Lisa Laukkanen - IR, The Blueshirt Group Mike Burkland - Chief Executive Officer Barry Zwarenstein - Chief Financial Officer.

Sterling Auty - J.P. Morgan Michael Huang - Needham & Company Nikolay Beliov - Bank of America Brendan Barnicle - Pacific Crest Securities Richard Davis - Canaccord.

Good day and welcome to the Five9 Incorporated First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen. Please go ahead..

Thank you, operator. Good afternoon, everyone and thank for joining us on today’s conference call to discuss Five9’s first quarter 2015 results. Today’s call is being hosted by Mike Burkland, CEO; and Barry Zwarenstein, CFO.

During the course of this conference call, Five9’s management team will make projections and other forward-looking statements regarding future events or the future financial performance of the company.

We wish to caution you that such statements are simply predictions, should not be unduly relied upon by investors and 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 our future results and cause these forward-looking statements to be inaccurate.

A more detailed discussion of the risk factors you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during the call.

Management believes that this non-GAAP information is useful, because it can enhance the understanding of the company’s ongoing performance and Five9 therefore uses non-GAAP financial information internally to evaluate and manage the company’s operations.

This non-GAAP financial information should be considered along with and not as a replacement for financial information reported under GAAP and could be different from the non-GAAP financial information provided by other companies in our industry.

The full reconciliation of the GAAP to non-GAAP financial data can be found in the company’s press release issued earlier this afternoon and available at five9.com. Now, I would like the turn the call over to Five9’s CEO, Mike Burkland..

Thank you, Lisa. Welcome everyone to our first quarter 2015 earnings call. We are delighted to report a great start to 2015 with results for the first quarter that exceeded our expectations across all metrics. Total revenue for the first quarter was a record $30.3 million up 25% year-over-year.

Our revenue growth which was entirely organic was a blend of our fast growth enterprise business and our steady growth SMB business.

We continue to strike a balance between solid top-line growth and significant progress on our path to profitability as evidenced by our EBITDA margin improving by more than 1,600 basis points over the last four quarters. Based upon our strong first quarter results, we are raising our guidance for both revenue and bottom-line for 2015.

Before going into specifics of our business momentum, I would like to highlight what sets Five9 apart from our cloud competitors. First, we are moving up-market on top of our already strong SMB business. Second, our PBX strategy is to integrate with best in class enterprise grade PBX and UC solutions such as Cisco and Microsoft Lync.

And third, we have a business model which is a 100% cloud with revenue growth that is a 100% organic. Now turning to some of the business highlights for the first quarter. We continue to build momentum by adding new enterprise clients and expanding deployments with existing enterprise clients.

And we remain extremely enthusiastic about our continued success in this enormous market opportunity. We had very strong win rates against our key competitors driving strongest first quarter bookings in the company’s history.

The success is a direct result of our ability to help our clients improve agent productivity, enhance customer satisfaction and reduce total cost of ownership.

We also continued to increase our average enterprise deal size due to a number of factors including a comprehensive end-to-end solution, our deep integrations with enterprise CRM applications, a strong implementation, our support capabilities and our excellent stability and uptime performance.

In addition, our go-to-market strategy includes a highly productive direct sales force combined with leverage from our growing ecosystem of partners.

For example, we recently announced the partnership with Netrix to deliver cloud PBX and unified communication solutions including Cisco and Microsoft Lync integrated to our cloud contact center software.

This strategic initiative allows businesses to deploy an enterprise class end to end solution for PBX, UC and contact center applications all in the cloud. Now I would like to share a few examples of recent enterprise client wins.

The first is a rapidly growing solar company that turned to Five9 to transition to the cloud as they expand domestically and internationally. The company had been using a premise solution to manage and route their inbound and outbound calls and to handle the complexities associated with scheduling field appointments.

Their prior solution gave them limited visibility and control resulting in extreme inefficiencies. Five9 was selected over other competitors due to our robust end to end solution including inbound, outbound and blended call management as well as the ability to give them real time and historical visibility into their overall contact center operations.

By using Five9’s workforce management solution powered by NICE and integration to their sales force CRM, Five9 is delivering an enterprise solution for over 400 agents with expectations for further growth. The second example was a fortune 500 manufacturer of industrial tools that chose Five9 over multiple premise and cloud competitors.

Five9 is delivering a complete suite of applications including inbound IVR, ACD, outbound dialing and sales force CRM integration, replacing their legacy on-premise contact center solution.

By providing this customer with complete carrier redundancy, a full suite of Five9 applications in the cloud, plus a secure MPLS connection to their agents, Five9 is uniquely positioned to deliver and manage this end to end solution. Finally, I’d like to share an example of the leading manufacturer of cycling and other supporting components.

Through our strategic partnership, Five9 was brought in by Oracle to replace this customer’s contact center solution. The customer required this contact center solution to be integrated with Oracle CRM and fully implemented in two weeks.

Five9 was chosen for our functionality, our integration with Oracle as well as our ability to execute and guarantee that integration in such a tight timeframe. In summary, we are extremely pleased to report a great start to the year.

We are experiencing strong momentum in our business as enterprises continue to shift their contact center solutions to the cloud. We believe we are very well-positioned to capture a large share of this growing market opportunity..

02:59:.

Thank you, Mike. As Mike just stated, we are extremely pleased with our first quarter results which further validate our ability to drive solid revenue growth but improving our bottom-line.

Across the board, our Q1 results were conservative than our expectations as we experienced strong momentum in the enterprise market and continued improve in the gross margins by maintaining diligent expense control. We remain focused on meeting our EBITDA and cash flow breakeven objectives.

Turning to our results, revenue for the first quarter of 2015 was $30.3 million, up 25% from the first quarter of 2014. Recurring revenue accounted for 97% of our revenues in the first quarter. Recurring revenue has made up of monthly software subscriptions, which are based on a number of agencies such usage which is based upon minutes.

The other 3% of our revenue is comprised of professional services fees generated from assisting clients in implementing the Five9 solutions and optimizing its use. Gross margins adjusted to exclude all non-cash charges was 56.6% for the first quarter compared to 51.1% for the first quarter of 2014.

We also posted a sequential improvement in adjusted gross margins of 197 basis points despite the January 1st reset of FICA and other federal and state contribution limits. Adjusted gross margin came in higher than we expected for two main reasons.

First, the Least Cost Routing technology that we deployed during the fourth quarter, delivered larger than anticipated increase in usage of gross margins and second, the leverage of higher subscription revenues set against fixed and semi-fixed costs.

It is important to point out that while our usage revenue generates gross margins below our subscription margins, usage revenue come through very minor incremental operating expenses and therefore generate considerable bottom-line leverage.

Please note that a reconciliation of our GAAP gross profit, adjusted gross profit as well as other reconciliations of GAAP to non-GAAP results is provided with our earnings press release and in our investor presentation on our website. The investor presentation also includes details of the non-GAAP adjustments to operating expenses.

GAAP R&D expenses for the first quarter of 2015 totaled 20% of revenue compared to 22% of revenue for the first quarter of 2014.

The year-over-year improvement reflects a continuing success in growing our R&D investment at a meaningfully lower rate than our revenue increase and we plan to continue to do so as a drive to our long-term model for non-GAAP R&D expenses of 9% to 11%.

GAAP sales and marketing expenses for the first quarter 2015 totaled 33% of revenue, compared to 37% of revenue for the first quarter of 2014. This year-over-year improvement is due to increased efficiency from our enterprise sales organization. Our long-term model for non-GAAP sales and marketing expense remains 28 to 32%.

GAAP, General and Administrative expenses for the first quarter of 2015 totaled 24% of revenue, compared to 25% of revenue for the first quarter of 2014. We do not anticipate any step function increases in G&A going forward and hence remain confident of our ability to reach our long-term model for non-GAAP G&A expenses of 6% to 8%.

Adjusted EBITDA loss declined to $3.2 million for the first quarter of 2015 compared to an adjusted EBITDA loss of $6.5 million for the first quarter of 2014. Adjusted EBITDA margin improved by 1,635 basis points from a loss of 26.8% of revenue in the first quarter 2014 to 10.4% of revenue in the first quarter of this year.

This improvement came from the year-over-year expansion in gross margins, diligent expense control and from operating leverage. GAAP net loss for the first quarter of 2015 was $8.9 million or $0.18 per share compared to a GAAP net loss of $8.3 million or $1.48 per share for the first quarter of 2014.

Non-GAAP net loss for the first quarter of 2015 was $5.9 million or $0.12 per share compared to a non-GAAP net loss of $8.7 million or $1.55 per share for the first quarter of 2014. Our DSO performance remains strong and DSOs for the first quarter ended March 31, 2015 were 24 days compared to 22 days in the first quarter of the prior year.

As of March 31, 2015, our cash and short-term investments totaled $70.6 million. Cash outflow from operations for the first three months of 2015 was $5.8 million and capital spending in the first quarter was $1.5 million of which $1.3 million was financed by capital leases and the remaining $0.2 million paid for in cash.

Free cash outflow defined as operating cash less capital spending paid for in cash was $6 million for the first quarter of 2015. As of March 31, 2015, our debt made up of term notes and our revolver totaled $37.7 million. Our obligations on the capital leases as of March 31, 2015 were $9 million.

I’d like to finish today’s prepared remarks with a brief discussion of our expectations for the second quarter and full year of 2015. For the second quarter, we expect revenue in the range of $28.7 million to $29.7 million. GAAP net loss is expected to be in the range of $10 million to $11 million or a loss of $0.20 to $0.22 per share.

Non-GAAP net loss is expected to be in the range of $7.6 million to $8.6 million or loss of $0.15 to $0.17 per share. For the full year, we expect revenue in the range of a $120 million to $124 million compared to the February 23, 2015 provided range of a $117 million to $122 million.

GAAP net loss is expected to be in the range of $34.7 million to $37.7 million or a loss of $0.69 to $0.75 per share compared to the February 23rd provided range of a loss of $37.1 to $40.1 million or $0.73 to $0.79 per share.

Non-GAAP net loss is expected to be in the range of $24.4 to $27.4 million or loss of $0.49 to $0.54 per share compared to the February 23rd provided range of a loss of $27.4 to $30.4 million or a loss of $0.54 to $0.60 per share. For modeling purposes, we’d like to provide the following additional information.

So, calculating EPS, we expect our shares to be 50.1 million for the current quarter and 50.3 million for the full year. We expect our taxes which relate mainly to foreign subsidiaries to be approximately a $110,000 for the year.

Our capital expenditures are expected to total approximately $8 million to $9 million for 2015, the same range as previously provided. In summary, we are very pleased with our first quarter performance. We’ll continue to be focused on driving solid revenue growth and making significant progress on our path to profitability.

Lastly, before we turn to your questions, I’d like to mention our upcoming conference participation. We will be presenting at the 43rd Annual JPMorgan Technology Media and Telecom Conference in Boston on May 20th. We’ll also be participating in the Bank of America Merrill Lynch 2015 Global Technology Conference in San Francisco on June 3rd.

Now, we’d like to open the call for questions. Operator, please go ahead..

Thank you. [Operator Instructions]. Our first question is from Sterling Auty with J.P. Morgan..

So looking at the dollar value retention in the quarter, it would seem to me that you had a pretty robust new customer bookings quarter.

You gave us a couple of examples of that but any additional color that you can give in terms of the strength in that new customer bookings, how much of that was coming from enterprise and also maybe some color on what was happening in the SMB?.

Yes, happy to do that Sterling. This was a record first quarter for the company and it was really driven as we said, by the enterprise traction. We had a really strong win rate against our key competitors, over 65% against our key cloud competitors.

I’ve talked in the past about our sales capacity and enterprise growing on a year-over-year basis at 30% to 40%. And I can tell you our bookings in enterprise outstripped our growth in sales capacity for the first quarter; I’m very, very pleased about that result.

And I would add I’ve talked about in the past our SMB sales capacity growing at about 10% year-over-year. And I can add that our bookings in Q1 for SMB actually outstripped that growth in sales capacity for that group as well..

So when you look at the SMB, anything changed in terms of was it the uptake of new SMB customers? Was it expansion of the existing because it feels like this is a little bit of change in tone in the SMB part?.

Well, again, I just wanted to be careful, Sterling, not to misled you. Our strategic opportunity is enterprise; it’s where we’re putting most of our investments, a very large disproportionate amount of our investments are going into enterprise. But we continue to execute very, very well in the SMB market. We’ve been in that market for a long-time.

It’s been a steady growth business for us. We’ve got a direct telesales effort that is an absolute machine. And I’m really proud of the execution that team has been able to achieve..

And last question would be just on the gross margin, you mentioned both least cost routing and then just to leverage that the subscription. Any additional insight in terms of the magnitude of which one contributed and just want to make sure we understand the sustainability of the improvements on the gross margin line..

Yes. So Sterling, in terms of the ranking, the improvement in the gross margin did outranked the improvement on the subscription side. The gross margin improvements came from the fact that the benefits from the Q4 installed least cost routing technology came bigger and faster than we thought and we brought them as imminently sustainable.

The second one is a familiar reframe that we have a large portion of our subscription cost that takes the semi-fixed and as the months and quarters and years go by, we’ve seen a consistent pattern of those gross margins improving because of leverage and Q1 was no exception..

Our next question comes from Michael Huang with Needham & Company..

Thanks very much and good afternoon guys. Just a couple of questions for you. Great to hear about the strong win rate, north of 55%.

Could you remind me just either directionally or if you have a number that would be great, like what was that win rate either last quarter or last year? And then to the degree that is improving, what’s changed, what’s driving that?.

So, we’ve been consistently in the 60% range against our key competitors. Again, I think it’s just a good indication of our ability to move our product and our platform forward.

As you know, we’re winning business against our key competitors for a number of reasons, our end-to-end solution for inbound, outbound and blended call management, the fact that we have one unified product for those various call flows as well as multi-channel as well as probably the deepest and best integration with CRM solutions in the marketplace.

I would add that we’re also getting additional leverage from our channel partners or ecosystem partners. We have worked diligently with a number of CRM partners and most recently have a had a lot of traction with Oracle in addition to a great traction with sales force.

So, I would say it’s a combination of things that continues to move our win rate higher and we’re very pleased with it..

So, if I were to kind of prove some of the commentary by some of your hybrid clouds here over the last like week or two, it seems like everyone seems to be doing pretty well.

Was wondering, I mean is that -- from your standpoint, is that just rising tide floats all boats or are you seeing any change with respect to year end customer standing on the dead line and willing to kind of get that deals off the finish line these versus kind of may be like a year ago?.

Yes, definitely. I think the best indication of our market being very, very robust and healthy is the fact that our average deal size has grown significantly. We’re seeing larger and larger enterprises move their contact center infrastructure and software and hardware solutions away from on-premise solutions into the cloud on solutions like ours.

So overall, this market is a very, very good one. As you know, it’s a massive market, 14.5 million call center and contact center agents around the world. And Gartner and other analysts estimate that 90% to 95% of those agencies are still running on legacy on-premise solutions.

So, we’re disrupting a huge market but we also have most of this market opportunity ahead of us. So it’s a great time to be in the space that were in..

Our next question comes from Nikolay Beliov from Bank of America..

Hi. Thanks for taking my question and nice start to the year guys, good performance.

Just wanted to confirm last quarter, you gave specific timeline for EBITDA and cash flow breakeven, I just wanted to confirm that you guys have joint track for that?.

The answer is yes, we’re on track for that. But based on our wonderful performance in Q1, we have an even greater degree of confidence in our ability to make those goals..

Got it. And then, when I look at the retention rate trend line, 95% this quarter, down from 100% a year ago and 96% last quarter.

If you can just talk about the puts and takes here? Is it that may the SMB out performance is bringing this down even more than you expected?.

No. Nikolay this is Barry. The two drivers for that year over year reduction in the dollar base retention rate. The first one is that we have a current client who is a major user of our international price -- of our international usage.

And at the time we were not competitive and they have moved that business off and given that they were one above the year times for UCs and subscription and store focus subscription that is adversely impacted the rate.

And that will continue to be the case for a quarter to two more and then the second of the two reasons is that we had a BPO customer, a major BPO customer that went out of business and adversely affected the rate..

Our next question comes from Brendan Barnicle with Pacific Crest Securities..

Thanks guys. I was following up some work you’ve been doing this quarter we’d seen generally at the margin, better strength at some of the SMB players and then we did out of some of our enterprise players. I know you guys have seen nice strength in both segments, even though you are more focused on the enterprise side.

Mike, did you see any difference in demand or even though you had good execution and difference in demand in the enterprise versus the SMB at all?.

We continue as I said to invest aggressively in that enterprise market opportunity for a reason and there are several reasons actually. We have a higher ROI opportunity in the enterprise space. We do -- occasionally do cac [ph] LTB analysis. And again the rates were higher for us in the enterprise market.

We’ve also been able to invest on the margin and make the higher ROI in that opportunity, a higher growth opportunity for us as well. And quite frankly it’s a larger opportunity. All that said, we continue to execute in the SMB market and it continues to be a very, very healthy grower for us..

And then Mike you mentioned link a few times in your prepared comments that it maybe think about whether there is an opportunity for you guys to part more extensively with Office 365?.

Yes. We clearly see an opportunity their Brendan. If you look at the enterprise PBX and Unified Communications market, Microsoft Lync is really becoming the guru in the space. There are lot of legacy players as well. And our partnership with Netrix to deliver our contact center solution integrated with Microsoft Lync all in the cloud.

It’s a very strategic opportunity; it’s early days for us but we view that as a really, really important opportunity for the company going forward..

And what are the next steps you would have us watch forward to show to see that you are making progress there?.

Yes. Over time and again it won’t happen immediately but over time as we deliver that integrated solution, we will be brining customers on to our platform integrated with Lync and we will be talking about that the proof points of that in future calls..

Our next question comes from Richard Davis with Canaccord..

First off it was nice to hear Barry plan to begin on the whole music. It’s live, I know. Anyway the first question is down sequential guide on revenues, is it just trying to set the high jump bar sufficiently conservative is one.

And then second the second is just hiring environment because they won’t try and hire people and that would be my questions..

So, I’ll let Barry fill in any blanks but the sequential revenue. As you know, we have a seasonal pattern to our business and we’ve historically seen more seasonality as we go upstream into the enterprise market, there are certain industries that have yearend activities as well as some that’s still into Q1.

And our Q2 revenue guide reflects that seasonal pattern enterprise business. And again, it shouldn’t be a surprise. We’ve talked about it in the past and I think we’re just -- we have gotten a lot better at understanding those seasonal patterns in our business. So that’s what that reflects.

As you know, we’re increasing guidance for the full year and that’s that.

And in terms of hiring environment, again we continue to invest in sales capacity in the enterprise part of our sales organization and we’ve had wonderful success in just continuing to bring on top talent from legacy vendors that have been in this space for a long, long time, most of our enterprise sales people have been in the industry for 10 plus years.

We have a great network if you will of sales leadership and their networks, so we continue to bring on people that they knew and worked within the past. I think it’s a strategic advantage that we have in this market..

[Operator Instructions]. And will take our next question from Raimo Lenschow with Barclays Capital..

Hi guys. This is Barry Haier [ph] on for Raimo. Thanks for taking the question and congrats on a good quarter. Clearly good results from the bigger customers; it’s good to hear that generally it seems as though no acceptance have set as bolstering their growth story here.

But any obstacles as you are still seeing from enterprise customers in terms of verticals, geographies or anything else -- what are you still getting in terms of push back?.

Our industry is one that has been around a long, long time. The call center industry has been around and dominated by these legacy vendors that we’re replacing and disrupting. I think if anything when were in larger enterprise opportunities, the biggest enemy so to speak is the status quo.

But I can tell you this, we’re getting so much better at knocking down those barriers of the status quo and staying with a legacy solution for one more year, mainly because if we walk into a large enterprise, they typically have a Avia, Genesis and Cisco all running in different contact centers within their environment.

And if we talk to -- given business unit that might be running Avia, they typically are running several reps behind on that solution, mainly because if they upgrade their solution, they typically will break all their integrations to CRM and other enterprise applications.

So, there is just a lot of pain around maintaining the status quo for a lot of these large enterprises.

Not to mention the fact that they can’t take advantage, if they stick with those legacy solutions, they can’t take advantage of some of the cutting edge technologies that we’re delivering such as social media routing and visual IVR and some of the real innovative things that we’re doing..

That does conclude our question-and-answer session. I’ll turn the call back to management for closing comments..

Thanks everyone for joining us today. As I mentioned earlier, we’re extremely pleased with our Q1 results as we drove solid top-line revenue growth while continuing to make significant progress on our path to profitability.

So, in summary, I’ll just say our momentum in the enterprise market is stronger than ever and we look forward to a great rest of 2015. Thanks again for joining us..

And once again, that does complete today’s call. We appreciate your participation..