Tony Righetti - IR, The Blueshirt Group Mike Burkland - CEO Barry Zwarenstein - CFO.

David Hynes - Canaccord Raimo Lenschow - Barclays Sterling Auty - JPMorgan Michael Huang - Needham & Company Nikolay Beliov - Bank of America Brendan Barnicle - Pacific Crest Securities Mike Latimore - Northland Capital Markets.

Good day and welcome to the Five9 Inc. Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Tony Righetti. Please go ahead, sir..

Thank you, Operator. Good afternoon, everyone. And thank for joining us on today’s conference call to discuss Five9's fourth quarter and 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 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 certain of the risk factors that could cause these forward-looking statements to be inaccurate and that 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 this call. Management believes that this non-GAAP information is useful, because it can enhance in 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 than 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 on the Investor Relations section of Five9 website. Now, I’d like to turn the call over to Five9's CEO, Mike Burkland..

Thank you, Tony, welcome everyone to our fourth-quarter and full-year 2015 earnings call. We are very pleased to report an exceptional fourth-quarter. We once again exceeded expectations across all key metrics and capped off a record year for Five9.

Total revenue for the fourth quarter was $36 million, up 27% year over year, an acceleration from prior quarters. This strong revenue growth is all organic and was driven by our very strong performance in our enterprise business as our LTM enterprise subscription revenue grew by 38% year over year compared to 35% last quarter.

Our commercial or SMB business continues to be a key component of our revenue delivering steady and consistent growth. In addition to our continued solid top-line growth, we achieved positive adjusted EBITDA in the fourth-quarter, three quarters earlier than expected.

This achievement is a clear demonstration of the power of our business model and the ability for our enterprise business to drive high marginal profitability. We believe that there are not many companies in the SaaS universe that are consistently delivering top-line growth in the mid-20s coupled with marginal profitability over 50%.

In the fourth quarter, we delivered over 70% marginal profitability measured by the percentage of revenue growth that drops to the EBITDA line. This is the fourth consecutive quarter that our marginal profitability exceeded 50%.

We view our strong and sustained marginal profitability as a key proof point for the operating leverage in our business model which supports our path to our long term goal of EBITDA margins in excess of 20%.

Bookings which I will discuss in a moment were another highlight as we set a new fourth-quarter record and the pipeline for future business is larger than ever. The combination of our business momentum and solid execution enabled us to deliver strong results throughout 2015. For the year, we grew revenue by 25% to $128.9 million.

My commentary today will again focus on our faster growing and more profitable enterprise business since that is where we are concentrating our investments and generating most of our growth. As a reminder, the enterprise contact center market is very large, underpenetrated and represents a significant ongoing growth opportunity for Five9.

There are 15.8 million contact center agents around the world representing an estimated TAM of 24 billion in annual recurring revenue, three quarters of which are enterprise and where cloud penetration is still under 10%. The following metrics highlight our accelerating momentum in this enterprise market.

First, 38% growth in LTM enterprise subscription revenue, an acceleration from 35% we reported last quarter. We believe that this key metric reflects the payoff from our ongoing enterprise go-to market investments. Second, enterprise revenue has grown to 65% of LTM revenue continuing a trend of 3 to 4 percentage point annual increases.

Third, our average new enterprise deal size in 2015 was approximately 450,000 in annual revenue, up from an average of approximately 350,000 in 2014. We will continue to provide this metric on an annual basis. And fourth, we estimate that our win rate against two key cloud competitors was once again over 70% in the fourth quarter.

Now that I've shared some of the key metrics for our enterprise business, I'd like to discuss some of the specific reasons why Five9 is being selected by new enterprise customers and why we are continuing to see increasing retention rates amongst our existing enterprise customers.

First, we offer an end to end solution that enterprise clients demand for this mission critical part of their business including ACD, IVR, dialer, inbound outbound, blending, multichannel, WFO, full enterprise reporting, rich APIs and a fully redundant network connectivity offering through tier 1 carriers.

Second, we continue to focus on and deliver an enterprise platform designed to adhere to the highest standards of reliability, security, compliance and scalability. We are extremely proud of our uptime performance which averaged 99.991% over the last 12 months.

Our operations team delivers a highly secure environment that continues to meet the security and data protection audit requirements of the most demanding clients including some of the leading financial services and healthcare customers.

Third, as I mentioned earlier, we have deep integrations with the leading CRM providers such as Salesforce, Oracle and others. This allows us to bring tremendous complimentary value to enterprise customers.

These relationships along with our SI partners such as Deloitte, PWC and several specialized SIs in the contact center and CRM ecosystem have brought us visibility and success in some of the largest and most complex enterprise opportunities.

And fourth, we continue to out execute the competition by delivering our solutions to enterprises with the industry's most thorough and proven high touch implementation process including detailed discovery, design, testing, implementation, training and optimization.

This not only accelerates agent activation but also targets desired business outcomes. Once live, we offer premium support service which includes a dedicated technical account manager to act as an extension of the customer staff to deliver ongoing optimization, fine tuning, call flow testing, custom reporting and analysis of customer KPIs.

All this helps our customers continuously improve the efficiency of their operations and maximize their return on investment on our platform.

These four key differentiators are increasingly being recognized by the market and by industry analyst, including Gartner, which as a reminder recently named Five9 as a leader in its inaugural North American Contact Center as a service Magic Quadrant report.

As a result, we delivered a record-breaking fourth quarter of enterprise bookings driven in large part by our strong and expanding ecosystem of partners with more than 40% of our enterprise deal flow being influenced by these partners.

We expect this percentage to increase over time as we significantly expand our channel partner program as announced in our press release in January 25, 2016. This expanded channel program is being led by industry veteran Wendell Black and includes new strategic partnerships with several master agents, system integrators and resellers.

In addition to continuing the successful referral partner program, our expanded channel program now offers partners the ability to be a reseller or a full OEM partner.

This is a great opportunity for the more traditional channels that have been focused on selling premise-based solutions to now sell Five9’s award-winning cloud-based contact center solution. We are very pleased that the early signs of success we have seen from this newly expanded program.

I will now share with you highlights from some of our fourth-quarter enterprise wins and expansions. The first is a large environmental services waste management company with over 5,000 employees and over 1 billion in revenue that recently selected Five9 for its enterprise contact center solution.

Previous to Five9 they operated several contact centers each with its own siloed system delivering inconsistent customer experiences and SLAs to their clients.

By moving all of these operations into one consolidated solution from the Five9 cloud, they are now able to achieve greater economies of scale which improves their response times and enables them to deliver better and more consistent customer experiences.

They are implementing Five9 across customer service, accounts receivable, and sales which allow them to scale as they expand their operations through acquisitions. We estimate this deal will generate over 750,000 in annual recurring revenue to Five9.

The second is a large online educational institution with multiple call centers for admissions, student care, financial services and the education group which had just recently deployed Oracle Service Cloud.

They were operating on a legacy on-premise system for their contact center infrastructure and had difficulty integrating that system with Oracle as well as difficulty getting flexible reporting by function which made workforce management an adherence impossible.

In addition, they were experiencing long IT turnaround times for implementing even simple changes in this legacy contact center solution hindering their ability to keep up with admissions and student care.

When Five9 came in at Oracle's request, we had a pilot up and running within 48 hours and we were able to deliver solutions to each of these challenges. This client is implementing a full Five9 suite for inbound IVR, ACD, outbound campaign dialing as well as Five9’s PCI compliant recording and Five9 WFO powered by NICE for its workforce management.

We estimate this deal will generate over 800,000 in annual recurring revenue to Five9. The third is a leading global provider of business services with over 70,000 employees. Our initial engagement is with a division which provides technology-enabled solutions for electronic discovery and related services, the legal industry.

This division employs hundreds of contact center agents around the clock to handle client interactions. This customer is leveraging Five9's leading ACD solution which as a reminder delivers customer interactions to the highest skilled agents.

In addition, this customer is also using our advanced call and screen recording solution in order to have a permanent archival of each complete interaction. Five9 was able to demonstrate that we can provide this critical audit trail and archive all interactions regardless of whether the agent is office based or an at-home agent.

Five9 is ideal because of all of the functionality can be used by office based agents as well as work at home at agents as applications are all being leveraged from the cloud. I’d now like to share two examples of expansion deals that highlight our land-and-expand strategy with existing enterprise customers.

The first example is a large provider of digital payment solutions for the retail industry. This customer following multiple acquisitions was running on multiple contact center solutions including Five9 to manage its in-house contact center agents as well as multiple outsourcers.

Increasingly, they found that the other cloud solution they had in-house was inadequate in several areas including the need for complex blended dialing, enhanced reporting, and in providing the level of support this customer required.

This customer decided to consolidate all of its contact center agents onto one solution, Five9 moving the remaining 230 agents from the other cloud-based solution onto Five9 bringing the total agents on Five9 to over 400. A great example of our land-and-expand strategy also comes from a customer win I shared with you several quarters ago.

You may recall the Fortune 50 healthcare company who initially started with Five9 about a year ago and is now using over 1,000 concurrent fees with us resulting in 1.9 million in annual recurring revenue.

Due to our success with them, in the fourth quarter, they contracted with us to expand their use of Five9 into additional business units that amount to an additional 750,000 in annual recurring revenue bringing their total ARR spend with us to over 2.6 million and we anticipate further growth ahead.

Along the way, we have replaced Aspect, Cisco and Avaya. In addition we replaced Barrett with Five9 WFO powered by NICE. Taking a step back to reflect on our business, it's clear to me that we are in the right place at the right time.

We are extremely well positioned in the context on our market that is in the early days of a massive push toward modernization, which includes a shift to the cloud for both CRM solutions like Salesforce and Oracle as well as contact center solutions like Five9.

A great proof point of the scale and momentum of this modernization trend is Salesforce.com’s service cloud revenue which is already at a $2 billion annual run rate and is growing at 38% year-over-year.

Our cloud contact center software is tightly integrated with leading CRM solutions like Salesforce and Oracle and we are going to market together to help our joint customers modernize their contact centers.

This modernization is enabling enterprises to realize the long sought after goal of delivering a better customer experience which in turn shifts the ROI away from simply reducing cost per interaction and towards the more strategic value proposition of driving up customer satisfaction, driving up customer retention and driving up revenue.

In addition, the power of our business model has never been so clear as we’ve delivered accelerating revenue growth coupled with extraordinary marginal profitability. More specifically, our LTM enterprise subscription revenue grew by 38% during the last year while at the same time, we reached adjusted EBITDA profitability well ahead of schedule.

While we are very pleased with reaching adjusted EBITDA profitability, this is just a milestone on our path to our long-term target of 20% plus adjusted EBITDA margins. I will now turn the call over to Barry to provide more color on the fourth quarter and full year financials..

Thank you, Mike. Revenue for the fourth quarter of 2015 was $36 million, up 27% from the fourth quarter of 2014. Sequentially revenue increased $3.7 million, up 12%, the largest sequential increase we have reported. These increases reflect the continued strong growth in our enterprise business as Mike has highlighted.

Recurring revenue accounted for 96% of our revenues in the fourth quarter of 2015. Recurring revenue is made up of monthly software subscriptions which are based on the number of agencies, plus usage which is based up on minutes. We enjoy a high retention rate on these recurring revenues.

In the fourth quarter of 2015 our annual dollar-based retention rate on recurring revenues was 96%, up from 95% in the third quarter of 2015, driven by a meaningful increase in the enterprise component of the calculation.

The other 4% of our fourth quarter revenue was comprised of professional services fees generated from assisting clients in implementing and optimizing the Five9 solution. Before turning to gross margins, I'd like to do distill the essence of why we are so positive about the 65% of our revenue that we are generating from our enterprise customers.

To repeat, first, LTM enterprise subscription revenue grew by 38%, an acceleration from the 35% we reported last quarter. Second, we believe our win rate against our two key cloud competitors was again over 70%. Third, our average new enterprise deal size in 2015 was approximately $450,000 in annual recurring revenue, an increase of 29% over 2014.

Fourth, approximately 96% of this enterprise revenue is recurring. Fifth, the retention rate on these recurring revenues is well above 100%. Sixth, there is no vertical concentration and there is no client concentration. Seventh, the revenue growth is all organic.

Eighth, the revenue from the enterprise customers has a high marginal profitability driven by an attractive LTV to CAC ratio. I will now discuss gross margins and expenses both of which I will address on a non-GAAP basis.

Please note that the reconciliations on GAAP to non-GAAP results are provided with our earnings press release and in our investor presentation on our website. Gross margin was 61.4% for the fourth quarter of 2015, compared to 54.6% for the same period in 2014.

Please note that we've increased adjusted gross margin sequentially in 14 out of the last 15 quarters and by approximately 10 percentage points in just the last six quarters. We expect the general trend to continue for most quarters as we close the remaining gap to reach our long-term model for gross margins of 65% to 70%.

These gross margin improvements have been driven by two main factors; increasing subscription revenues set against fixed and semi-fixed costs, and by increases in the usage gross margins due to lease cost routing technology.

Before turning to expenses, one final separate overarching and important point on gross margins relating to revenue which comes from usage. While the usage revenue generates gross margins below our subscription margin, usage revenue comes with very minor incremental operating expenses and therefore generates considerable bottom line leverage.

Turning now to expenses, which I will discuss in the order of the remaining GAAP to close to reach the long term 20% plus EBIT DA model. G&A expenses for the fourth quarter of 2015 were 15% of revenue, a reduction of 4 percentage points versus the prior year. We have reduced G&A percent of revenue in seven out of the last eight quarters.

Given this demonstrated ability to leverage G&A and since we do not anticipate any step function increases in G&A, we remain confident of our ability to reach our long-term model for G&A expenses of between 6% and 8%. R&D expenses for the fourth quarter of 2015 were 14% of revenue, a reduction of 4 percentage points versus the prior year.

We reduced R&D percent of revenue for six out of the last eight quarters. Similar to G&A, given this performance and given that we do not anticipate any step function increases in R&D either, we remain confident in our ability to reach our long-term model of R&D expenses of between 9% and 11%.

Sales and marketing expenses for the fourth quarter of 2015 were 29% of revenue, a reduction of 3 percentage points versus the prior year. Unlike G&A and R&D, our long term model does not assume any major leverage from sales and marketing and the long term target remains 28% to 32%.

We are extremely pleased to report that we have achieved positive adjusted EBITDA of $1.2 million for the fourth quarter of 2015 or 3% of revenue compared to an adjusted EBITDA loss of $4.3 million or 15% of revenue for the fourth quarter of 2014.

This improvement was driven by the over 70% marginal profitability that Mike referred to earlier with $5.5 million of the year-over-year revenue increase of $7.8 million dropping down to the EBITDA line.

While we are very pleased to have reached this important milestone, please keep in mind that our proximity to breakeven will mean that it will take several quarters to breakthrough on a persistent material basis.

With respect to 2016, we expect that our EBITDA will be positive for the year, with EBITDA losses in the first half approximately breakeven in the third quarter and strongly positive in the seasonally strong fourth quarter.

GAAP net loss for the fourth quarter of 2015 was $3.5 million or $0.07 per share compared to a GAAP net loss of $9.4 million or $0.19 per share for the fourth quarter of 2014.

Our non-GAAP net loss for the fourth quarter of 2015 was $1.6 million or $0.03 per share, compared to a non-GAAP net loss of $6.8 million of $0.14 per share for the fourth quarter of 2014.

Before turning to our full year performance, I'd like to note that our average concurrent seat count for the fourth quarter of 2015 grew to 55,329, a 19% increase from the fourth quarter of 2014. As a reminder, we are providing the seat count metric only on an annual basis. And now for a closer look at key 2015 income statement metrics.

For the year ended December 31, 2015, revenue was $128.9 million, up 25% year-over-year, again driven largely by the growth in enterprise. Gross margin for 2015 improved to 59.1% from 52.7% in 2014. Operating expenses for 2015 were $81.5 million, up $4.4 million or 6% from 2014.

As a result of the solid revenue growth, the continuous improvement in gross margin and operating leverage, the 2015 adjusted EBITDA loss narrowed to $5.3 million from $22.7 million in 2014.

GAAP net loss for the year ended December 31, 2015 was $25.8 million or $0.52 per share, compared to a GAAP net loss of $37.8 million or $1 per share for the year ended December 31, 2014.

Non-GAAP net loss for the year ended December 31, 2015 was $16.5 million or $0.33 per share compared to $32.3 million or $0.86 per share for the year ended December 31, 2014. Finally, before turning to our guidance, some balance sheet and cash flow highlights.

Our DSO performance remained strong and DSOs for the quarter ended December 31, 2015 were 24 days, the same as in the fourth quarter of the prior year. As of December 31, 2015, our cash and short term investments totaled $58.5 million compared to $39.5 million as of September 30, 2015.

Cash outflow from operations for the fourth quarter of 2015 was only $66,000. We are especially pleased with the progress we have made in this metric during 2015 given that the operating cash outflow was $5.8 million in the first quarter 2015 and it improved sequentially in each of the subsequent quarters.

Capital spending was $2.6 million, of which $2.1 million was financed via capital leases and the remaining $0.5 million was paid for in cash. Free cash outflow defined as operating cash outflow plus capital spending paid for in cash for the fourth quarter of 2015 was $0.6 million compared to an outflow of $4.1 million in the fourth quarter of 2014.

As of December 31, 2015 our debt totaled $37 million made up of a $12.5 million revolver and $24.5 million in term debt. The term debt has extended maturities, with half coming due this year and next and the other half in 2018 and 2019.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the full year of 2016 and for the first quarter. We expect revenue for 2016 to be in the range of $148 million and $151 million. GAAP net loss is expected to be in the range of $20.1 million to $23.1 million or loss of $0.39 to $0.44 per share.

Non-GAAP net loss is expected to be in the range of $11 million to $14 million or loss of $0.21 to $0.027 per share. For the first quarter of 2016, we expect revenue in the range of $35.5 million to $36.5 million. The revenue outlook reflects the fact that we are coming off a seasonally strong quarter.

GAAP net loss is expected to be in the range of $5.4 million to $6.4 million or loss of $0.10 to $0.12 per share. Non-GAAP net loss is expected to be in the range of $3.2 million to $4.2 million or loss of $0.06 to $0.08 per share.

Our first quarter bottom line guidance includes the impact for higher costs and expenses related to hires we have been making and continue to make to support our revenue growth as well as the impact of our annual restart of FICA and unemployment obligation. For modelling purposes, we would like to provide the following additional information.

For calculating EPS, we expect our shares to be 51.4 million for the first quarter and 52.3 million for the full year. We expect our taxes, which relate mainly to foreign subsidiaries to be approximately $135,000 for the year.

As a reminder, we have a substantial NOL carry forward balance of $124.4 million at the federal level and $85.2 million at the state level. Our capital expenditures for the full year are expected to total approximately $8.7 million to $9.7 million, of which approximately $2.1 million to $3.1 million are planned for the first quarter.

In summary, we are very pleased with our fourth quarter and full-year performance. We will continue to be focused on driving solid revenue growth and driving towards our long-term model of 20% plus adjusted EBITDA. And now, we'd like to open the call for questions. Operator, please go ahead..

Thank you. [Operator Instructions] Our first question comes from David Hynes with Canaccord..

Hey. Thanks, guys. Good set of numbers. Mike, I guess what jumped out at me was the year-over-year increase in enterprise deal sizes. Pretty impressive.

Any additional color on what you think is driving that? I mean, is it now you have reference customers or are your partners bringing you bigger deals? Is it direct reps? Just any color on what is happening there would be helpful?.

Yeah. Sure, DJ. Yeah. As you noted or I noted earlier, the enterprise deal size has grown to $450,000 in annual recurring revenue. We're proud of that. It's a collection of things.

It's really a combination of our partners in our ecosystem, driving more and more business our way, especially the Salesforce and Oracles of the world that are in the enterprise market, in the very large enterprise market. We're going to market arm in arm with those partners.

If you look at any contact center in the world, there are two key technology building blocks. And that is the CRM, and the contact center infrastructure. And the CRM being provided by companies like Oracle and Salesforce and their service cloud offerings.

More and more of those CRM systems are moving to the cloud and being modernized along with more and more contact center infrastructure solutions being moved to the cloud on Five9.

So I would say first and foremost, it's those partnerships and I would say it's a maturing of the market in general, the acceptance of cloud in general by large enterprises and that's not just in our market, but if you look across many markets, larger enterprises are embracing the cloud like never before..

Yeah. It's pretty evident the market has been moving in that direction. I guess that's a good segue into kind of my next question, which is broader competitively.

What's the update on what you are seeing the legacy contact vendors doing to fend off the cloud competitors?.

Yeah. I would say, DJ, that the good news for us is not much. They continue to really be stuck in the mud in terms of migrating to the cloud. I think it's a very, very difficult transition for them financially.

If you recall, most of the legacy players in our contact center infrastructure market are - have gone private and are heavily burdened with large amounts of debt.

It's just a very, very difficult financial transition for them to make and it's kind of showing itself in the fact that they have not been able to deliver cloud solutions that can compete with ours. And again, there is varying degrees of messaging out there by the legacy vendors, but in terms of where the rubber meets the road, they are not there..

Okay, great, that's helpful color. I'll pass the line. Thank you..

Thank you. Next question comes from Raimo Lenschow with Barclays..

Thanks for taking my question and congrats from me as well. Can I go back to the enterprise side? The growth rate is really impressive with the 38%, but if I think about the size that you are representing at the moment versus what we're seeing out of the services cloud, out of Salesforce, Oracle, we don't have the numbers, but they seem a lot bigger.

How do you see your medium to long-term growth there Mike in terms of - are you hitting the law of large numbers soon or is this kind of like an area given the opportunity that it actually should be driving your upside for quite a while?.

Yeah. Great question, Raimo. The good news for us is remember we're the cloud replacement for these legacy solutions for contact center infrastructure. And this market is still very, very early in terms of cloud replacing on-prem. To give you some figures, in our market, less than 10% of the contact center agents in the world have moved to the cloud.

The other 90% are still on these legacy systems. So we're nowhere near the law of large numbers in terms of our market opportunity.

I think if you look at Salesforce service cloud, the numbers that I cited earlier, they've gone from a pretty small number a few years ago in service cloud, right, that's fairly new for them, to a $2 billion revenue run rate, growing at 38% year-over-year as I said.

And that is a very, very good data point to show that this market is not near mature, even for them, at that $2 billion run rate. And it certainly is not a mature market in the contact center infrastructure side of the equation..

And how does it - I mean, because it looks like the service cloud is still much bigger than you. But you mentioned the customer example where the Oracle guys called you in.

How do we have to think about it? Is it a little bit like they are trying to do with the legacy vendor and a modern front-end and then more realize it doesn't work and then you get pulled in at step 2? Is that the right way to think about it?.

Yeah. I'd say more than not, more often than not. We tend to come in second. The CRM service cloud offerings are paving the way so to speak. Many enterprises are attempting to take that cloud CRM solution and have it work along with their legacy contact center infrastructure solution. Like that example I gave the customer win earlier.

It's very, very difficult to do and typically that's when we get brought in. So often times we're brought in hand-in-hand at the beginning of the sales cycle but more than not, we're brought in just after the CRM component is moved to the cloud..

Perfect, thank you. And can I squeeze in one last for Barry. Barry, thanks for giving us the EBITDA, kind of an idea of how we have to think about EBITDA in 2016 and you kind of mentioned the first half loss and then Q3 breakeven and very strong Q4.

Any idea about cash and how we have to think about the cash profile?.

Yeah. So in this last quarter as we mentioned, we came within $60,000 odd of operating cash flow breakeven, which is a massive improvement from where we were at the beginning of the year. We also said that as far as EBITDA, we'd be pretty much at breakeven in the third quarter of this year.

And so we will be approximately at breakeven operating and free cash flow in the third quarter as well. It will take us a little while longer to get to total cash flow breakeven, maybe another six to nine months after that..

Okay. Perfect. Thank you. Well done.

Thanks, Raimo..

And next will be Sterling Auty with JPMorgan..

Yes. Thanks. Hi, guys. Wanted to start with the macro. Given you've got presence all the way from enterprise to SMB and across a number of different enterprises.

Kind of curious what you are hearing from your customers around macro impacts and how that might be either accelerating or limiting any purchase decisions in this area?.

Yes. Sterling, very good question. I'll reflect back if I could a few years back when we went through a pretty tough economy back in the 2008/2009 timeframe and we've always been a cloud provider for contact center software. It's all we've ever done. We had some of our best growth years in the toughest economies.

So I'll just kind of give everybody that as a data point. The good news is if you look at a subscription model compared to a CapEx model, it's much more appealing for enterprise customers to migrate toward the cloud and away from an on premise solution.

So in general, we do pretty tough - we do pretty well, excuse me, even in tough economies, but we're not really seeing a whole lot of comments from our customers relative to any slowdown in their deployment of our solution and part of this is because we're in a replacement market.

We are replacing an antiquated legacy solution in these large enterprise deployments. They don't have to necessarily be growing their business to replace a legacy system with a cloud solution. So the macro environment really does not play into that equation. And I would say this that the pipeline for future business for us has never been better.

It is absolutely tremendous right now..

That make sense.

I missed it if you said in the prepared remarks, but any sense that you can give us in terms of industry breakdown?.

Yes. I did not refer to that much in the prepared remarks, but our industry breakdown continues to be very similar to what it has been in the past. A couple of the wins that I highlighted earlier on the call are in education and healthcare arena. One in particular that was a large expansion deal for us in the healthcare arena.

This is not a customer that's doing open enrollment or anything like that, but they are more general pharmaceutical and healthcare related.

And this customer is one of our largest, not our largest and they just expanded with us, they did about $1.9 million in annual recurring revenue in 2015 and they should top $2.6 million with this expansion with us. So we continue to do a lot of business in technology, healthcare, education, financial services..

And then last question, you talked about the last time [ph], the 25th, the expansion of the reseller in terms of the go to market program.

How should we think about any sales hiring or channel managers or other types of support personnel necessary to go along with that expansion?.

Yes. Very good question and the way we look at channels and as you know, we've historically been very direct sales heavy so to speak. We get a lot of referral business through the channel. As we open up our program to include more classic resellers and OEM partners, we definitely will hire people to support the channel and make that channel effective.

I'm a big believer that you cannot sign channel partners and expect them to produce. So the way we model it, the way we look at sales headcount and the like, we really look at direct sales headcount and indirect sales headcount and supporting that channel.

So we will continue to expand our sales capacity at 30% to 40% year-over-year as we have done since IPO. You can see those investments are paying off. There's about an 11 month lag as I've said before between the time I hire a salesperson in enterprise and the time that they become fully revenue producing.

And if you look at our business model and the fact that we're having very good success in revenue acceleration as well as bottom line leverage, that is really the payoff from those investments we've been making for the past eight quarters..

Got it. Thank you..

You got it..

[Operator Instructions] Next question will come from Michael Huang with Needham & Company..

Thanks very much. Nice quarter, guys. Just a couple of questions for you. First of all, just with respect to that Fortune 50 healthcare follow-on deal there. I was wondering if you could kind of walk us through how that works.

Are you guys now fast-track given the fact that that is your first division there or was that a competitive sales cycle? And then maybe if you could just touch on how penetrated are you relative to the seat opportunity there?.

Yeah. Good question, Mike. So again, this is a customer that's been with us for about a year and has been ramping their seat count as I said to over 1000 already on our platform. This is a perfect example of our land and expand success and strategy with enterprise customers. We're nowhere near penetration with this customer.

Again, this is a Fortune 50 organization with I think over 70,000 employees. Even at a 1,000 agents, we are just getting started in this account. We've had a great track record within this customer for this past year and that's what led to this additional opportunity with additional business units.

We certainly benefit from having that internal reference. But at the same time there is a lot of headroom in this account and many other enterprise accounts we have..

And did you have to compete for this one or was that more - has there been some sort of standardization been around Five9?.

Yes, that's an interesting question Mike. We competed for this with other vendors. There is often times with a new business unit an RFP process. But again, having that internal reference puts us at a very good advantage in that process..

Okay great. And then with respect to record booking in Q4, I mean, great to see.

I was wondering how that compares relative to - to meet your expectations and then to the degree that you can help roll into that a little bit, was driven more by volume of deals or larger deals and was there any kind of mega deal that contributed to this?.

Yes, so we continued to benefit from - even in our enterprise business, Mike, it's a pretty diversified pipeline. If you think about the deals we are doing, even though the couple that I cited were $750,000 in annual revenue and $800,000 in annual revenue, I highlighted in the prior quarters some deals that we did that were just over $1 million.

These are not such large transactions that they take over a quarter. We continue to have a lot of transactions in a given quarter, which really removes that kind of lumpiness that some people have in their business model.

So again in terms of our expectations, I look at our sales headcount, our quota-bearing reps and their productivity and that continues to be very, very steady over time as we continue to grow that organization by 30% to 40% year-over-year..

Got you. Great, thanks guys. Appreciate it..

And next will be Nikolay Beliov with Bank of America..

Hi, thanks for taking my questions.

Barry, just trying to bridge the gap between total revenue growth of 25% last year, agent count up 19%, just trying to bridge the gap here, is it a combination of more professional services and some ISP uplift?.

Yes, so we are selling here to enterprise clients primarily, and those enterprise clients are perfectly willing and anxious in some cases to take add-on products from - in a number of different services.

And that has resulted in higher revenue per seat for those enterprise clients and that’s a faster part of our business, faster growing part of our business. And then in addition to that Nikolay, we are benefiting from pretty robust product upsells into our store base..

Got it.

Barry, can you also speak to the changes in LTV and LTV to CAC over time, it sounds like LTV is going up, is CAC going up, is the cost to acquire a new enterprise customer steady, if you can just like show the trends here?.

Yes, so no major changes in the trend excepting it has been increasing, the ratio has been increasing, primarily more on the LTV side of it, but not hugely material..

Got it. And Mike, if you can comment on your international strategy, just give us a number here..

Yes, happy to do that, Nikolay.

So as you guys probably heard in the past, we have expanded into the UK market, put our first data center in there a few quarters ago, started to hire our first sales feet on the street a couple of quarters ago and have closed our initial set of customers over the past quarter and half, and are really excited about the early signs there of success with a pretty lean team in terms of quota-bearing sales people in the UK market and we will get a little bit louder over there in terms of official launch events in the future, but very, very pleased with early signs of success internationally..

Got it. Thank you..

And next will be Brendan Barnicle with Pacific Crest Securities..

Thank so much.

Mike, just following up on some of that earlier comments about competition, is - are you guys seeing any increased competition among the non-legacy vendors like yourself or is this all really still just coming at share gains from the legacy guys?.

Yes, good news is, the barriers to entry are showing through Brendan, in terms of cloud contact center. So it has remained a three-horse race in our market in terms of enterprise cloud solutions.

We have seen a couple of venture backed companies, try to come into our market and just not have a very good success and actually back-off and come - go back to whether they were an international player that tried to come into the US or a vendor that was trying to go SMB up into enterprise market.

So they just have not been successful in coming into this space. We have been at this since 2003. We have invested well over a 1,000 man years in our platform. Our cloud competitors have made similar investments.

There is a significant barrier keeping new players out of our space, which is also evident even within if you watch some of the legacy players that have tried to pivot or have begun to pivot to the cloud. It’s very, very difficult, it’s proving to be very difficult..

That’s great. Additional color.

And then following up on Sterling’s question about sort of sales and distribution plans for this year, a) any kind of like reorg or change here the beginning of the year, and b) any change outside of partners in terms of go-to-market strategy?.

Yes, good question. No reorg in terms of the way we are structuring our sales teams, but the addition of the channels organization and Wendell Black’s arrival, you heard that in my comments earlier, and we did put out a press release.

Wendell is a 25-year veteran from the contact center space, was in Vocalcom, also spent some time at Aspect and a couple of other contact center vendors. Just a great industry veteran that’s in there done that in terms of channels before within our domain so to speak.

So we are really pleased that he is leading the charge in terms of our channel strategy and has already made great strides in a very short period of time bringing on new partners and bringing on some new channel sales people too..

Great. And then Barry, I had two quick ones for you. Obviously great upside in this gross margin numbers in Q4.

Could we see 65% in gross margins at any point this year?.

Well, that’s a pretty tall order. We have got a long-term target of 65% to 70%. We have had tremendous success. I will add that a fair amount of that success has come from the usage component due to the least cost routing and there is a limit to an upside to how much that can increase quickly.

We have other levers we are following, but I think it’s extremely unlikely that we will get to 65% in the course of 2016..

Okay. That’s helpful. And then over in CapEx, I think you had said 8.1 to 8.7 for the year and I think what 2.1 to 3.1 in Q1. That’s a pretty big increase from what we have seen in the last couple of years.

Can you remind us what that investment is going to be in?.

Yes, it’s primarily driven by growth investments. If you look at as a percent of sales, it’s very much similar, it works to 6% of sales in 2016 at the midpoint. And it’s just as we grow, we need that additional capacity..

Great.

So it’s buildings you’re talking about like real estate or is it the data center capacity?.

No, its data center..

Thanks, guys. Appreciate it..

Thanks, Brendan..

[Operator Instructions] Moving on to Mike Latimore with Northland Capital Markets..

Thanks. Well, a nice quarter and a year.

On the usage revenue, was that similar percent to prior quarters still or has that changed much?.

Yes, it’s virtually unchanged. Very similar..

And then on some of these enterprise deals, how often is it that you’re competing with an on-premise system kind of in the final big-off [ph] versus a cloud provider?.

Yes, so we are almost always competing with the on-premise vendor that we are replacing, right, the incumbents so to speak, Mike.

So they continue to be in that competitive environment, but a lot of times they will be eliminated early in that sales cycle because enterprises have made a decision to get off of the painful legacy technology that they are running on that can be driven by a number of things, including integrations to cloud CRM and a requirement there or other limitations in terms of just long IT turnaround times for doing simple things, making simple changes.

So sometimes, they are eliminated, sometimes they are there till the very end. In terms of, to give you a sense for the size of this market though, we probably see a cloud competitor in about 50% of the opportunities we are in. And when I say cloud competitor, I am talking about our key cloud competitors.

In the other 50%, we don’t see one of them and that’s just a good indication of how large this market opportunity is..

Have you seen pure cloud much in the last few quarters?.

No, and again, I don’t want to sit here and talk too much about a direct competitor, but I think they have really delivered first and foremost on the PBX, you see side of that solution and contact center isn’t their future?.

I guess, fairly last question, obviously you’re doing very well.

I guess, over the course of this year, what kind of new features or technology might you come up with?.

Yes, so our roadmap is confidential, but I can tell you thematically that we’re working on a number of things that really stick with the themes that you have heard from us before in terms of simply smart and trusted in terms of our platform.

The simple really comes into the user experience and making sure that the agent experience in our cloud solution is different than it was in the legacy solutions. Often times, we are replacing legacy solutions where contact center agents are swiveled sharing between multiple applications and multiple screens for example.

We continue to just make that a seamless, easy, simple, agent experience and that does lead to better customer outcomes. In terms of smart, a lot of things that we are investing in are in the areas of analytics and guidance for those agents to deliver better solutions to customers.

And in terms of trusted, we continue to invest in our infrastructure in delivering the best-in-class reliability that we have been delivering for our customers. So hopefully, those themes can give you a sense for where we are investing..

Great. Thank you..

And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional or closing remarks..

Thank you, operator. I just want to thank everyone for joining us. As you guys have heard, 2015 was a superb year for Five9. I think the power of our business model was showing through with accelerated revenue growth and strong marginal profitability. We really are encouraged to see that and are just extremely excited about 2016 and what lies ahead.

So thank you again for joining us. Take care now..

Well, thank you. That does conclude today’s conference call. We do thank you for your participation today..