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 improvements in financial and related metrics, expected ARR from certain customers, 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, our AI revenue opportunities and current estimations regarding same, company growth, enhancements to and development of our solution, market size and trends, our expectations regarding macroeconomic conditions, company market position, initiatives and expectations, technology and product initiatives, including investment in R&D and other future events 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 the impact of macroeconomic challenges, including continuing inflation, uncertainty regarding consumer spending, high interest rates, 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 website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today, February 20, 2025 and may no longer be accurate at the time of a 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. I'm pleased to share that we finished the year strong with annual revenue exceeding $1 billion. This was driven by fourth quarter revenue growth accelerating to 17% year-over-year, primarily due to our subscription revenue growing 19%. Adjusted EBITDA margin for the fourth quarter reached a record 23%, helping drive record operating cash flow of $50 million or 18% of revenue. And record free cash flow of $33 million or 12% of revenue. As you all know, we take a balanced approach to delivering top line growth and bottom line profitability. I'm highly encouraged by the execution and bookings momentum being delivered by our sales organization, especially in the $1 million-plus ARR part of our business. Andy will provide more color on this in a moment. Also, we recently held our global sales kickoff and the passion, energy and excitement were unparalleled as we all aligned on our formula to drive success for our customers and continue building upon our momentum in 2025 and beyond. On today's call, I will spend much of my time covering our progress in AI and how we believe platforms like Five9 are uniquely positioned when it comes to AI for customer experience. We continue to extend our leadership position in AI as demonstrated by our enterprise AI revenue growth accelerating to 46% in the fourth quarter. AI has now grown to 9% of enterprise subscription revenue. We believe AI revenue momentum will continue as AI bookings for enterprise new logos grew nearly 50% year-over-year in Q4. Again, making up more than 20% of enterprise new logo ACV bookings with 100% attach rate on $1 million-plus ARR deals. We are also successfully penetrating our enterprise installed base with AI bookings growing 50% year-over-year in Q4. And now I'd like to spend a few minutes talking about how we believe platforms like Five9 are uniquely positioned when it comes to AI for CX and why we are winning in AI and why we expect to continue winning. Of course, you're all aware that we have a broad portfolio of AI solutions but I'm going to focus today on self-service and AI agents. As consumers, we all know, AI agents will only be used by consumers if they are accurate and personalized. When we say accurate, I think that's pretty obvious to everyone. And when we say personalized, we mean that the AI agent knows enough about you as the consumer such as who you are, what products and services you've purchased from the brand, the details of your recent interactions with that brand, including recent problems or issues you've had and so on. And brands are learning that if they want to offer AI-driven self-service, these AI agents need to be accurate and personalized. And like I said, if they're not, consumers will not use them. CCaaS platforms like Five9 are uniquely positioned to deliver these accurate and personalized AI agents. This is our moat and this is why we believe we will continue to win in AI for customer experience. Let me explain further. Four key ingredients are required to deliver this accurate and personalized self-service using GenAI. First, you need access to LLMs. Second, you need real-time contextual data about the consumer and the brand. Third, you need historical interaction data specific to the consumer and their interactions with that brand. And fourth, you need channels to connect consumers to that self-service application as well as provide an escalation path to a human agent when needed. So let's take these one at a time. The first ingredient, access to LLMs has become commoditized now and all vendors have the ability to use a mix of open source and hyperscaler provided models. Five9, however, has been at the forefront of engine-agnostic AI for many years, ensuring that brands can easily change the underlying engine quickly to leverage the latest, greatest and highest performing models. Our strategy of being engine-agnostic continues to be validated with every new engine that emerges. And as everyone knows, this is happening almost on a weekly basis. Additionally, we have a team of AI experts benchmarking these engines to ensure our customers can leverage the best engine for a given use case. On the other hand, solutions that are built on proprietary models will not be able to leverage these new innovations that are rapidly coming to market. Therefore, we believe Five9's approach allows our customers to future-proof their AI decision. And when it comes to our competitive moat, it's clear that the layer above these engines is what matters. And that layer includes our AI applications that require business logic, that require workflows, that require important data and integrations to back-end systems. The second ingredient, contextual data is what is fed into the LLM in real time and provides true context around an interaction. This includes customer-specific details as well as brand-specific knowledge, both of which are often distributed across many back-end systems. Unlike AI point solutions that require costly one-off integrations to access contextual data in real time. Our platform typically is integrated into more than 20 back-end systems during the initial customer deployment. This means that when a brand adopts AI with Five9, they can immediately leverage our seamless integrations which are designed to reduce cost, accelerate time to value and deliver accurate and personalized experiences at scale. The third ingredient is historical interaction data from which Five9 is the system of record. Historical interaction data is comprised of voice calls, texts, e-mails, web chats and social interactions between a consumer and that brand, including interactions handled by human agents as well as handled by AI agents. This historical interaction data is a significant requirement for personalization. In other words, the AI agent knows not only who you are and what products and services you purchased but it also knows every detail of your prior interactions with that brand, including what problems or issues you had. The fourth ingredient is channels such as voice, text, e-mail, web chat and social. You need these channels to connect consumers to an AI agent as well as provide a seamless escalation path to a human agent when needed. The market demands AI agents that work across all these channels. However, providing the voice channel globally at scale with reliability is a huge barrier to entry. We have invested hundreds of millions of dollars over 2 decades to build that globally connected platform optimized for CX across these channels. AI point solution vendors entering the contact center market have not made that significant investment nor are they likely to which is why they prefer to integrate to our platform. We believe these AI point solutions as well as other third-party AI will continue to integrate to our platform to gain access to these channels from us. That positions our platform as a control point in the AI-driven CX ecosystem, enabling us to monetize that access which we are successfully doing through voice stream and transcript stream. So to summarize, the last 3 of these 4 key ingredients are unique to platforms like Five9. In addition, our AI experts act as a force multiplier working closely with our customers to tailor an AI blueprint for their business and help them deploy our AI solutions to deliver real business impact. We not only have the talent to ensure success but we also provide products like AI Insights to identify high ROI opportunities to deploy AI to enhance CX and drive operational efficiency. As well as our studio products that provide the ability to build these self-service applications, workflows, integrations and business logic. And as a result, we believe our comprehensive AI suite combined with our deep AI expertise will enable us to continue winning in AI. Our differentiated approach to AI is being validated by the industry where we were once again ranked as having the best AI solutions in the semiannual Baird survey that was recently conducted in December. Additionally, industry analysts continue to recognize our innovation with Five9 recently winning the 2024 Aragon Research Innovation Award for AI contact Centers. Five9 was positioned as the most strategic vendor reinforcing our leadership in AI driven CX and our long-term vision for the CX market. Now, I'd like to touch on the momentum we are seeing with our ecosystem of partners. Our partners have been an important part of our success here at Five9. We have significant opportunities in 2025 to continue our momentum following announcements we've made over the last few months with partners such as Salesforce, ServiceNow, Microsoft, Verint and Google. The partnership between Salesforce and Five9 continues to gain momentum, driving alignment across go-to-market strategies, product innovation and customer acquisition. Salesforce and Five9 share a vision where AI agents and human agents work together to elevate customer experiences. We are strengthening the integration between Five9 and agent force to develop industry-specific AI agents, including patient scheduling agent and a collections agent. Furthermore, we are harnessing customer interaction data, such as real-time voice across sales, service and marketing clouds to create a seamless and unified customer journey for brands. In numerous recent wins, we've been able to work with Salesforce to deliver a unified CRM and CCaaS platform for customers to deliver AI elevated CX in industries, including telecommunications, financial services, software, life science and other industries. In November, Five9 and ServiceNow jointly announced an expanded partnership to bring AI-powered solutions for unified employee experiences and customer experiences. By enhancing our integration, we're streamlining self-service and assisted service, creating more efficient support processes that reduce cost, boost agent productivity and elevate customer satisfaction. Via this expanded integration, Five9 and ServiceNow are redefining the next generation of CX, expanding beyond our history of ITSM integration and into integrated CRM experiences. Customers gain single-agent experiences for voice and digital interactions and a unified routing engine to streamline engagement. Additionally, in December, we announced the latest release of our Microsoft Teams UC integration. Enterprises are constantly bringing the unified employee communications platforms closer to the customer services platforms to enhance employee efficiency and productivity. Five9's integration with Microsoft Teams brings this to life and enhances employee productivity by delivering our game-changing bidirectional presence between Five9 agents and Microsoft Teams users to simultaneously view each other's real-time availability. This empowers agents and experts to collaborate internally with confidence. And we are pleased with the momentum we're seeing as we have had several new customer wins during the fourth quarter using this enhanced integration. And with Verint, we've made a key announcement in late Q3 regarding our strengthened partnership announcing a new native cloud-to-cloud platform integration which includes Verint bots. During the fourth quarter, we saw an acceleration of opportunities validating demand for our integrated value proposition. And finally, we're so excited to announce Five9's global availability on Google Cloud Marketplace, including the full Five9 AI-powered CX platform plus the release of a stand-alone, Five9 AI agent designed for Google Cloud. Businesses can now quickly activate Five9 seamlessly through Google Cloud Marketplace, a universal catalog of enterprise-grade, prevalidated solutions that run on or integrate with Google Cloud. This simplifies the procurement, billing and deployment of our joint solution to deliver AI elevated CX. Our innovative solutions which leverage Google Cloud technology can enable organizations to create exceptional customer experiences while leveraging their Google Cloud credits to drive loyalty and business success. We're excited about this new route to market and look forward to bringing on more mutual customers with Google. In summary, our record results and strong traction in our AI business continue to demonstrate the power of our platform and enabling brands to elevate their CX in this rapidly evolving world of AI. At Five9, we've always been ahead of the curve. Just as we paved the way for the cloud revolution in CX, we are now leading the charge in delivering the new CX powered by our suite of AI solutions. I also want to take a moment to thank our amazing team of Five9ers [ph] whose relentless dedication and passion empower us to continue to lead this market. We believe we are well positioned with our AI-powered platform and trusted AI experts to continue driving durable, long-term growth and we look forward to building on our momentum in 2025. Before I turn it over to Andy, I'd like to comment on one more topic. As many of you have probably seen, earlier today, we issued a press release announcing Barry's retirement as CFO effective March 31 as well as his providing assistance with the transition for 6 months. Barry, I just want to express my deepest gratitude to you for your exceptional leadership, partnership and unwavering commitment to Five9 these last 13 years. You have played pivotal role in shaping our company's growth, financial strength and company culture. Your contributions have been invaluable. It has been an honor to work alongside you Barry. And on behalf of the entire Five9 team I wish you the very best in your well-earned retirement. I'm also pleased to announce the appointment of Bryan Lee, our long-term EVP of Finance to the role of interim CFO. Bryan will be joining us on the call today. As many of you know, he has gained an extremely deep understanding of our business over the last 11 years. Having worked closely with Bryan during his tenure here at Five9, I'm excited to have him step in as interim CFO and I'm confident in his ability to excel. We will be kicking off a CFO search with Bryan as an internal candidate. And with that, I will now turn it over to our COO, Andy Dignan. Andy, please go ahead.

Thank you, Mike and good afternoon, everyone. As Mike mentioned, we had another strong quarter of sequential bookings growth that exceeded expectations. We are pleased with the early results we are seeing from the realignment of our resources and enhancements to our sales motion. For instance, we had strong enterprise new logo bookings in Q4, driven by the highest number of $1 million-plus ARR new logo wins in any quarter of 2024. Additionally, Q4 installed base bookings came in at the highest level we've seen in 8 quarters. We also continue to experience heightened levels of RFP volume in the fourth quarter and our pipeline remains robust as we enter 2025, in part driven by our Acqueon pipeline, increasing 4x sequentially. And now as we normally do, I'll share some of the examples of key wins for the quarter. The first example is a leading real estate investment company focused on health care infrastructure, senior housing operators, post-acute care providers and health systems. Their contact center manages urgent service requests from existing residents and various inquiries from potential residents. They were limited by their on-premise system as they struggle with operational inefficiencies and quality. They chose Five9 for our industry-leading omnichannel capabilities across voice, text, chat and e-mail as well as our Agent Assist to transcribe summaries into the CRM and AI insights to gain visibility into interaction trends, identify opportunities deliver high ROI AI-powered outcomes. We anticipate this initial order to result in over $3.1 million in ARR to Five9. Now the second example is a nonprofit health system with 9 hospitals and hundreds of primary specialty and urgent clinics. They have been using a premise-based solution which was very limited. They chose Five9 for our comprehensive platform that includes our Acqueon solution, allowing the health care provider to manage voice, chat and e-mail and improve the experience for agents and patients through our key integrations, including Epic, ServiceNow and Salesforce. Additionally, they leverage our quality assurance and automated scheduling through our WEM powered by Verint. While Five9 Agent Assist transcribes conversations and standardizes responses, we said this initial order to result in approximately $3 million in ARR to Five9. The third example is one of the largest credit union service organizations in the country that selected Five9 to replace multiple on-premise solutions that were causing inefficiencies, missed SLAs and poor CX. By consolidating onto Five9, they now benefit from streamlined operations, seamless integration with multiple third-party systems and our WEM solution powered by Verint. Additionally, they adopted our IVA platform to enable self-service for account inquiries, fund transfers, payments and more. We anticipate this initial order to result in approximately $2.4 million in ARR to Five9. Now, I'd like to highlight a Q4 expansion in one of our largest customers. A parcel delivery company, where we expanded into a new business unit that was running on an on-premise solution. This business unit provides customer support for global documentation, taxation, customs and regulatory requirements. This was implemented in live within 60 days and represents over $1.2 million in additional ARR to Five9. With that, I'd like to turn it over to Barry to take you through the financials. But before doing so, I'd like to echo Mike's comments and extend my gratitude to you, Barry, for your leadership and your commitment to Five9. Barry?

Thank you Andy and Mike for your kind words. And thank you both for your leadership and support through my tenure at Five9. It has been an incredible privilege to work alongside you and the outstanding Five9 team over the years. I have been working uninterrupted for 50 years, including 13 deeply rewarding years here at Five9. That's a lot of early morning alarms, working through vacations and time away from family. Now it's time to rebalance and focus on my personal journey. As I step away, I do so with immense confidence in Bryan's leadership. He is more than just a safe pair of hands. He is a natural leader, a strategic thinker and someone deeply respected both within the company and by many of you who have worked with him over the years. Few understand Five9's financial engine better than he does. I will be cheering this remarkable company on from the sidelines as it seizes opportunities of an AI-driven future backed by an exceptional leadership team and a culture that continues to inspire. Thank you, again, for the incredible journey and now to business. We are pleased to report fourth quarter revenue growth of 17% year-over-year, primarily driven by subscription revenue growing 19% year-over-year, in Q4. Subscription revenue growth was driven by, first, as Andy mentioned, strong install-based bookings; second, continued strength in that market where our $211 million plus ARR customers made up 56% of subscription revenue, growing 26% year-on-year. And third, by the significant traction we are seeing with our enterprise AI revenue which grew 46% year-over-year. In the fourth quarter, subscription revenue made up 79% of revenue, while usage revenue accounted for 14% and Professional Services made up the remaining 7%. Enterprise revenues from subscription, usage and PS combined made up 89% of LTM revenue. Our commercial business which represented the remaining 11% grew in the low single digits on an LTM basis. Our LTM dollar-based retention rate remained the same as last quarter at 108%. Turning now to profitability. We are pleased to again report strong margin expansions across the board, driven by the increase in revenue, scaling against fixed and semi-fixed costs, a full quarter impact of the RIF and our ongoing focus on tight expense control. As a result, Q4 adjusted gross margins increased approximately 220 basis points year-over-year to 63.5%. And adjusted EBITDA margins increased approximately 290 basis points year-over-year to 23.1%, an all-time record. I'd like to point out that stock-based compensation, again, decreased year-over-year from $50 million to $38 million an improvement of 7 percentage points to 14% of revenue in the fourth quarter. As a result of both the improved adjusted EBITDA margin and significant improvement in stock-based compensation, we are very pleased to report GAAP operating income of $4.2 million and GAAP net income of $11.6 million in the fourth quarter. Fourth quarter non-GAAP EPS was $0.79 per diluted share, up $0.18 year-over-year. And now for a closer look at the key full year 2024 income statement metrics. As Mike mentioned, 2024 revenue exceeded $1 billion, growing 14.4% year-over-year. 2024 adjusted gross margin expanded by approximately 70 basis points year-over-year to 61.7%, while 2024 adjusted EBITDA margin expanded by approximately 50 basis points to 18.8%. 2024 non-GAAP EPS came in at $2.47, a year-over-year increase of $0.42 per diluted share. Now, I'd like to share some cash flow highlights. I'm pleased to report that LTM operating cash flow reached an all-time high at $143 million or 14% of revenue. This is primarily driven by record adjusted EBITDA and continued strength in DSO performance which came in at 34 days. LTM free cash flow also came in strong at $79 million or 8% of revenue. As Mike mentioned, our fourth quarter operating and free cash flow both hit all-time records of $50 million and $33 million, respectively. Before turning to guidance, I would like to comment on seat count. As our business has evolved, the seat count metric we have been providing annually in the fourth quarter have become less relevant as a growing number of our products are no longer priced on a per seat basis. Subscription revenue is the most meaningful metric for our business as it reflects the growth in customers coming on to our platform as well as the products they are purchasing. We are mindful though that we need to close the supporting that properly and we are, therefore, sharing that the average seat counts totaled 432,818 in the fourth quarter, including Acqueon. Going forward, we will not be providing our seat count metric given that it is no longer a meaningful performance indicator. One more item before guidance. Given the CFO transition, we will not be hosting analyst day in the first half of this year. Please stay tuned for an update on timing. Turning now to our full year 2025 and first quarter guidance. For the full year, we are guiding annual revenue to a midpoint of $1.14 billion which is $11.5 million higher than the high-level outlook we provided last quarter. This, of course, is a starting point and we will update our outlook as the year progresses. With regards to the bottom line, we are guiding 2025 non-GAAP EPS to a midpoint of $2.60 per diluted share which is $0.08 higher than the high level outlook we provided during our last earnings call. Please note that this guidance reflects our assumption that we'll use cash to retire the remaining $434.4 million principal balance on our 2025 convertible notes which will be maturing in June. Also, we expect annual adjusted gross margins and adjusted EBITDA margins to improve further year-over-year. As for the first quarter, we are guiding revenue to a midpoint of $272 million. This represented a 2% sequential decline which is similar to our typical guidance pattern in the first quarter. As for the remainder of the year, we expect a very small sequential growth in the second quarter and larger sequential increases in the second half. We expect first quarter non-GAAP EPS to come in at $0.48 per diluted share at the midpoint, a decline of $0.31 sequentially. As a reminder, our first quarter non-GAAP EPS is always the weakest of the year and the $0.31 quarter-over-quarter decrease is similar to our typical guidance pattern in Q1. For the remainder of the year, we expect non-GAAP EPS to increase slightly in Q2 and further improved in the second half. Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count, taxes and capital expenditures as well as the LTM enterprise subscription revenue. In summary, we are very pleased with our fourth quarter performance. We accelerated revenue growth and we have demonstrated as the metrics make clear, superb execution on our winning AI strategy and we were efficient. We achieved record highs for adjusted EBITDA, GAAP net income and for operating and free cash flow. In 2025, we will remain laser-focused on driving higher profitability while investing surgically in key strategic areas to further position as a leader in AI for CX. Operator, please go ahead.

Thank you, Barry. [Operator Instructions] And with that, our first question comes from Ryan MacWilliams with Barclays. Ryan?

Excellent. Barry, man, congrats on the career, this is tough but, it's great work with you. And I'm going to have some Cap'n Crunch in your honor this weekend. And for that reason, I'll save my first question for Mike. Mike, how have the conversations with your customers has been since the election. Has there been any changes or any changes to start this year? And as you think about potential upside drivers for 2025, we'll get you most excited? Is it potential improvements in cloud conversions for larger contact centers? Is it AI upsells? Is it adding more usage or seats? Like what could improve in 2025?

Yes. Great questions, Ryan. Look, our conversations with customers continue to be very focused around leveraging AI. And frankly, we're investing a lot in enabling our go-to-market teams to be the AI experts and help guide our customers in this new world. Our results are showing our progress with AI, not just technically but in our business, right, up to 9% of our revenue mix and 46% growth in enterprise AI revenue. So it's a new world and the customers all want to talk about the new world but I'll -- you heard a lot of my comments were kind of nuts and bolts around self-service. And we spend a lot of time talking about Agentic and other very advance things that we're obviously delivering as an industry. But today, our customers, they want to deliver self-service and they want to deliver it accurately, in a personalized way. And that is so important to them. And so that's why I really spent a lot of time today talking about that. In terms of upside drivers for us in 2025, obviously, look, AI is growing faster than the rest of our business but our core business is growing very, very nicely. Subscription revenue is the key metric, 19% this last quarter. We're very excited about the pipeline we've got. Andy and Matt and the rest of the sales organization are executing in a -- just a great way. And I think we've still got upside on that but we're getting -- we're just getting to that level where I feel like we're optimized but I think we've still got a little headroom there, too. So I think there's upside there as well as, obviously, we've talked about macro and the impact of a better macro is going to be significant as well. But again, we're delivering this growth that we delivered in Q4 and arguably a sideways macro, a little bit better in Q4, right? It was a little better and we'll talk about that, I'm sure.

Our next question comes from DJ Hynes with Canaccord.

First question is for Barry, what are you going to do with all those ties?

I saved the special one for today.

Mike, one for you. So I think one of the questions that I think investors are wrestling with is, if it's not the CCaaS vendors, whose AI or agents that end up winning in the space, right? Like maybe that business gets cut off at the pass via Salesforce or ServiceNow or whoever that third party might be. Like obviously, those other systems still need access to that contextual data that you highlighted as being so important today, right? All that resides inside of Five9. Can you talk about how you monetize that data access and what that could mean for your financial model just given there's still some uncertainty about kind of who wins in the end with AI?

Yes. Really good question, DJ. And again, you're spot on, right? It's about contextual data. AI is only as good as the data it has access to. And our platform is control point for a lot of that contextual data. Not just information about the customer and about the brand but also about recent interactions between that consumer and the brand. It's absolutely critical to delivering AI-driven self-service, as I said in my remarks. And the good news is, as you stated, look, we're a winner either way. We are a great partner to Salesforce, a great partner to service now. We are in the market together. And look, we're in the business of winning the CCaaS platform. We know that Salesforce, for example, is in the business of winning the CRM platform. The question at hand is whose AI is the customer going to choose. It's going to be a mix. We're very convinced of that. And the good news for us is, even if in a given use case, for a given business unit that organization wants to use Salesforce for their AI. The good news is they still need access for that AI to do its job, they need access to all the contextual data in our platform. And that's why we're great partners. They know they need us and we're very welcoming to that relationship. We want to do what's best for the customer at the end of the day. We monetize that through voice stream and transcript stream. Think of that as a pipe or an API where essentially, we're charging on a per minute consumption basis. That adds up to somewhere between $40 and $50 per month in recurring revenue to us just for that connection per AI agent, say, on that third parties part. So -- and again, that can actually scale up even higher than that on a monthly revenue basis. For us, if those AI agents are more efficient than, say, a human agent. So yes. Hope that's helpful.

Our next question comes from Michael Turrin with Wells Fargo.

Wonderful. Testing my reflexes with the

Yes. So let me start with the fourth quarter. We look at it by vertical. And it is clear that for the consumer, in particular but health care as well, it is better than we originally anticipated and better than last year. I know that a number of you have rolled your eyes when we keep talking about the JPMorgan data, especially if we don't work at JPMorgan. But at the end of the day, the numbers are clear. If you look at last -- well, look at Q3, the numbers is 112% [ph], those percentage increased in July, August and September. And then for this last quarter, October, November, December, it was 344% [ph]. So for the first time in a long time, we've had actually positive real growth as opposed to just nominal growth. And that showed up in the numbers. Interestingly, in the consumer side, there was actually more use well -- both health care and consumer actually there was more usage. Telephony usage, that's why it went from 13% of total up to 14%. And you can -- you just can't hire an agent that quickly and who got -- you might have this longer hold time or whatever. You just can't fix that quickly. And with respect to 2025. Look, we're not macroeconomists. We don't know exactly what's going to happen. What we do know is that there's a lot of uncertainty out there. January retail sales were the weakest in 2 years almost. And you're talking about tariffs, you're talking about deportations. You're talking about wars and so on. And we just -- we compensate for that by being more prudent. And we've layered that prudency into 2025. And by the way, you should be hearing these financial answers in serials because the guy who actually is doing it is Bryan. And lastly, we took an extra layer of the portion in the seasonality for the second half of the year because of the massive uncertainty we're facing.

You asked about expansion. And as you heard Mike talk about in our installed based booking teams, we made some changes in Q2 and this is really starting to accelerate. And so having the largest installed base bookings quarters in 8 quarters with 50% year-over-year growth in AI driving that. It gives us a lot of confidence on the expansion side that the teams are really executing on what we're asking them to do.

Our next question comes from Siti Panigrahi with Mizuho.

Barry, congrats on your retirement. Certainly, it was great working with you and Bryan congrats on your new role. So Mike, I want to keep it at a high level and we keep hearing about how AI is going to replace human agents. Even we saw last year when Klarna announced that they're going full on an AI for customer support. And then recently, I don't know if you have seen, they talked about reversing the course now to include human agents. So my question is, as AI is becoming more mainstream, what are you hearing from your customers when they are thinking about their AI strategy for customer surveys -- I mean customer service? And what's your view on seat reduction, we should expect? How would that offset by AI?

Yes. Thank you, Siti. A great question and thank you for citing that quote by the Klarna CEO. It's amazing how -- look, we all get out ahead of ourselves sometimes when there are innovations like this, right? And I'm not surprised at all. We've been saying that, look, that was an over rotation to say the least. Our customers are doing what we've been saying for quite some time. What they're trying to do is deflect the self-service on the margins, some small percentage of their interactions, 5%, 10% in the near term. Eventually, it will be a little more than that if we're all successful in delivering Agentic and personalized and accurate AI which we're well on our way to doing. But at the same time, look, there -- they're being very -- our customers are being very calculated around how fast they try and push automation upon their consumer, right? It's so important to deliver a great customer experience. At the end of the day, we're still getting tremendous ROI. Even if they're able to shave 5% of those interactions and put them through self-service. It's usually resulting in just less growth in human agents as opposed to a true reduction. But sometimes, again, they're striving to get that labor arbitrage ROI in the long run, for sure. And we're helping them deliver that very tangible ROI. So it's a real thing but it's not anywhere near what I think people were concerned about.

Our next question comes from Scott Berg with Needham.

Hi, everyone. First of all, can you hear me okay?

Yes, we got you, Scott.

Great. Nothing like being in an airport lounge right now but all good there. So Mike, why don't you just talk about the bookings and maybe Andy wants to take this. You seem pretty happy with the fourth quarter bookings. Are they -- as you've seen pipelines and booking activity actually hit, is it truly in kind of a normalized environment today relative to what you saw in Q2? And the improvement that you saw in Q3. Just trying to help understand where we are in that trajectory, if that's still to come or you think we are squarely there today?

I'll start and Andy, please chime in. Scott, it's a very good question. We've talked about this in the past, right? Q2 was kind of the pinnacle of the AI fog as I call it, the distraction factor, right, where everybody was just really trying to figure out AI. Q3 got better, Q4 got even better on top of that. And again, it's -- I wouldn't necessarily say we're all the way back to normal because there is still uncertainty, there's still kind of this in the macro side of things. Again, our bookings were strong on both net new and installed base but again, I do believe in an even healthier macro, there's upside there. But Andy?

Yes. I mean the only thing I would add, Scott, would be just the execution of the team, right, is in terms of we got -- we're focusing on mega deals. And when I look at the largest number of $1 million dollar-plus ARR deals in 2024 and just look what the team is executing on. We're getting more of the dolphins, right, more the size of the customers that we -- which is the engine of the company which is the biggest part of the market and that's good to see.

Got it. Helpful. And then, Mike, in your pre-scripted comments, you've spoken about some agents that you're building in conjunction with Salesforce in a couple of different areas. What does the monetization of that look like relative to your own agents? Help us understand what that economic model kind of looks like for Five9?

Yes. And it relates to my earlier comments, Scott, again, we're monetizing third-party AI if it's in some of these cases. But again, when it comes to Salesforce, a lot of times, it's our AI, not theirs. Sometimes it's going to be their AI but we monetize it if it is their AI through transcript stream and voice stream. And again, it's a win-win no matter what, between Five9 and Salesforce, where we like to say we're better together and we're out winning joint accounts, especially in some of these vertical markets like health care, where we're actually delivering vertical AI agents like patient scheduling agent which AI agent which is, again, if you think about it as a consumer, wouldn't it be great to be able to schedule a health care appointment with AI instead of a human agent. That's a perfect transaction for AI to handle and we're doing it with Salesforce through some deep integration. It's pretty cool.

And then lastly, Barry, it's been a really fun 10 years. Thanks for all the fun time.

Thanks, Scott.

Our next question comes from Peter Levine with Evercore.

Congrats, Barry on your retirement. Maybe a 2-part question. One is on the AI trajectory, the 9% which is up from 7% in Q4 of last year. Maybe help us understand what's the trajectory of that look like? Is it steady state? Or is there an inflection point where we could really see that ramp and then the second question would be, Barry, you talked about CCaaS not being the right metric anymore. Customers are moving more from a seat basis to more of a consumption token-based model. So maybe help us understand. You guys used to talk about a metric where the seat price was 150 [ph] for the core and then there was a 3x to 4x uplift. Is that still the case with a fully autonomous agent today if the seat count metric necessarily isn't the right metric?

Yes. Let me start, Barry and feel free to chime in. Peter, great questions. The trajectory out of our AI revenue is, again, it was 46% year-over-year growth in AI revenue, this is the enterprise part of -- in our SMB or commercial business, there's not a lot of AI there. So where AI exists for us is in our enterprise business. It grew 46% year-over-year in terms of the trajectory. That's up from, I believe, 40% last quarter. And again, we talked about kind of our bookings as a leading indicator and that's what I said. I said we feel very good about AI revenue growth in the future given the bookings growth that we're seeing for AI. Net new is attached as well as in the installed base. So again, we're very pleased with the fact that it's growing in the mid-40s and that's obviously growing a lot faster than the rest of our business, albeit it's only 9% today. But again, a growing percentage of the mix. We're excited about that. Barry, if you want to start on the seat count side of things. I may add a little bit but I'll let you.

Well, it's very straightforward, Peter. There's a huge ROI to our customers from this. We're going to be able to charge for that on a consumption basis as we currently are. And the number that you cited at 3x, when you do compare it to the historic seat base which is still, of course, the majority of our business, it is in the order of 3x on -- particularly on IVAs. But you heard Michael talk about the voice stream and transcript stream adding another $50. And there's more than enough to go around for our customer and for Five9.

Yes, I think you said it. That's good. Thank you, Peter.

Our next question comes from Taylor McGinnis with UBS.

Okay. Can you guys hear me? Perfect. Barry, congrats on retirement. Sad to see you go but I'm very happy for you as you take that next chapter.

Thank you.

Barry, maybe for you and Bryan, too, when you talked a little bit about the usage trends earlier and it was clear like in the results that there definitely was a big acceleration in that piece. So as we get into 1Q, can you just talk about the trends that you're seeing? Are you seeing maybe a little bit of a reversal from what you saw in 4Q. Can you remind us maybe what verticals are -- have greater exposure in 1Q? And maybe just like a second part to that question, how we should think about the trajectory of NRR from here?

Got it. So I'm happy to answer the first part and then I'll pass it on to Barry. But before I do, Taylor, I just want to say to Barry, it's been truly an honor and a career highlight for me to have worked with you and I just want to thank you for everything you've done for Five9 and for me personally. And I hope you love retirement as much as you love being CFO of Five9. And so to get back to your question, Taylor, in terms of the Q1 guide, you'll see that we're implying a 2% quarter-over-quarter decline. And that is right within the range of 0 to negative 4% that we typically guide to for Q1. But if you compare it to last year, you'll notice that we actually guided to sequential flatness quarter-over-quarter in Q1. That reflects what Barry said earlier. We had a stronger-than-expected seasonal uptick in consumer and health care in Q4. So we're expecting the downtick to be stronger than what we saw last year. And there's actually one more component there from a tough comparison perspective. So one of our biggest mega customers was going through a significant growth phase in the ramp throughout 2024 who've ended the ramp. But if you kind of look at these multiyear ramps, is usually small contributions in the beginning and much more in the latter part. So that Q4 to Q1 transition last year compared to this year, it creates a little bit of a tough comparison. So that's what's in the 2% guide quarter-over-quarter decline. But I do want to emphasize the fact that you know we have a prudent guidance philosophy and that hasn't changed.

Yes. And Taylor, in terms of the DBRR, on the surface, it looked like it's quite placid. We've had 3 quarters at 108% but there's actually significant crosscurrents underway. On the headwind side, if you will, working against us is the fact that we have sharper downtick, as Bryan just mentioned but also on top of that, just the muted seasonal uptick that we're assuming for the time being. On the positive side, we have the AI momentum. We have the million-dollar plus customers that have a dollar-based retention rate that is meaningfully higher than 108% and which are growing faster. They're growing this last quarter at 26%. I believe, yes. And so we don't quite know how to handicap that. What we can say is that whether that goes up, slightly or down likely over the upcoming quarters, that fluctuation is likely to be extremely minor. And that's the best we can say at the moment.

Our next question comes from Meta Marshall with Morgan Stanley.

Great. And I'll echo the congrats, Barry. A couple of questions. I know you guys have kind of made it across the board. RIF has been kind of flowing through results this year. Just how do you think about kind of where investments as you kind of ramp up, again, will kind of be most focused, particularly given the RIF. And then maybe just second, just any disruption from Dan's kind of upcoming departure, Dan Burkland's kind of upcoming departure?

Yes. Thanks, Meta. I'll talk about Dan first, again, Look, we promoted Matt to EVP of Sales andy has all of sales and go-to-market functions rolling up to him now. And as both Matt and Andy have kind of solidified in their seats. Dan will be less involved in the day-to-day and moving to a consultant role. And again, we don't -- we've been extremely lucky to not have disruption. We've been a team forever. We're still a team. And that's just kind of the Five9 way. That's part of our culture. So I would say, very, very little disruption, if any. And in terms of where we're investing, it is -- look, we believe in this market so much and we obviously are going to continue to put the pedal down a little bit on R&D investments, specifically in AI to extend our leadership position there. It will probably -- not probably but we are also pretty focused on our go-to-market team and our sales capacity and our quota capacity. Again, the way we grow our business, the way we've been growing it for 17 years I've been here, is bookings growth, right? And the only -- there's a formula there. Obviously, we got to grow the top of the funnel but we have to increase our quota capacity along with that. And we're very careful about not getting out ahead of ourselves but you'll see us continue to add quota capacity through the year as well. So it's really building product and selling product and those will be the priority areas for us.

Our next question comes from Jim Fish with Piper Sandler.

This is Quinton on for Jim Fish. And I also wanted to add our congrats to both Barry and Bryan here. Mike or Andy, maybe questions for either of you. Avaya recently announced a change to their platform, that kind of forces some customers away. I know it's still really early here but as you've kind of seen this announcement, any change in the pipeline or customers coming to you? Basically, any early indication of the donation that you expect from that competitor? Or is this just they've been donating for a while and so you expect that to be more steady from here?

I can take that. Yes. I mean, obviously, they've been donating for a while to use your term. But yes, we obviously noticed that -- we do have a lot of good processes in place to make these migrations from Avaya pretty straightforward. Now it was their Avaya Experience platform public, right, for 200 seats and below. So kind of one piece of the puzzle. Yes, we're focused on that part of the market. What I would be interested in seeing would be as customers that are higher than 200 seats, right which is another big engine for us. Do they see sort of a lack of commitment for the future from that? So something we're keeping an eye on and we're focused on and we're good at those migrations. And yes, we'll keep an eye on it.

Our next question comes from Tom Blakey from Cantor. Tom?

Wow, I didn't get a heads up for that. Thank you for taking the call and Barry, congratulations. It's been great working and dining with you and best wishes to you and your family. Just maybe a 2-parter. First, we've been hearing from yourself throughout last year and from some of your peers about slowdown in close rates and elongated sales cycles related to the increased complexity of large deals and layering in AI and making these things harder to implement. I'd love to get your update there and what you're seeing Andy and Mike in terms of visibility on those types of deals. And then Barry, on the model and these partnerships, we're picking this up from our checks too. Congratulations on this. This new channel. I'd love any color if you can maybe extend that type of color you normally give us in terms of what you believe partnerships could be over time and any impact to the model, to Meta's question about investing, maybe there could be some leverage here leveraging these huge partners. That would be helpful.

Yes. I will start with the last question, Tom. Look, the partnership ecosystem is driving a lot of our business already. We expect that to continue to increase. When you think about that Google Cloud Marketplace announcement that we made, that's a game changer for us. And again, something that opens up new avenues and an easier procurement process and into the Google customer base. And these are the types of partnerships, quite frankly, that, to me, are so important to us to continue to move the needle in terms of our penetration into this market. So again, whether it's deeper integration with Salesforce or ServiceNow or continuations with Verint or it's the Google Cloud Marketplace announcement, we're going to continue to leverage the ecosystem in this new world of CX, it's a wonderful time to be in this space. And it's a big driver of our growth in the future. And again, we'll continue to aim to find additional leverage points like this. That allow us to get, again, just like I said, leverage, right? And again, we're going to continue to build out our quota capacity but we're also going to continue to get leverage from partners in the channel.

And then Tom, the other part of the question was, are we still seeing elongated sales cycles? Mike talked about that the AI fog being lifted and we're seeing a little bit of that, right? We're cautiously optimistic about that and obviously, macro as well. But when I look at the sales cycles. Our teams are doing an excellent job really focusing on the ROI part of AI, right which is we launched our AI blueprint. So leveraging our teams to go in and really identify those ROI use cases. That helps in these customers that are going in. I'm going to make my CX decision but the AI part of it is going to really drive it. And so I think, we are executing well there. And again, cautiously optimistic that those very, very long sales cycles shorten.

Our next question comes from Michael Funk with Bank of America.

Yes, great. Thank you and Barry, congratulations to you. Mike, I wanted to dig into a comment you made in your prepared remarks about your AI strategy relative to proprietary models that are out there. How that advantages Five9. Any more color on how it does advantage you during negotiations during the RFP process. I think I know you're talking about but love to hear more detail on how that differentiates?

Yes. It's a great question, Michael. And again, our engine agnostic strategy from literally day one, even before we acquired Inference, is playing out so nicely, no pun intended. We -- and I really mean that. There was nothing intended there. We started out, I think, with the right strategy. Others are now following this strategy. So again, everyone's going to have access to these LLMs. That's not going to be a differentiator. What is the differentiator is everything that we've built on top of those engines. And the good news for us is we didn't waste a lot of time and energy trying to build our own engines. We're now, again, able to leverage the latest and greatest for our customers to leverage the latest and greatest engines as they come to market. We just plug them in. It's easy to do through our AI studio framework and it is a real advantage. And again, in the RFP process, we get a lot of questions around our AI strategy, including the architecture of it, including which engines we're leveraging and customers really do appreciate the way we've approached it. And we're winning because of that.

Our final question will come from Arjun Bhatia with William Blair.

Perfect. Thank you, guys. Barry, since this is your last call here, one for you to end it maybe. Just I think this is maybe the most optimistic I've heard you sounding on some of the forward-looking trends like bookings, AI traction pipeline, et cetera, in several quarters here. I mean, yet the guidance for next year, I think, still suggests sub-10% growth. When we're trying to reconcile those 2, can you just give us a sense for where there is kind of the most conservatism? I know you mentioned Q4 seasonality but how are you thinking about turnups, how are you thinking about cloud migrations, AI bookings converting into revenue? If you could just give us a little bit more detail there, that would be super helpful.

And I'm happy to answer that. So Arjun, the way we think about the annual guide, I want to point out first when we had our earnings call last quarter, we did mention that the outlook -- the consensus at $1.13 billion, we are comfortable with that number. And the guidance that we gave this time for the midpoint is an $11.5 million beat and raise, right? So there's that point. And I do want to emphasize the point that our guidance philosophy is always prudent and that has not changed. And Barry mentioned the seasonal uptick in Q4. We have to be prudent. There's a lot of uncertainty out there in terms of macro. So we have to be prudent that, that -- there is another layer of conservatism there. In the back half of 2025 for seasonal assumptions. And of course, the mega customer ramp that I talked about will be a tough comparison. So at the end of the day, it's prudent and it's a starting point and we'll continue to update you as the year progresses.

All right. Well, thanks, everyone, for joining us. Barry, we're going to miss you. Congratulations and thank you. But thank you for -- to all of you for joining us and we look forward to keeping you updated as we progress through the year. And thanks again.