Five9, Inc. (FIVN) Q1 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed but overall positive outlook. Strong financial performance is highlighted by record revenues, impressive EBITDA and free cash flow, and robust AI revenue growth. The company announced partnerships with major players like Salesforce and Microsoft, which could boost short-term stock prices. However, the lack of specific guidance and concerns about competition and currency fluctuations pose risks. Given the company's market cap and strong financial metrics, a positive stock price movement (2% to 8%) over the next two weeks is anticipated, despite some uncertainties.

Key Financial Performance

Subscription Revenue $X million (14% year-over-year growth) driven by strong revenue contributions from new logos and highest year-over-year growth rate in three years for installed based bookings.

Adjusted EBITDA Margin 18.8% (360 basis points year-over-year increase) due to disciplined expense management.

Operating Cash Flow $48 million (17% of revenue) representing a Q1 record, driven by strong adjusted EBITDA and DSO performance of 33 days.

Free Cash Flow $35 million (12% of revenue) achieving an all-time high, with a free cash flow conversion rate of 66%.

Non-GAAP EPS $0.62 per diluted share (29% year-over-year increase) due to improved profitability and reduced stock-based compensation.

Enterprise AI Revenue 32% year-over-year growth, contributing to the fastest growing category of the product portfolio.

LTM Dollar-Based Retention Rate 107% (down from 108% last quarter) primarily due to tough year-over-year comparisons.

Stock-Based Compensation $39 million (14% of revenue), decreased by 12% year-over-year from $45 million.

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Operating Highlights

New Product Launch: Five9 announced the launch of Five9 Fusion, a native integration with Salesforce to enhance AI-powered customer experiences.

AI Product Suite: The company reported significant momentum in its AI product suite, with enterprise AI revenue growing 32% year-over-year.

AI Insights Offering: Five9 introduced Spotlight for AI Insights, designed to help brands unlock customer insights from interaction data.

Market Expansion: Five9 is expanding its partnership with ServiceNow to integrate its transcript stream into ServiceNow interaction management.

New Market Opportunities: The company is seeing increased traction in the Google Cloud Marketplace, adding over $35 million in ACV pipeline.

Operational Efficiency: Five9 achieved a record operating cash flow of $48 million, representing 17% of revenue.

Workforce Reduction: The company announced a 4% reduction in its global workforce, expected to save $20 million to $25 million in annualized expenses.

Strategic Shift: Five9 is focusing on AI and go-to-market initiatives to drive revenue growth and capitalize on a significantly expanding TAM.

Long-term Goals: The company aims to achieve a rule of 40 on adjusted EBITDA by 2027.

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Risk or Challenges

Macroeconomic Conditions: The company faces risks from adverse economic conditions, including inflation, uncertainty regarding consumer spending, and high interest rates, which could impact future results.

Geopolitical Risks: There is resistance in international regions to doing business with U.S. vendors, which could affect the company's operations in those markets.

Sales Cycle Lengthening: The lengthening of sales cycles on larger deals is attributed to the macroeconomic backdrop, which may delay revenue recognition.

Regulatory Compliance: The company must ensure compliance with regulations such as TCPA, which adds complexity and potential risk to their operations.

Workforce Reduction Impact: A recent 4% reduction in the global workforce may lead to short-term disruptions and costs associated with severance, impacting operational efficiency.

Customer Retention: The company experienced a slight decrease in LTM dollar-based retention rate, which could indicate challenges in maintaining existing customer relationships.

Market Competition: Intense competition in the CCaaS market may pressure pricing and margins, impacting overall profitability.

Currency Fluctuations: Fluctuations in currency exchange rates could adversely affect financial results, especially in international markets.

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Guidance & Outlook

Transformation Initiatives: Five9 is executing transformation initiatives to bolster long-term competitive position and reestablish itself as a rule of 40 company, targeting to be above the rule of 40 on adjusted EBITDA by 2027.

Investment in AI: The company is prioritizing investment in AI and go-to-market initiatives to drive revenue growth and capitalize on an expanding Total Addressable Market (TAM) with AI.

Salesforce Partnership: Five9 is deepening its partnership with Salesforce through the launch of Five9 Fusion, enhancing AI-powered customer experiences.

AI Momentum: The company is experiencing significant momentum in AI, with enterprise AI revenue growing 32% year-over-year in Q1.

Workforce Reduction: A 4% reduction in global workforce was announced, expected to reduce annualized compensation-related non-GAAP expenses by $20 million to $25 million.

2025 Revenue Guidance: Full year 2025 revenue guidance remains unchanged at $1.14 billion.

Q2 Revenue Guidance: Guiding to a midpoint of $275 million for Q2 revenue.

2025 Non-GAAP EPS Guidance: Raising the midpoint of 2025 non-GAAP EPS to $2.76, reflecting a $0.16 increase from previous guidance.

Q2 Non-GAAP EPS Guidance: Guiding Q2 non-GAAP EPS to a midpoint of $0.65 per diluted share.

Adjusted EBITDA Margin Improvement: Expecting at least a two-percentage point improvement in annual adjusted EBITDA margin in 2025 from the 18.8% reported in 2024.

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Shareholder Return Plan

Share Repurchase Program: Five9 has developed a holistic framework to evaluate capital allocation alternatives, which includes a balanced approach to assessing organic investments, share repurchases, and opportunistic acquisitions.

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Key Q&A

Q:Do you believe 1Q is going to be the trough for the year?

A:We haven't given specifics around the subscription growth in terms of guidance, you have our annual total revenue guidance out there. We have it unchanged at $1.14 billion from what we guided to at the beginning of the year.

Q:Can you provide any color on the breakdown that you're anticipating for the Rule of 40 target?

A:The medium term, what we have assumed for revenue growth is 10% to 15% and that's assuming a stable macro condition similar to what we saw in Q1.

Q:Could you elaborate on the longer sales cycle in the enterprise side due to macro?

A:It's really focused on the large end of the enterprise market. Just these bigger deals, just a little bit longer sales cycles.

Q:Did it trigger any kind of deal slippage to next quarter?

A:These deals just slipped into the next quarter and the teams are still focused on those deals.

Q:How does genius AI now play into this environment and customers making decisions?

A:Uncertain times always impact decision making, but we're also benefiting from this AI revolution that is causing a rush for companies to figure out AI.

Q:How should we think about the impact on the organization in terms of the different divisions?

A:The reduction in force was across most departments and a majority of that was in the U.S. but we made sure that from a sales capacity basis, it's not impacted.

Q:What do you think is driving the growth in BYOT and why now?

A:Salesforce has been heavily investing and taking their customers on the AI journey and we've been on that journey with them collectively.

Q:Can you talk about the transformation you're going through internally?

A:Transformational initiatives across top line and bottom line to get on that path to Rule of 40 on a free cash flow basis.

Q:How did you stress test the full year guide?

A:We assumed the seasonal uptick in the second half of this year to be more muted than the strong seasonality that we saw in the back half of 2024.

Q:How much of a risk is the resistance of international companies using American vendors?

A:International represents about 12% of our business, so it's not a large portion but it's greater than zero.

Q:How is the relationship with BT progressing after the tariff announcement?

A:Our relationship with BT continues to be strong. A lot of good activity, continue to win deals.

Q:Are any of the partners incentivizing their own sales organizations?

A:All of them have very healthy co-sell arrangements where we're partnering effectively in the field.

Q:What does the AI revenue contribution look like as you march toward your medium-term target?

A:The 10% to 15% revenue growth has sort of a general momentum of AI that we are seeing today.

Q:What is included in the AI revenue bucket?

A:This does not include simple automation and other things, including WEM functionality that is not included in that.

Q:Will AI usage and adoption be a potential headwind to gross margin?

A:We actually see it just the opposite. We see AI as a tailwind.

Q:Review of Unclear Management Responses

A:Management avoided giving a direct answer on the specifics of subscription growth guidance and the breakdown of the Rule of 40 target.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call highlights strong financial metrics with record high AI bookings, increased revenue guidance, and robust enterprise AI adoption. The Q&A section provides clarity on revenue conversion and strategic partnerships, reinforcing positive sentiment. Despite some concerns about mega deals and commercial revenue, the overall guidance and financial health are optimistic. The market cap indicates moderate sensitivity to these factors, suggesting a positive stock price movement of 2% to 8% over the next two weeks.

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FIVN Report

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