Good day and welcome to Five9’s Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Lisa Laukkanen. Please, go ahead..

Thank you, operator and good afternoon, everyone, and thank you for joining us on today’s conference call to discuss Five9’s fourth quarter and full year 2019 results. Today’s call is being hosted by Rowan Trollope, CEO; Dan Burkland, President; and Barry Zwarenstein, CFO.

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

You’re cautioned 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 Five9’s 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 that you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in Five9’s 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 an 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 is also available on the Investor Relations section on Five9’s website. And now I’d like to turn the call over to Five9’s CEO, Rowan Trollope..

Thank you, Lisa, and thanks to all of you for joining our call this afternoon. We delivered very strong fourth quarter results, leading to a great close for the year. Fourth quarter revenue was a record $92.3 million, up 28% year-over-year. The same as we delivered in the third quarter.

Sequentially, we were up 10%, a strong performance considering that it comes on top of the 8% sequential growth we delivered in the third quarter. We closed 2019 with $328 million in revenue, up 27% from 2018 continuing a multi-year pattern of mid to high-20s growth. Our revenue growth is driven by our success in the Enterprise.

We had 59 customers generating more than $1 million in Q4 ARR and Enterprise now comprises 81% of our annual revenue. Please note that going forward, we'll provide this metric on an annual basis in the fourth quarter. This success in the Enterprise is also what drives our bottom line.

In the fourth quarter, our adjusted EBITDA margin was 21.2% and we reported positive GAAP net income. For 2019, we delivered an adjusted EBITDA margin of 18.5%, up 50 basis points from 2018. Despite increased investments in our product and go-to-market strategy, which we expect to pay dividends in 2020 and beyond.

And today, I am excited to announce our acquisition of Virtual Observer, a WFO solution that we've been selling for some time and which will allow us to natively expand our portfolio of offerings for our customers while also expanding gross margins. I'll share more on Virtual Observer in a few minutes.

Now, I'd like to turn the call over to our President, Dan Burkland to share some important wins in the fourth quarter and the progress we've made expanding our go-to-market engine.

Dan?.

Thanks Rowan. Our Q4 Enterprise bookings grew strongly year-over-year and was a record for our fourth quarter. Also, our pipeline reached another all-time high. We continue to see larger and larger deals coming in and more than 60% of those deals were influenced by our ecosystem of partners.

I'd like to share some key enterprise wins, which demonstrate our strong traction moving up-market.

First is a leading global services and consulting firm specializing in insurance brokerage, risk management and human resources that was looking to modernize, consolidate and move from several hosted legacy solutions to one global virtual contact center in the cloud.

Their insurance business requires unique intelligent routing to select individuals who are properly skilled and licensed for certain programs and certain products in specific states, which they could not achieve effectively with their older systems. With Five9 Genius workflow and intelligent routing, they found precisely what they were looking for.

They also opted for Five9 premium support offer called Hypercare, which gives them 24/7 help desk assistance for their agents around the world. We anticipate this initial order to result in over $1.5 million in ARR to Five9.

Another win for the quarter was a large mutual bank with approximately 100 branches that takes inquiries from their banking and insurance customers. The legacy system had no ability to deliver a fully integrated, seamless omni-channel experience. They worked with Master Agent, Intelisys to manage an extensive RFP process.

They chose Five9 for the superior chat, e-mail, supervisor and admin portals, deep web-based CRM integration, MPLS agent connect with guaranteed voice quality and Five9 WFO powered by Verint for WFM, QM and speech analytics. We anticipate this initial order to result in over $1 million in ARR to Five9.

We also landed a leading national healthcare company specializing in hospice care that had been using premises-based contact centers and WFO that could not integrate with their Microsoft Dynamics CRM and other back-office data systems.

Five9 replaced their legacy contact center system and is also providing Five9 WFO powered by Verint for WFM, QM and speech analytics. We anticipate this initial order to result in approximately $1.7 million in ARR to Five9.

Now, I'd like to share an example of an existing customer who continues to expand with Five9, a prominent 100 year old brand delivering gourmet foods directly to consumers. Having been a Five9 customer for nearly three years and helping them thrive during the busy gift-giving seasons, the customer decided to sign on for an additional three years.

As part of their renewal, they added over 600 VCC seats along with adding Five9 WFO powered by Virtual Observer, formerly CSI, and now part of Five9 as Rowan mentioned, for all of their agents including WFM, QM and their lights-out capability, which provides speech and desktop analytics that automatically detects and redacts sensitive credit card information from recordings for PCI compliance.

We anticipate this add-on order to result in an additional $1.6 million in ARR, bringing their annual spend with Five9 to over $2.3 million. These wins demonstrate that we're seeing increased demand from Enterprise customers and we continue to execute very well at market.

At our Analyst Day recently in November, we discussed our new sales motion of aligning our Enterprise sales organization to cover all categories of the market, including mid-market, enterprise and large enterprise or strategic accounts.

We've made these changes to the teams and are beginning to see excellent results from having individuals focused on the market categories, which best match their skill sets and experience. Before turning the call back over to Rowan, I do want to spend a moment and highlight the success of our Enterprise Professional Services team.

This team has doubled in size in the last three years and along with our customer success and customer support teams is pivotal to our ongoing success. They not only deliver thousands of projects annually, but with our unique high-touch model. They also receive unparalleled NPS scores.

In Q4, this team's NPS score averaged 96, which is a result of increased automation, added efficiency, and the team's dedication to successful outcomes. In addition, for the first time in our history, PS gross margins were positive. Recall that when we went public, we had triple-digit negative PS gross margins.

Now inevitably, given the nature of this business, PS margins tend to fluctuate from quarter-to-quarter, but as you can see with this dramatic improvement, we are directionally in a very good position.

We believe all of these indicators demonstrate that we differentiate on service and experience, along with our market leading highly reliable and innovative solution set. With that, I'll turn it back to you, Rowan..

Thanks, Dan. I'd like to begin with a brief retrospective on 2019. First, we now have the key leadership in place that we believe can take us through a 10 year growth horizon. We also significantly strengthened management deeper in the organization, especially in the go-to-market, engineering and product management areas.

I'm extremely pleased and proud of what we've accomplished in this respect. Second, our strengthened and expanded product and engineering teams continue to scale our platform for the global enterprise. And over the course of the year, we've added over 90 brand new features.

We've also deepened our CRM and partner integrations and made the platform increasingly open via enhanced APIs and SDKs. Third, we made strategic go-to-market, international and channel partner investments that give us a force multiplier that equates to thousands of agents selling and endorsing the Five9 solution.

Now, this momentum was clearly illustrated by our recent Global CX Summit in Las Vegas, which had more than double the number of attendees from the prior year and where the upbeat reception to the presentations and workshops was clearly apparent. Finally, I want to emphasize the importance of culture.

We are attracting and building an incredible team that's aligned on the values that underpin our culture and our vision to drive durable growth. The culture and the team are the key reasons why I believe that we have a sustainable competitive advantage.

Now, for some more specifics; beginning with updates on our recent acquisitions, Whendu and Virtual Observer. Starting with Whendu; recall that we can now rapidly connect to more than 50 other systems on box to Five9 contact center.

These integrations create real-time streams of data, which we aggregate and visualize, leading to the true power of the platform, which is enabling customers to build real-time, automatic and responsive workflows.

Further, Whendu’s no-code workflows can typically be created and deployed in hours or days instead of weeks or months, and the response to our initial SKUs has been very positive.

In addition, we announced today the acquisition of Virtual Observer, an innovative, native cloud SaaS provider of Workforce Optimization, WFO solutions that transform contact center operational efficiency while enabling superior customer experiences.

As customers move to the cloud, many seek benefits of simpler administration and streamlined data, which come from tighter integration between WFO and contact center infrastructure.

In our experience, working with Virtual Observer are over 150 joint customers love the comprehensive and user-friendly aspects of the product, as well as the seamless cloud-to-cloud integration with the Five9 platform.

However, I'd like to point out that from a strategic point of view, we're continuing with our proven successful strategy of offering best of breed solutions. Specifically, for large complex enterprise deployments, we continue to work with Verint and other WFO providers. For simpler, more straightforward deployments, we will utilize Virtual Observer.

Financially, this acquisition allows us to expand our gross margins, which will enable us to further invest in our R&D and go-to-market initiatives. I'm very excited to welcome the Virtual Observer team into the Five9 family. And now for some more detailed updates on various ongoing initiatives.

First, we made significant strides with respect to our AI initiatives in 2019, developing a roadmap, locking down the strategy, validating it with analysts and customers, hiring a small and specialized team and shipping our first alpha version of the product.

Our strategy emphasizes automating real-time tasks through agent assist, which makes agents more efficient and improves the customer experience. Given the positive reception of our agent assist solution during alpha trials, we're very excited for our planned initial launches as we targeted GA date in the second half of 2020.

Second, we launched Five9’s App Marketplace late last year to highlight and aggregate the scale and breadth of our partner integrations. Since 2018 we've more than doubled our ISV community, enabling us to provide more choices to our customers.

The App Marketplace spans 10-plus categories, including artificial intelligence, CRM, unified communications, workforce optimization and messaging. The marketplace enables our ISV partners to seamlessly integrate into Five9 and provide valuable extensions to our platform.

Third, in addition to adding our new sales motion, including the strategic accounts team that Dan spoke about earlier, we've been investing in multiple routes to market. For instance with systems integrators, we continue to strengthen our partnership with Deloitte and we're getting great traction with others like EY, Slalom, Accenture and IBM.

As we've discussed, these SIs are often tapped by enterprises to help with their digital transformation strategies, of which contact center migration to the cloud is a critical part.

Not only are our strategic account teams being pulled into larger enterprises with our SI partners, but also for the first time these global SIs are investing and building business practices for cloud contact centers, certifying and training their personnel on Five9.

This is resulting in more enterprise business and growing pipeline both domestically and internationally. Now, speaking of international, we've made meaningful progress in 2019 under new leadership, increasing our international go-to-market headcount by nearly 50% and deepening our international channel partnerships.

Our international revenue grew 45% year-over-year in 2019, but there's still a lot of runway given that more than half of contact center agents are located outside of North America and we have barely scratched the surface.

This year we plan to expand our dedicated customer support team, cut the ribbon on additional offices and continue to increase our headcount. Lastly, it's worth noting that our international expansion has prompted us to evaluate our strategy around data centers.

Today, our software and voice traffic are deployed in our own cloud data centers here in the U.S. and in Europe. Additionally, in some international markets, our voice traffic is deployed on AWS.

As we further expand internationally, we plan to take advantage of significant recent advances in public cloud to automate the creation of new Five9 international data centers, rather than manually racking and stacking hardware so that we can quickly provide services in new markets. Our architecture is leveraging our two significant advantages.

First, we have extensive experience in our core services that were born in the cloud; and second, a PaaS platform that allows for rapid development of new applications. Our architectural strategy is to combine these strengths so that we have both depth and agility, which we believe few other vendors will be able to match.

Financially there will be initial one-time development costs and somewhat higher operating costs, but we're convinced that this is the right approach. So 2019 was a strong foundational year and in 2020 we'll continue to execute well. Our market is strong and the expansion is driven by two durable trends.

First, there's the migration of premise to the cloud, cloud penetration is under 15% and we believe the pace of migrations is likely to accelerate. And second, as millennials and Gen Z enter the workforce and demand better customer service, companies are placing increasing importance on digital transformation and the overall customer experience.

We also have the team and importantly the culture in place, which is essential for our long-term success and 30s level growth in LTM Enterprise subscription revenue. With that, I'll turn it over to Barry..

Thank you, Rowan. Before going into specifics, I'll remind you that unless otherwise indicated, all financial figures I will discuss are non-GAAP. Reconciliations from GAAP to non-GAAP results are included in the appendix of our investor presentation currently on our website.

We had another excellent quarter with both top and bottom line results, exceeding our expectations. As Rowan mentioned, revenue grew 28% year-over-year and 10% quarter-over-quarter on top of the 8% sequential growth in Q3.

This was driven primarily by our Enterprise business, where subscription revenue continued its growth in the 30s, increasing 34% year-over-year on an LTM basis. Enterprise now makes up 81% of LTM revenue and our commercial business, which represents the remaining 19%, grew again in the single digits as expected.

Recurring revenue accounted for 91% of our revenue, the other 9% of our revenue comprised of Professional Services. One additional point I would like to make on revenue, we have been very successful in winning larger and larger enterprise deals as demonstrated by our 59 customers with more than $1 million annual recurring revenue.

These clients come onto the platform at different times and ramp at different rates. This lumpiness can cause fluctuations, which was a primary driver of our LTM Enterprise subscription revenue growth rate coming in at 34% versus 36% last quarter, and our LTM dollar-based retention rate coming in at 105% versus 107% last quarter.

Please note that we expect to see additional fluctuations both up and down in the upcoming quarters as we continue to win larger and larger customers.

Fourth quarter adjusted gross margins were 64.4%, an increase of approximately 40 basis points sequentially, but a decrease of approximately 60 basis points year-over-year primarily due to the increasing revenue mix from Professional Services.

Professional Services were profitable in the fourth quarter for the first time, though had meaningfully lower gross margins than the rest of the business. Fourth quarter adjusted EBITDA was $19.6 million, representing a 21.2% margin.

While this is a decrease of approximately 150 basis points year-over-year from our record 22.7% in Q4 2018, we exceeded our 20% guidance for the quarter even as we continue to ramp our go-to-market and R&D investments.

Fourth quarter non-GAAP net income was $17 million, a year-over-year increase of $2.5 million, and we recorded positive GAAP net income of $0.8 million. Before turning to our full year performance, I would like to report that our average concurrent seat count for the fourth quarter grew to 131,954, up 25% year-over-year.

This is below last year’s record fee growth of 28% because we did not have the same commercial tailwind. However, Enterprise continued their strong growth in the 30s. Note that we estimate the concurrent seats to be equivalent to nearly 200,000 seats on a named-seat basis, a unit of measure that some others in the industry cite.

As a reminder, we provide the seat count metrics on an annual basis. And now for a closer look at key full year 2019 income statement metrics. For the year ended December 31, 2019, revenue was $328 million, up 27% year-over-year.

Adjusted EBITDA was $60.8 million, representing a margin of 18.5%, which expanded approximately 50 basis points year-over-year despite the meaningful investments we have been making in go-to-market and R&D initiatives. Finally, before turning to guidance, some balance sheet and cash flow highlights. DSO were 32 days in Q4.

Fourth quarter operating cash flow was $15.6 million and a record $51.2 million for the full year. We remain optimistic about our potential for continuing cash flow generation, given our long-term model, our substantial NOLs and our low DSO.

I’d like to finish today’s prepared remarks with a brief discussion of our expectations for the full year and the first quarter of 2020. For 2020, we expect revenue to be in the range of $380.5 million and $383.5 million. GAAP net loss is expected to be in the range of $30.9 million to $27.9 million or $0.48 to $0.43 per basic share.

Our GAAP net loss guidance includes $6.5 million in onetime integration costs and expenses for Virtual Observer and Whendu. Non-GAAP net income is expected to be in the range of $55.5 million to $58.5 million or $0.83 to $0.87 per diluted share.

Note that this bottom-line guidance reflects initial increased costs for leveraging the public cloud as well as further investments in go-to-market and R&D. For the first quarter, we expect revenue to be in the range of $89 million to $90 million.

This reflects the typical impact of the expected falloff from the strong seasonal tailwind in the fourth quarter. GAAP net loss is expected to be in the range of $9.9 million to $8.9 million or $0.16 to $0.14 per basic share. Our GAAP net loss guidance includes $1.1 million in onetime integration costs and expenses for Virtual Observer and Whendu.

Non-GAAP net income is expected to be in the range of $9.5 million to $10.5 million or $0.15 to $0.16 per diluted share. The guidance for the current quarter includes the impact of our ongoing investments, resulting in a similar quarter-over-quarter decline we guided to last year in Q1 2019.

With respect to our expected revenue trend by quarter for the remainder of 2020, consistent with the guidance in past years, we do not expect sequential growth in revenue in the second quarter. However, following seasonal business patterns, we expect revenue to increase sequentially in the third and particularly the fourth quarters.

Given the shape of this revenue curve and the ramping of expenses, in business you should expect our bottom-line to be weaker sequentially in the second quarter and stronger in the second half. In short, our bottom-line will not increase linearly during the year with most of the year-over-year improvement coming in the fourth quarter.

For modeling purposes, we would like to provide the following additional information. For calculating earnings per share, we expect our diluted shares to be 65.2 million and our basic shares to be 62.5 million for the first quarter of 2020. And 67.1 million and 64.4 million, respectively, for the full year 2020.

We expect our taxes, which relate mainly to our foreign subsidiaries, to be approximately $95,000 for the first quarter of 2020 and $410,000 for the full year 2020. Our capital expenditures for the first quarter of 2020 are expected to total approximately $6 million to $7 million.

For the full year 2020, we expect capital expenditures to be between $30 million and $33 million. At the midpoint, this represents approximately 8% at the midpoint of the revenue guidance, about 2 percentage points above what we have reported in the past.

It’s higher than our typical level of spend as a percentage of revenue basis, it’s primarily due to facilities related initiatives. In summary, we are very pleased with our fourth quarter and full year performance.

We continue to execute consistently against this massive opportunity, and ongoing investments position us very well as we look forward to the decade ahead. Operator, please go ahead..

Thank you. [Operator Instructions] Our first question will come from Sterling Auty with JPMorgan..

Yes, thanks. Hi, guys. So for my one question, I’ll focus on Virtual Observer. You mentioned the different segments of the market that you would focus on with this solution.

And I’m just curious, is that just based on where you think it’s best fit? And in other words, is there any technological reasons, either lack of certain feature functionality or lack of certain types of technological scale that would prevent it from actually being used upmarket?.

Hey, Sterling, thanks for the question. This is Rowan. It’s really – it’s about positioning the right product for the customer. As we’ve articulated before, our strategy is best-of-breed. This is a product that has been positioned more in the sort of simpler environments.

It’s not some – and the question that you asked specifically about – does it have a lack of capability or any other reason why you couldn’t sell it upmarket. The answer is, no. We do actually sell it upmarket to some customers where the feature set is a good match for those customers. But it typically tends to be in the sub-200, 250-seat range.

That’s where it typically tends to be. Again, we already have 150 customers with them. But we’ll continue to position Verint for the larger and more complex environments, and we’ll keep selling and even more aggressively selling Virtual Observer to the – to where it’s more suited..

Understood. Thank you..

And our next question comes from Raimo Lenschow with Barclays..

Thanks for taking my question. Can I actually stay on that subject? So in other parts of software, you can see that kind of in the lower parts of the market or smaller parts of the market, people want like an integrated offering. Political high up in the market, people are kind of happy to take on more complexity.

And hence, it’s more a best-of-breed thing.

Is this kind of the right way to think about it for Virtual Observer as well and how you position it?.

I think – well, I think every customer wants to get the best and what’s the best for them really depends. What we found that – is that in the sub-250 space, it’s really a – Virtual Observer is the best fit for them, where a product like Verint tends to be overkill.

In fact Verint themselves have a different product that they tend to sell in the smaller areas of the market. But we found surprisingly, with Virtual Observer is that even larger customers are quite happy, very happy with it, if their needs match up with the feature set. So it’s a complete WFO offering.

But it doesn’t have necessarily all the bells and whistles that you see with the Verint..

And then can you talk to your – the change in strategy a little bit around cloud and how you want to kind of do cloud going forward? But then also kind of link it up to the increased CapEx that we see for this year? Like, are they totally unrelated because they don’t seem to – doesn’t seem to be kind of adding up there.

Can you just talk to that a little bit? Thank you..

I’ll talk about the strategy and let Barry comment on the CapEx question. The strategy here is really being driven by our international expansion where we needed to expand very rapidly, particularly in Canada and Europe. And so we’re taking our cloud-native software and deploying it into GP. It’s not that difficult for us to do that.

And so that’s just an expansion strategy. We’re continuing to leverage the network and infrastructure that we have for our own voice. So it’s going to be an interesting sort of hybrid of public cloud, and our own resources is how we’re sort of pursuing that. But it’s primarily driven by the need to be more agile and to expand quickly globally..

And Raimo, with respect to the CapEx, it’s entirely due to the increase above what we normally would have to facilities. The facility that we have here at our headquarters in San Ramon is expiring approximately a year from now. We need to get ahead of that.

And when I’m looking here at the list of CapEx projects for 2020, the facilities is the number one position, which would not going to normally be the case. The only indirect link with the move to the public cloud is that we are working with an outside firm and some of those costs in relatively minor part are capitalizable under GAAP..

Okay. Thank you. Well done..

And moving on to Terry Tillman with SunTrust Robinson Humphrey..

Hi, everyone. I’m going to be disciplined here and just ask one question, but I want to ask so many. So actually, I’m going to focus on Dan.

In terms of some of the evolution of your go-to-market activities and motions in 2019, maybe some observations on what you’re seeing? How do you manage around potential disruption, in particular with maybe the new strategic accounts group..

Yes. So thanks, Terry. And regarding strategic accounts, we’ve taken our sales teams, as I mentioned in the opening comments and really put them into three – the enterprise folks into three segments, if you will, where they can focus on the skill sets and experience that they’ve been successful with in the past.

And we’re finding great benefit from that and finding that they’re able to focus on opportunities that they can win and opportunities that they have the highest win rates in. So that’s really helped us in the go-to-market sense. Not sure if that was the direct question. I missed the first part of your question…..

I was just going to say it was related to how do you mitigate potential when there’s changes, but how do you minimize – I mean you’ve to try to minimize as much as you can disruption? Or just like what have you seen so far? And are you managing around the potential distraction or disruption?.

Disruption within the customers?.

No. The sales – the changes in your sales team..

Yes.

I mean there really isn’t any disruption to it because the people tend to gravitate towards what they’re comfortable with and where they fit, right? It’s to prevent people from getting big eyes and going out over their skis and trying to attempt to sell opportunities that they don’t have the experience working with this can happen in large strategic accounts.

You get a multi-thousand seat opportunity that stares in the face. It’s tough to walk away from that or give it to someone else, they’re going to chase after that, even if they’re not skilled and have the experience set to be able to do so.

And so this allows us to really allocate and distribute the leads more effectively to the right people so that we have our highest confidence and the highest probability of success. Yes. It’s the same people. It’s just putting them in their swim lines..

And our next question comes from Meta Marshall with Morgan Stanley..

Great. Thanks guys. Just on the partnership front. I know that Deloitte has been kind of an attractive channel for you guys or partnership kind of over the past couple of years. I just wanted to know whether you could speak to some of the other partnerships that you think could kind of grow and blossom over the course of the year.

And then just maybe digging into the gross margin uplift comment that was kind of noted due to the acquisition.

Is that something we should be kind of modeling or just how to think about there?.

Yes, great. I’ll start with the Deloitte and The SI question, and then I’ll hand it to Barry for the margin impact. But looking at what we had done over the last four-plus years with Deloitte. They were really the first large global SI to lean in and build a business practice around cloud contact center.

They chose us and Salesforce to develop their experience centers and really build out their teams to be well-positioned with some of the large customers around digital transformation.

We’ve taken that same model, and the timing couldn’t be better in working with Slalom and EY and IBM and Accenture as they’re all now recognizing that customers and the partnerships that they work with are seeking the same solution, these cloud solutions.

So they’re actually, for the first time, leaning in investing their resources, getting trained and certified on Five9 to be able to be intelligent about positioning us in the market. And it’s just a great opportunity for us to get expanded reach and to get global with some very large accounts..

And with respect to the gross margin, we don’t give formal guidance. But last year, we were at $64.2 million. And there’s some puts and takes. The put is clearly we get from Virtual Observer, some tailwind. But remember, it’s a tiny sliver of our total business.

And we will be making some investments to – ongoing investments to bring the company into the fold. And then, of course, we have our standard factors that have driven our gross margin expansion over many years, most notably the fact that our subscription business is a bigger part of the total, and that’s got the highest gross margin.

On the other side, though, the move to the public cloud will involve quite meaningful both onetime and ongoing costs, similar to gross margin. So putting a bow around all of that and it – you should not expect any dramatic movements up or down in the gross margins from what we experienced in 2019..

All right. Great. Thanks guys..

And our next question will come from Nandan Amladi with Guggenheim Partners..

Hi, good afternoon. Thanks for taking my question. So Rowan, at the – in the second part of your script, you did that retrospective on 2019. As we look ahead, you’ve got multiple vectors of growth to focus on the go-to-market side; the SIs, the geographic expansion and also to the move to cloud.

How are you planning to prioritize both our investments and the management attention on these different vectors?.

Yes. So it’s all really behind driving us up into the large enterprise, it’s sort of the overall theme and that comes part and parcel with the SIs.

So expanding, as Meta mentioned or asked sort of expanding beyond Deloitte, something that we’ve seen a lot of – we’re leaning into that because we’re getting pull and a lot of interest from the other SIs as well as from a geo perspective.

Number one, there’s a lot of opportunity outside of the U.S., but number two, we’re being pulled there by the larger U.S. based multinationals. So that’s helping us lay the trucks in advance of those go-to-market investments and what was underpinning the leverage of public cloud to get acceleration in that. So those are really the big priorities.

I’d say, beyond the SIs, we’re also looking at some of the more traditional VAR partners who have – they’ve been transitioning their premises-based UC to UCaaS, and I think they’re all starting to realize that they need to have a cloud contact center. So we’re going to see increased traction from VARs as well as service providers.

The service providers are roughly in the same position as the VARs. And so yes, just – we’re getting a lot of inbound from a channel partner perspective. We – Dan has built out that organization with, I would say, the industry’s top talent, frankly. And we’re expecting that to look to pay dividends in 2020. So really exciting set up of the year..

Thank you..

Thanks, Nandan..

And moving on to Richard Baldry with Roth Capital..

It seems like there’s been a small acceleration to your acquisitions sort of pace. Could you talk about whether that’s been just opportunistic because there are some things who were randomly brought in front of you? Or how should we think about growth, the acquisitions, your cash balances.

Obviously, it’s still actually been growing even as you’ve done these tuck ins.

Is there an appetite for things that are larger? Or do you think really focusing on small technology pull-ins is the right strategy?.

Thanks, Rich. I’ll take that. This is Rowan. It’s – these were very strategic for us. As we thought about the last two acquisitions, the first one with Whendu was about how do we accelerate large enterprise adoption.

And there, we were seeing traction with this company called Whendu, and they were already selling into our base, helping land larger and larger customers who had more complex business processes that had to be moved over. So that was really strategically driven to help us accelerate that large enterprise. And then on the Virtual Observer side.

This is something we’ve been looking at for a very long time. We’ve been looking at the space. We’ve been partnered with Virtual Observer and Verint and also with Calabrio. So we’ve been able to see how they performed in the market. And this was a bite-size acquisition, relatively small for us, but brought us, best technology for that customer base.

And so these were opportunistic, strategic acquisitions, all with the intent to sort of continue to grow our portfolio to be able to sell more and expand our TAM as well as accelerating our Enterprise business. So strategic acquisitions. And in terms of terms of whether we’ll have appetite to do more or not.

I think we haven’t changed our underlying strategy and sort of principle that we prefer to build organically. So we’re leveraging that on the AI front. There’s plenty of exciting AI companies out there to go acquire, but we’re not making those moves.

We’re fulfilling that organically, and we’re also, as you saw us do last year, investing very – we’re investing in our R&D function to do even more organic development. So that’s going to start to pay off this year. Last year, we shipped over 90 brand-new capabilities to our customers.

And this year, you’ll see that accelerate because we’ve actually built out that engineering capacity over doubling the number of developers at the company in the last 18 months. So, I think that’s something we’re going to be looking to pay dividends both in AI and in the core feature set over the balance of 2020..

Thank you..

And next will be Scott Berg with Needham..

Hi everyone, congrats on the great quarter and thanks to taking my questions. Now, I guess I don’t know if this is for Rowan or Dan. But as you start looking at the investments in the sales side this next year, where do you think you can put a disproportional number of those.

You guys certainly talked a lot about large enterprise and some of the international opportunities, you kind of sprinkle all the different areas equally? Or is there really a point of emphasis we should be looking at for 2020?.

Yes. So, hey Scott, it’s Dan. I’ll take this initial and then see if Rowan wants to add to it. But looking at those resources, we’ve already put most of those resources in place. As we came into the start of 2020 it was imperative for us to go ahead and really staff up the latter half of 2019 to prepare here. And we’ve messaged to that as well.

If I had to say the disproportionate amount, it’s really the channel.

And the channel is really where – when we look at where we’re going over the next decade and the type of force multiplier that we’re going to get from having thousands of people out there representing Five9 and providing our product both domestically here in North America as well as internationally.

It’s key that that channel be as effective as possible.

And that includes, as Rowan was mentioning earlier, VARs, it includes carriers, it includes service providers and it also really includes if you look the carriers and service providers are one element, but then the SIs that we talked about earlier, considering those as part of the channel it really provides us an upmarket workforce that really is hired to be inside those companies and helps them with vendor selection and really putting the best way forward there to make sure that the digital transformation that they’re going to go through is done – the very thorough method and a very well thought out method, and we play a big part in that.

So that’s, I’d say channels more than anything, but that includes the international piece because many times as we go upmarket, we’re dealing with more and more multinational companies that have local presences around the globe.

So those SIs helped pull us into those markets, and we’re also investing in our own offices, as was mentioned in the opening remarks, cutting the ribbon on several new offices around the world. So, I think it’s, to answer your question, it’s kind of hitting on all those cylinders.

That’s why we mentioned those as kind of our three areas of investment..

And the next question comes from Alex Kurtz with KeyBanc Capital Markets..

Well, thanks guys for taking the question. Barry, you’re talking about the linearity of the year and larger deal flow. I guess, back to the strategy of the SIs.

Are they at a maturity point where you can see the second half and they’re in their pipeline engagement and have some comfort and kind of what they can deliver through the year, or is it still in the earlier parts of those partnerships?.

Okay. Sorry. You can – I thought you were talking about the – my apologies, I thought with the pipeline you were going to take it, Dan. So in terms of the SIs, the others besides Deloitte under active development. And I, frankly, would need to defer to Dan in terms of how much in the pipeline is for those as SIs for the second half..

Yes. That’s accelerating rapidly. I mean the SIs play in the largest of organizations and they get pulled in to assist with their strategies. And like I said, several years ago they were leading with the traditional premises-based solutions. That’s what they were comfortable with.

That’s what they could make services on and that pendulum has swung over to the cloud rather rapidly. They’re scrambling to get their businesses in order and build their practice around being able to position cloud. And so stay tuned.

Don’t have anything material yet to deliver to you as far as the details, but the pipeline is growing rapidly and we’re getting into accounts that we otherwise wouldn’t have had access to..

Thank you..

And our next question will come from Jeff van Rhee with Craig-Hallum..

Great. Thanks for taking my question guys. So, I guess, so for my one question, I’ll focus on agents, if I could.

Maybe, I guess probably for you, Rowan, if you can talk about as you’ve kind of gone through the alpha process, what the learnings are, what kind of yields returns, results you’ve driven, and what’s the bridge from current stage/ alpha to GA? What – so essentially what did you learn and what do you need to accomplish that between here and a fully ready product?.

Yes. We’ve learned a lot. We are – we’re on track to release in the second half or midpoint of this year is our current target. We want to – we’ve been focused on a handful of alpha accounts where we can drive white papers and success stories there. We’ve been finding in terms of the – a few – I guess a few interesting learnings.

One is that someone unexpectedly, the accuracy of ASR is not simply important to the intent detection. So in other words, the computer doesn’t have to really hear everything that – doesn’t have to hear accurately everything that the caller is saying in order to very accurately predict the best possible next action for that call.

And that’s important because the real world performance of ASR on customer service calls is not 95% like it has been as you speak to say for an example at Alexa or a Google Home Assistant or Siri.

So that’s a – that’s been an interesting learning in other words, that the technology that we have is effective at accurately detecting intense and then doing the predictions. And I think we’re also learning about pricing.

As we engage with these customers, they can now – our alpha customer is able to look at potential savings from deploying this technology. And so we’re able to start now engaging in pricing discussions. That’s early days still, but that’s very helpful as we head into a product launch later this year gone really well. Thanks, Jeff..

Okay, thank you..

And moving on to Catherine Trebnick with Dougherty..

Thank you. And thanks for taking my question. And it was a really good quarter. So, could you give us more context around the bookings. It seems like that was very strong. There are larger percentage coming from your expansion sales or net new logos and then geographically, how would you say that is dispersed? Thank you..

Yes, thanks, Catherine. This is Dan. Regarding bookings as you know, we don’t disclose the bookings numbers per se, but when you look at the momentum, when we talk about the bookings quarter, we’re referring to overall, net new bookings for new logos. And so those continue to accelerate and give us, as I mentioned a record Q4.

And with the pipeline growing, it’s not restricted to any geography, in fact, as we’ve talked earlier about our international expansion that’s helping bring additional opportunities to the end of the fold. And so bookings are growing.

I think Rowan mentioned our international booking’s growing 45% year-over-year, which is very exciting to see and we’re getting more people on the street in various markets expanding our product portfolio to be able to have the localization and language necessary to cater into those markets. So it’s coming and kind of hitting on all cylinders there.

And like we’ve talked about the market’s ripe, it’s under 15% penetrated or moved to the cloud. And so the opportunity is still very, very large and in front of us for the most part..

All right. Thank you..

And our next question comes from Will Power with Baird..

Great, thanks. The question probably is for Rowan or Dan, just on competition. A number of the kind of UCaaS-focused providers who have reported have called out contact center as a source of strength.

I wonder if you can comment on anything new you’re seeing competitively? Or is a lot of that’s just a function of – there’s still a big market opportunity. And I guess along those lines, there’s been a lot of hoopla around the RingCentral, the ACO product coming out here a little over a lot.

But I wonder any perspective you could share in terms of potential opportunity that could create as and if more folks move the PBX to the cloud? Thanks..

Yes. Well, I think the UCaaS vendors as sort of as a class have definitely validated interesting market opportunity with contact center. And frankly, they all need to have an offer. The big dog in that space, obviously, is RingCentral who resell and don’t own their own contact center solution reselling in Contact.

And so I think that just reinforces the duopoly that we have in the market with us and then Contact. We’ve been really focused on our UC relationships. We integrate with all of the UC vendors that are out there. We’ve been making really good traction with Zoom. So, we’re excited about accelerating that partnership with Zoom there.

I would say the logical sort of main threat potentially to RingCentral in terms of UC traction just given their scale of their business and the acceleration that they’re seeing. So exciting on that front. With regards to hoopla as to use your word around ACO. We haven’t actually seen a delivery of a CCaaS product.

So the story there is delivering a via cloud office from RingCentral to the Avaya customers. And that following that, at some point later, Avaya would deliver a cloud-based CCaaS offer that has not launched yet. We haven’t seen it and so we don’t know where that really stands at this point, but we’re watching that carefully.

We do view this as an opportunity to drive awareness as the customer thinks about switching from their existing premises-based Avaya you see in contact center. We’re already closing lots of those deals. I mean, they’re contributing a huge amount to our revenue acceleration. And I think that’s going to continue.

And frankly, given that Avaya is now essentially admitting, “Well, yes, actually, cloud does make sense, and we’re going to have our own product at some point.” It’s a great opportunity for us because we don’t have to wait for a product we already have one, and it works really well, and a lot of Avaya customers love it.

So, I think that’s an opportunity to accelerate our penetration into the Avaya installed base..

Thank you..

Thanks, Will..

And our next question comes from Mike Latimore with Northland Capital Markets..

Yes. Thanks a lot. Great quarter there. So, just curious about some of the technology partnerships you have and what kind of influence they might have in 2020.

And in particular, what are you seeing in terms of just opportunities around Microsoft and Salesforce? And then with Microsoft kind of splitting it up between UC and CRM there?.

Yes. Maybe, I’ll take the second part, and Dan, you can comment on tech partnerships and influence. If you want to add anything to my answer. We are excited about the Microsoft Teams partnership that we announced earlier or Access, I guess it was in 2019. Microsoft has been making pretty good traction with Teams UC, the headlines on that front.

And following in closely behind that is their UC ambitions. And I think as those UC ambitions really start to bite, they’re recognizing the need for a contact center strategy. And so that’s where we’ve been engaged with them.

And we’ve had solid partnership – we had solid progress with their channel partners who they’ve introduced us to and going to their events and stuff. So yes, we are excited about the Microsoft, especially longer term, the Microsoft opportunity.

We see them as the huge disruptor potentially to the UCaaS space and potential long-term winner, frankly, in that space. From a Salesforce perspective, we continue to have great traction with an executive alignment with Salesforce. And I think we’re going to continue to see that moving forward.

Their customers are really happy with Five9 and they’ve continued to pull us into deals, and we continue to close deals with Salesforce. So good progress on that front. With regards to technology partnerships and influence in 2020.

I guess, any other comments you want to make on that, Dan?.

Yes. So Mike, just to also talk Microsoft Dynamics CRM, very much partner. In fact, you heard me mention it on one of the opening examples that I gave of a win last quarter. So we continue to engage and do more and more with them. Salesforce, obviously, being the market share leader there.

We do a ton with them and we’ll continue to deepen those integrations and make sure that the customers are getting the value. But if you step back from it, CRM is certainly one very strategic integrated element that we deliver to our customers together.

But then you look around at the other adjacencies like you see that we just spoke of, critical to have those partnerships. But then you look at all the other ancillary applications that live in and around the contact center. And it’s very important.

And one key element is the Whendu acquisition gives us a lot of those integrations already prebuilt out of the box, which is key, but also more than ever because of where Five9 is in the marketplace. We have a ton of folks that are joining our ISV program. And that really is technology partners that want to come on and integrate to our platform.

And then be recommended or endorsed by us to go ahead and fill out some of those immediate adjacencies that they can bring value for. And we not only have expanded our ISV program. But we’ve now listed them on the marketplace on our website.

So it’s very easy for customers and prospects to go find who we work with well and who we’ve already endorsed the integration with. So, getting great traction from that..

Fair enough. Thank you..

Yes..

And we’ll take a follow-up question from Sterling Auty with JPMorgan..

Yes, thanks. You mentioned the potential for accelerating move to the cloud. You talked about 200,000 name seats at this point. If you were to look across the entire industry, what would you estimate the total number of contact center seats that have moved to the cloud.

So in other words, where are we in just the overall industry penetration of cloud as a whole?.

Yes. This Rowan, Sterling. Thanks. You were breaking up a little bit. But I would say, the part of the question I heard was estimating the total penetration. I would say, look, the number is less than 10% of the total seats. Total seats globally, 16 million, call it – so 1.6 million. And of that, I would be surprised if real cloud is over 1 million seats.

But it’s probably somewhere between 1 million to 1.5 million is my guess total seats..

Okay. Thank you..

And you have to exclude, by the way, the reports from some of the other vendors who include hosted. They essentially take their premises-based offers and give it to partners and say, please put this in your data center and then deliver it as a service to your customer.

And that’s not – customers have wised up to that, false cloud sort of proposition, and are really pushing back on those under saying, no, no. I’m expecting a true multi-tenant cloud. I don’t want to be more than – we actually hear this from customers all the time. Are we more than 1% of the volume on your cloud, and they don’t want to be.

That’s a big safety factor for a huge company. Do you have – we may be running one of the largest, if not the largest, multi-tenant cloud contact centers with 200,000 named agents.

And so that is a huge safety point for large enterprises as they look to multi-tenant, not just essentially taking what they already have and putting it in somebody else’s data center. So that’s – those numbers tend to be included in the broader “cloud seat” counts that some of the vendors report on..

Makes sense. Thank you..

Yes..

And our final question will come from Terry Tillman with SunTrust Robinson Humphrey..

Hey, yes, thanks for including me again. Yes, maybe, Barry, I don’t know if I missed this, but when we look at the combination of Whendu, which you know is more of a technology acquisition. And then a product acquisition from Virtual Observer, the WFO acquisition.

Could you give us any sense on how that looks from an impact on 2020 revenue? That’s all I had. Thanks..

Yes. So, straightforward. In terms of Whendu, very minimal. We’ve got the SKUs out there. They’re doing well. They’re four SKUs and one platform SKU. It’s going to take a while before that starts working to the left of the decimal.

In the case of the existing 150-plus customers that we have with Virtual Observer, that’s a tiny sliver of our current business. We obviously plan to accelerate that and make some investments to help achieve that. But it’s not going to be that meaningful in terms of comparison of where we are currently with Virtual Observer in 2020.

So in other words, the growth from 2019 – 2019 to 2020 will not be material..

That’s all. Thanks..

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

Thank you, operator. Well, in closing, I am pleased with our strong fourth quarter and annual performance.

So, as we start the new decade here in 2020, I believe that we’ve got the best team, the best technology and the best vision to continue leading the cloud contact center market, and there’s tremendous opportunity for Five9, and we look forward to sharing our ongoing progress as this year unfolds. Thank you all very, very much..

Well, thank you. And that does conclude today’s conference. We do thank you for your participation. Have a wonderful day..