Good day and welcome to the Five9 Fourth Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Lisa Laukkanen. Please go ahead.

Thank you, operator. Good afternoon, everyone and thank for joining us on today’s conference call to discuss Five9’s fourth quarter and full year 2014 results. Today’s call is being hosted by Mike Burkland, CEO; and Barry Zwarenstein, CFO. During the course of this conference call, Five9’s management team will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply predictions 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 these risk factors you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission. In addition, management will make reference to non-GAAP financial measures during the call. Management believes this non-GAAP information is useful, because it can enhance the understanding of the company’s ongoing performance and Five9 therefore uses non-GAAP financial information internally to evaluate and manage the company’s operations. This non-GAAP financial information should be considered along with and not as a replacement for financial information reported under GAAP. 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 available at five9.com. Now, I would like the turn the call over to Five9’s CEO, Mike Burkland.

Thank you, Lisa. Welcome everyone to our fourth quarter and full year 2014 earnings call. We're extremely pleased to report results for the fourth quarter that were better than expected across all metrics and capped off a very strong year for Five9. Total revenue for the fourth quarter was a record $28.3 million, up 20% year-over-year. This strong revenue growth combined with continued gross margin improvements and diligent expense management resulted in a significant improvement to our bottom line. We remain focused on investing at the appropriate levels to achieve solid topline growth, while at the same time continuing our path to profitability as evidenced by the fact that we know our fourth adjusted EBITDA loss by 620 basis points year-over-year. I would also like to add we're confident that we will achieve further improvement this year as we continue on our path to profitability and cash flow breakeven and plan to do so without the need to further access capital market. Throughout the year we continued to build momentum by adding new enterprise clients and expanding deployments with existing enterprise client. This drove 28% growth in annual enterprise revenue in 2014. As a reminder, this growth is entirely organic. This success is a direct result of our ability to help our clients improve age of productivity, enhance customer satisfaction and reduce total cost of ownership and as evidenced by our strong win rates against key competitors. We continue to penetrate the enterprise market as we deploy larger and larger customers. Our strong implementation and support capabilities have proven to be key differentiators for Five9. We have a comprehensive six step implementation process including on-sight consultation designed, test, launch, training and optimization. In addition, we offer premium support with dedicated personnel and ongoing training through our Five9 University. In the…

Thank you, Mike. At the outset, I would like to highlight again how pleased we are with the progress we made during 2014. As Mike mentioned, our better than expected fourth quarter results were due to strong momentum in the enterprise market, continued improvement in gross margins and diligent expense control. We're intensely focused on making sure that we invest at the appropriate level to achieve solid topline growth, while at the same time, continuing our path to EBITDA and cash flow breakeven and we're planning to reach cash flow breakeven with ample liquidity in hand. Turning now to our results, our revenue for the fourth quarter of 2014 was $28.3 million, up 20% from the fourth quarter of 2013. The two main drivers for our larger than expected revenue growth were first, faster than anticipated turn-ups by new enterprise clients and second, our forecast of the fourth quarter seasonal uptick tend out to be conservative. A key strength of our business model is that 97% of our revenue is recurring and that our recurring revenue enjoys excellent dollar based retention rate. Specifically, our dollar based retention rate for the period ended December 31, 2014, was 96%. Please keep in mind that the dollar based retention rate is a blended rate for the 61% of our revenue, which comes from enterprise customers, where our rate is consistently above 100% and the 39% of our business that comes from SMB where as you would expect, it is below 100%. As a reminder, before we move on to discuss gross margin, we calculate the dollar based retention rate by taking the average of the 12 months of year-upon-year net invoicing changes from clients in our store base in the prior 12 months similar to same store sales. Gross margin, adjusted to exclude…

[Operator Instructions] And we’ll take our first question from Sterling Auty with JPMorgan.

Hi it’s actually Darren Jue on for Sterling. I appreciate all the commentary on the enterprise business. Just wondering if you could maybe provide a little bit more color on how the SMB segment did in the quarter?

Yeah, happy to do it Darren, this Mike, we continue to grow our SMB business while it’s slower growing business than our enterprise business, it continues to be a nice healthy, consistent, steady machine underneath the faster growing enterprise business. So we’re thrilled with the output on both sides.

Okay. Could you also maybe talk about whether or not you're starting to get any benefits from the lease cost routing?

Yes we are. I’ll let Barry speak to that in a little detail here.

Absolutely. One of the two drivers for the improvement in our gross margins and expected future improvements in on ESC side, the other though of course being the higher subscription revenue against the fixed cost. And we’re delighted with what’s happening on the usage side. We commenced implementation of lease cost routing in the course of the fourth quarter. And as I have mentioned in prior occasion, it’s actually more value based routing, which also introduces the aspect of quality. And through this, we’ve been able to get meaningful improvements in both margins and customer satisfaction.

Okay. Thank you.

We’ll go next to Nikolay Beliov with Bank of America.

Hi thank you for taking my question and nice quarter. I was just wondering about what trends the guidance embeds for enterprise versus SMB growth rate, international expansion and lastly retention rate? If you can talk about qualitatively about the trends and the puts and takes that would be really helpful. Thank you.

Yeah happy to take that Nikolay. Our guidance as you can see is and I’ll remind everyone that our revenue growth is a blended growth rate between enterprise, which makes up about 61% of our business today. And our SMB business, which makes up about 39% of our business. So again please keep that in mind when you look at our guidance going forward. We continue to invest in sales capacity for the enterprise opportunity and clip of 30% to 40% year-over-year growth and sales capacity. And our sales productivity has continued to be very consistent amongst that organization. And that is a meaningful input if you are trying to model the difference here. And when you think about the SMB business, we’ve been increasing the sales capacity by about 10% on a year-over-year basis and that’s also a very good reference point for modeling.

And then is there any international revenues embed in the guidance?

We are as you know we've built our first datacenter and are turning up first customer in Europe and we just did that recently and we will take an incremental approach in Europe in terms of growth to have a meaningful impact on our overall revenue will take time. I can tell you the other strategic reason for our expansion into Europe was for our multinational customers that require a global footprint from us in terms of our datacenter presence. And one of the examples I touched on earlier, the customer wins in the quarter was a customer that had that very requirement that got 11 service centers around the globe and it was important for them that we had a datacenter in Europe.

And then a question for Barry, so agencies increased 19% last year whereas total revenues increased 23%. I’m just wondering whether the difference was driven by maybe higher ASPs or maybe higher usage.

No it’s -- in fact it’s not higher usage Nikolay, it’s -- there has been a steady tailwind in terms of ASPs and pricing. It has been somewhat firm and I think dramatic and that is the main reason for the improvement.

And one last question. Last year you said some seasonality around the BPOs and the healthcare vertical. How shall we think about that for 2015?

Yeah very good question Nikolay. We’ve done a complete bottoms-up analysis of all of our enterprise customers that have some seasonal aspect to their business. So we do model that into our internal models for that go-forward into 2015. But again it’s if you look at it from a big picture standpoint, we typically see Q3 and Q4 as seasonally strong mainly driven by year end activities in some of those industries.

Got it. Thank you.

And we’ll go next to Richard Davis with Canaccord.

Hey thanks. Quick question, in terms of thinking about the operating leverage in the model, is it -- so we kind of think of it fairly evenly spread. You gave kind of the headline thoughts on gross margins, but in terms of OpEx should it kind of evenly spread out there? And then secondly, are there any large customers' accounts kind of like what we saw last year with the Affordable Care Act in aggregate affecting the numbers that we should be aware of it could or might cause that motion in the numbers? Thanks.

Richard in terms of the first question in terms of the operating ratio, as you mentioned on the gross margin side, we're on a steady march to the 65% to 70% maybe some headwinds in the first part of this current year due to the fact of the resets on the limits etcetera. With respect to the operating expenses, you’ll see the biggest leverage unquestionably in G&A and we’ve started to demonstrate that already if you look at the dollar amount on a non-GAAP basis, which is after all what we’re talking about over here. We've improved year-over-year by between 300 and 400 basis points. We also will get leverage in R&D. You can see the dollar amount there, also being relatively flat recently. And we’ll get some leverage but less in terms of the sales and marketing expenses as we invest their primarily on the enterprise side and continue to get success. On your second question on the seasonal impact, well first of all, let’s all hope that the complete plutonic shift in the plates that happened last year is not repeated this year again and it doesn’t appear to be by all accounts. It seems to evolve very smoothly. And we’ve taken quite a number of additional steps to make sure as one can possibly be on this sort of thing that we’ve taken it into account, specifically our account managers have restarted the key customers and got detail bottoms up forecast of the major accounts and we feel very, very solid on the first part of the year. Naturally this early in the year, it's little bit more difficult to look at the second half where our client settle on us and therefore, we reflected upon prior seasonal patterns obviously normalizing for the ACA and we've added I think we've conservatism into that process until we see what happens.

Got it. Thank you.

[Operator Instructions] We’ll go next to Raimo Lenschow with Barclays Capital.

Yeah, thanks for taking my question. Quick one first, Mike, you've been investing into kind of still some marketing capacity, but also into the marketing organization. At some point, like in the past, we were thinking of like that should probably kind of lead to towards an acceleration of growth. Can you just talk a little bit how you think about that at this point, especially if I look at the guidance 2015, is that kind of more second half 2015 and 2016 when these guys get productive and you should see that and then I had a couple of follow up questions.

Yeah and thanks Raimo, good question. So yes, we’ve been investing in sales and marketing capacity for enterprise in the 30% to 40% range and over time, that will translate into revenue growth that lines up with that. But I’ll tell you this. We’re striking a balance to invest and driving solid top line growth and making sure that we make significant progress on our path to profitability at the same time. So, we’re taking a balanced view and as Barry, said we’ve got some conservatism build into the revenue guidance in the second half of the year based on seasonality and again it’s work directly with our install base customers to estimate that. But we again given how far that has in the future we felt it was best to be somewhat conservative on that. So hope that gives you some insight.

Perfect that’s helpful. And Barry, congratulations on kind of giving and thanks for giving us a lot more clarity on the cash and the debt situation. Can you talk a little bit about the puts and takes there that kind of change the equation for you like you kind of looked quite far outward? What are the leaves that you were looking at to kind of over underperform there on kind of coming towards that Q4 2016 and then a little bit later for EBITDA at breakeven and then a little bit later for cash?

Very good question. So Mike basically summarized it. We got the message there is a balance between solid growth and profitability. We were enormously encouraged by our performance both on the income statement and the balance sheet in the fourth quarter. We shouldn’t have been quite that surprised, because our model is such that we do have this fixed and semi-fixed cost, which inevitably are going to generate higher profits and cash flows as the revenue rises. And we’ve just been extremely mindful in all areas of the company to do more with less.

Perfect, that’s really helpful. Barry, thank you and congrats on a great quarter.

Thanks Raimo.

And we’ll go next to Michael Huang with Needham & Company.

Thanks very much and good afternoon guys. A couple questions for you. First of all, I was wondering if you have done, how much of you seems with respect to cross-sell opportunity given the fact you're able to roll out social mobile last year and kind of what are you trending there? And then maybe as a follow-up to that from a product roadmap standpoint, what are some of the key initiatives for this year?

Yeah good question Mike, so in terms of cross sell again social, mobile and native multi-channel being added to our product during 2014. Those were significant milestone for us from a product development standpoint. And we continue to see very, very good traction in the market from both our installed basis as well as new customers in the attach rates. I will tell you this it will take time for that become a considerable part of our overall revenue. But we’re seeing very, very good signs from a cross-sell up-sell perspective. In terms of product roadmap, we’ve got a machine here that’s producing products and upgrades on a very, very regular cadence, which I’m really proud off. Most of our innovation going forward is going to center around the customer experience but really driven by the age and experience. We’re providing our next release significant I would call it innovation around agent experience, not only in terms of the user interface, but also the tools that we arm agents with within the contact centers so that they can have a great customer interaction and in the end of day, that’s what our enterprise customers want and that’s what our mid-enterprise and even our SMB customers want us to drive a great customer experience.

Great. Okay. And then with respect to the seat count, appreciated the update there, on seat count for the year, but what is and I don't know if you have a general sense for what this is, what is the penetration rates of your enterprise customers in terms of potential seat count? Do you have a sense for what percentage of the potential seats that you guys are in right now?

We look at that anecdotally from time to time Mike, I can’t give you an exact figure, but I can tell you in many of our large enterprise accounts we're 10% to 15% penetrated but you heard earlier about that example customer that added 200 seats in the quarter and that’s a perfect example of our land and expand opportunity in many of these large enterprise accounts.

Okay. And then final question just with respect to competition and how often are you popped up against the more cloud focused guys like InContext and Interactive, who also both appear to be doing well and do they agree that you have some sense here. Are they doing well because that's the strength of secular trends here or what are you seeing out there? Thanks.

Yeah great question, Mike. So we continue to see again the on-premise legacy guys Avaya, Genesis, Cisco, more than anyone mainly, because we’re replacing them in these enterprise opportunities. I’d say and roughly half the opportunities we see the hybrid cloud competitors and our win rates remain very, very strong against them, namely our most often seen competitor we had a win rate north of 60% this past quarter.

Great. Thanks guys.

[Operator Instructions] And we have no further questions in the queue at this time.

[Operator Instructions] And we do have a question from Brendan Barnicle with Pacific Crest Securities.

Thanks so much guys. Barry, just following up on Richard Davis' question about where we could see the margin leverage, as we think about getting to that that free cash flow breakeven point, maybe sometime in '17, what at that point would you see percent of revenue from those areas, R&D, sales and marketing and G&A looking like?

Yeah Brendan, it will be -- I don’t want to go into the really specifics of each item in there. There will be steady progress across each of the three areas gross margin R&D and G&A and we haven't provided that level of interim modeling.

Okay. And then Mike I appreciate the color on competition that you were just sharing, I was impressed with the ASP increases and I was curious about maybe a little more color on that pricing increase you guys were seeing. Is that you think just reflective of the overall shift more towards kind of cloud based alternatives versus competitive win rate or that just a reflection of that competition.

Yes, I think it's all of the above Brendan and I can tell you that one data point that I think will probably be helpful for you guys is we did a quick analysis of the average deal size in our enterprise go-to-market efforts, 2013 to 2014 and I can tell you our average deal size as we continue to move up stream has grown significantly up by about 25% to 30% on a year-over-year basis and our average enterprise win are customers that are going to generate about 350 K in annual revenue for us.

Great. That's helpful color. Thanks guys.

You got it. Thanks Brendan.

And we have no further questions in the queue at this time.

Well thank you, operator. I just want to thank everyone for joining us today. In closing I'll just say that 2014 was a very, very strong year for Five9 across all metrics highlighted by our enterprise revenue being up 28% for the full year and tremendous progress on adjusted EBITDA on our path to profitability. I would also add that our Q4 finish to the year was significantly strong with 9% sequential growth in total revenue. So we enter 2015 with strong momentum and great optimism about the future, and our business and our markets. So thank you again for joining us everyone.

And that does conclude today’s conference. Thank you for your participation.