pushing into Q4. And so -- and the good news is those 2 deals that pushed out of Q3 and into Q4 were actually closed in October, in fact, fairly early in October. So Andy and team have done a great job of kind of -- just continuing to execute on the dolphins and the middle of that -- the middle of the bell curve, as I always call it, right, the bread and butter of our deal flow. If you look at the examples that Andy talked about, that third example is classic Dolphin. It's a $1 million deal. They valued our AI, they valued Acqueon, they've got just the right ingredients. And again, we're going to see, I think, that's a pattern that I look forward to seeing more and more of those kind of deals because, again, they're right in our sweet spot, there's tons of them, and they turned to revenue fairly quickly.

Our next question will come from Michael Funk with Bank of America Merrill Lynch.

Great. Thank you all for the question. Barry, you've talked a lot about the macro environment. But I'd love to hear your thoughts on the competitive environment. Are you seeing more competitive pricing pressure, more competitors at the table when you're bidding for a deal. And then finally, are you seeing customers ask for or get price down per seat coming to you asking for concessions or reworking and pricing?

Yes, Mike, I can go ahead and take that one. So yes, essentially, we're not seeing a different set of competitors. It's the main competitors that we've continued to have. In terms of pricing pressure, we're not seeing that either. I think we've held strong our pricing in terms of seat based. And then obviously, when you look at the AI applications that were building on top, we're continuing to see our MRR perceive go up. And so yes, that's really sort of the main thing, I think, from a competitive perspective.

Yes, I'd just like to add on to that, if you don't mind, Andy. I mean once, in the fourth quarter, we give the numerator and the denominator. And you'll be able to see clearly, again, that there's no major changes. These things move very slowly. And remember, we're selling more and more software. And with that comes a higher price, especially on the AI side, where it's so massive, the benefit to the customer and the benefit to ourselves. So people are not [indiscernible] volunteer to information and then I do -- never sold the contact center system in my life. But people are not making this decision based upon price. They want to see a road map so that they can believe in. Do we have AI leadership, that sort of thing. And of course, that is not an open checkbook, but it's still very responsible across the industry.

And we have time for one additional question, which will come from Catharine Trebnick with Rosenblatt.

One of the questions I had is Verint. You have a partnership with Verint and how is that progressing compared to the 1 that RingCentral announced today. And they announced $11 million deal for voice spot? And how does that play in with what you're working on?

Yes. Great question, Catharine. I've already heard from Dan Bodner, they're a key partner for us. Verint that is, the CEO at Verint. We continue to do a lot of business together I think what -- again, if you think about what Verint does, they're WEM provider. They partner with the entire market of CCaaS players. And I think it's important for their business for them to be open and partnering with more than just Five9. We're their #1 partner. We just won their partner of the year again. But we don't have any issue with them partnering with other players, and we get that. That interest expands their market opportunity. And RingCentral is at the low end of the contact center market. They've been in the UC market for a long, long time. They're building their own CCaaS solution and replacing over time, probably the nice CCaaS solution with their own. And just like we partner with Verint, they're going to be partnered with Verint. So I think it's all good for the industry. And again, I know both Vlad at Ring and Dan at Verint. They're both good leaders and quite frankly, good partners to us. So it's all good.

And the only thing I would add would be, you've heard us launch the cloud-to-cloud integration with Verint's cloud portfolio. We're building a strong pipeline there, executing. And so we'll continue to see opportunities where our teams work closely together with our customers and they have their bot portfolio. And at the end of the day, we'll look at what's the best solution for the customer in terms of the ROI around AI use cases.

Well, and that does conclude today's Q&A session. I'll turn it back to Mike for closing comments.