Five9, Inc. Aktie

Good day, and thank you for joining us today. On the call from Five9 are Amit Mathradas CEO; Brian Lee, CFO; and Andy Dignan, President.

During today's conference call, certain statements will be made that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding our Q2 second half of 2026 and full year 2026 guidance, expected improvements in operating and financial metrics.

CCaaS and AI revenue growth trends, industry trends, including with respect to AI, our strategy, priorities and execution, our product road map and technology investment, our markets, customer demand trends, our market position and opportunity, our capital allocation strategy, including our share repurchase programs and other future events or results. Such statements are simply beliefs and predictions should not be unduly relied upon by investors. 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, including the impact of adverse economic conditions lower growth rates within our installed base of customers, failure to manage our technical operations infrastructure, unsuccessful development of our AI solutions, failure to maintain and develop our contact center solutions failure to achieve the anticipated benefits of our share repurchase activity and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and a reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck that can be found in the Investor Relations section of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today and may no longer be accurate at the time of a replay.

Lastly, a reminder. Unless otherwise indicated, financial figures discussed are non-GAAP. And now I'd like to turn the call over to Five9's CEO. Please go ahead, Amit.

Thank you, Tony, and welcome, everyone, to our first quarter 2026 earnings call. We delivered an encouraging start to the year, and I am particularly pleased to report an acceleration in subscription revenue growth with top and bottom line results coming in above the high end of the guidance ranges. While we are still early in our work, this quarter marks an important step in showing that our actions are beginning to translate into better business performance with the indicators we care about moving in the right direction again.

This is my first full earnings call as CEO. I want to frame our work around 4 priorities that I believe are essential to driving long-term value at Five First, building a performance-driven culture rooted in accountability and transparency; second, optimizing operations; third, stabilizing and strengthening the core business, and fourth, winning an AI empowered customer experiences. Let me start with our first priority, culture. Over the past 3 months, I've spent a significant amount of time with our teams and leaders across the company and had frank conversations with employees across functions and geographies.

What is clear to me is that Five9 has talented people highly strategic assets and a real desire to be. But winning also requires clarity of mission, high standard urgency and accountability. We need a culture where performance is measured rigorously decisions are made quickly and leadership is held to a high standard. That starts with me. Transparency with the investor community is equally important. Over time, our story has become harder for investors to underwrite than I believe it should be.

Some of that was about how we executed, how we communicated and how clearly we translated our strategy into measurable progress. Going forward, we will demonstrate progress through clearer, relevant and trackable metrics that help investors assess the health of the business and hold management accountable. We understand that investors want evidence, not ambition. And our job is to convert our vision into results that are quantifiable. Turning to operations. Over the past year and with the support and oversight of the Board, Five9 has been executing a significant operational review designed to improve efficiency and simplify execution.

This work, which was well underway before I joined, helped drive the 470 basis points increase in EBITDA margin from 2024 to 2025. This foundational work is crucial. But it is only the beginning. We are now in a better position to move faster and reinvest in critical areas. Building on this foundation and with the support of external advisers I am leading a series of deep dives across the product portfolio to align investments with our long-term competitive priorities. To help accelerate this effort, we are filling gaps and making changes in leadership, adjusting our organizational design, including reducing spans and layers to improve focus, speed and accountability.

These changes will help us operate more efficiently and effectively and build more disciplined foundation for innovation, growth and continued operating leverage over time. An example of this was our recent hire of Gale, our new Chief Marketing and Growth Officer. In this newly created role, Gale unify global marketing with revenue strategy and operations to build a more aligned insights-driven go-to-market engine that delivers a seamless experience for customers and partners. Let me shift to my point of view on the strategic outlook for our industry and our business specifically.

AI is one of the most important shifts underway in our industry. And customer experience is one of the most compelling application areas. In my conversation with customers, I'm consistently hearing that AI is fundamentally increasing the importance and value of every customer interaction. Historically, contact center spending has been overwhelmingly weighted towards labor, creating a difficult trade-off between lowering costs and delivering better experiences. AI is acting as a catalyst to change this. Customers now see the potential to reallocate a portion of their labor spend to fund the combination of AI and enhanced CX. Better addressing the trade-off between cost and quality.

This makes the move to a modern cloud-based platform more urgent than ever. This shift is forcing a critical decision. Customers must now consider how AI is incorporated into their CCaaS platform because they want to avoid a strolling collection of disparate tools that cannot seamlessly coordinate between their human agents. This means that AI point solutions are not enough because they only solve a fraction of the problem. Enterprises are looking for a complete customer experience platform, they can trust to handle the entire life cycle the orchestration, the data, the integrations and the governments needed to run reliably in production.

This is precisely what Five9 provides. What's interesting is that AI handles a large share of routine customer requests. The role of agents is elevated, not eliminated. People become experts who manage complex escalations and provide essential oversight and necessity in several regulated industries. A platform infused with AI and CX technology empowers these agents with real-time guidance and suggested next steps, while simultaneously giving supervisors unprecedented visibility into every interaction, not just a sampling.

Importantly, human-based intelligence and case resolution provides a critical feedback loop for training AI agents, which in turn drives continuous performance improvements of the entire unified platform and further differentiates Five9. This evolution is about more than just efficiency. It's about value capture. As AI reduces the customer's traditional labor spend that budget shifts towards technology. We believe this fundamentally expands our monetizable service area. By enabling entirely new use cases and more differentiated customer experiences, our path to success is no longer about simply selling seats.

Instead, it's about selling a complete solution based on capabilities and consumption. This is where we believe our category is going, and we plan to lead it by pairing these and other powerful agent capabilities into a platform that has trust governance that enterprises seek. But we are not assuming success here. We must earn it, and we will measure ourselves not by demos, but by production, adoption and customer outcomes. We are seeing signs that our strategy is working. In the first quarter, we posted our second consecutive quarter of year-on-year accelerating subscription revenue growth, an important indicator that the core business is strengthening.

We are also seeing customers adopt our AI solutions in production as an integrated part of our CX platform, leading to multiple quarters of strong AI revenue growth. This effort is amplified by the strength of our platform and our ecosystem. Our cloud-native CCaaS platform is built for high reliability and features open integrations which has allowed us to build an ecosystem of over 1,400 partners. Our deep strategic relationships with market leaders within this ecosystem are critical. Serving to validate our technology, strengthen our go-to-market reach and accelerate enterprise adoption. This is a large opportunity, and we believe Five9 is one of the few key players truly positioned to capture it. We intend to do so with both urgency and discipline.

Before I hand it over to Brian, let me say a few words about capital allocation. We take our role as stewards of shareholder capital seriously. Our approach will be disciplined, return oriented and balanced. This includes investing organically in our business, evaluating inorganic opportunities against a high strategic and financial bar. And when appropriate, returning capital to shareholders. On the last point, reflecting our confidence in the company's intrinsic value, we intend to complete our remaining amount of $150 million share repurchase authorization by the end of Q3.

In addition, our Board has authorized an additional $200 million share repurchase program. We see this as a compelling use of capital, and Brian will provide more details in a moment. Since joining in February, it has become even clearer to me that Five9 has talented employees a portfolio of highly strategic assets and significant upside potential. It has also become clear to me that we must operate with greater urgency, better execution and higher accountability as we build towards an AI-driven future.

That work is underway, and I intend to drive meaningful change as we work to turn Five9 from a good company into a great business with a disciplined focus on creating long-term shareholder value. With that, I'll turn the call over to Brian.

Thank you, Amit, and good afternoon, everyone. I would like to begin by underscoring our commitment to transparency in our reporting. To that end, starting today, you will find the supplemental metric disclosure in the Investor Relations section of our website. While many of these metrics have been disclosed previously, we believe this new format will help simplify your modeling.

As Amit noted, we have taken decisive action on returning capital to shareholders. After repurchasing $10 million of shares in the first quarter, we intend to enter into an accelerated share repurchase program for the remaining $90 million under the current authorization, which we expect to be completed by the end of Q3. The Board has also approved a new share repurchase program of $200 million, which we expect to execute opportunistically.

These actions reflect our deep conviction in our long-term opportunity and confidence in continuing to generate strong free cash flow, while also providing ample strategic flexibility. Now turning to our financials. Q1 revenue was $305 million, up 9% year-over-year. Of the total for the quarter, the contributions from subscription, telecom and professional services were approximately 82%, 12% and 6%, respectively. Our subscription revenue grew 13% year-over-year.

This was driven by our CCaaS revenue, which grew 8% at our AI revenue, which grew 68% to an annual run rate of over $125 million. For clarity, please note that this AI revenue figure now includes both enterprise and commercial, providing a complete view of this growth driver. Our AI revenue now represents approximately 13% of total subscription revenue compared to approximately 8% a year ago, and the year-over-year growth rate accelerated from 49% in Q4 '25 to 68% in Q1 26 primarily driven by our backlog ramping earlier than anticipated.

Looking ahead, we expect total subscription and CCaaS growth to trend with our overall revenue guidance. AI revenue growth is expected to fluctuate quarter-to-quarter given varying ramp schedules with full year 2026 growth anticipated to exceed 40% year-over-year. LTM dollar-based retention rate defined in our filings as the retention rate of recurring revenue from subscription plus telecom was 105%, which is the same as Q4 2025. Given our focus on subscription revenue going forward, we will transition our DBRR disclosure to LTM subscription DBRR, which came in at 107% in Q1 compared to 106% in Q4 '25.

Please refer to the previously mentioned supplemental metric disclosure on our Investor Relations and upside with 9 quarters of historical dollar-based retention rates. As anticipated, both DBRR metrics stabilized in Q1 and we expect Q2 to be at relatively similar levels, plus or minus 1 percentage point before inflecting in the second half of the year. Adjusted gross margin in Q1 was 64% compared to 62% in Q1 last year. Adjusted EBITDA was $74 million or 24% of revenue compared to $53 million or 19% of revenue in the same quarter last year. In terms of cash flow, cash from operations was $64 million or 21% of revenue, and free cash flow was $49 million or 16% of revenue.

These profitability and cash flow margins benefited by slightly more than 1 percentage point in the first quarter from a onetime discount negotiated with a key vendor that we do not expect to recur in future periods. From a balance sheet perspective, we ended the quarter with $724 million in cash, cash equivalents and short-term investments. On to guidance. For the second quarter, we're guiding total revenue to a midpoint of $306 million with a range of $303 million to $309 million.

For the same period, our guidance for non-GAAP EPS is a midpoint of $0.60 per diluted share with a range of $0.65 to $0.6 And the largest driver of the sequential decline is the onetime discount I mentioned a moment ago that benefited Q1. Additionally, this guidance includes an estimated 3.6 million shares being retired through our accelerated share repurchase. For the second half, we continue to expect total revenue growth to accelerate to double digits driven by our backlog of both new logo and installed base bookings. For non-GAAP EPS, we expect steady sequential increases in the second half. For the full year 2026, we're guiding total revenue to a midpoint of $1.26 billion with a range of $1.54 billion to $1.266 billion, which is up from our initial midpoint guidance of $1.254 billion.

Our guidance for 2026 non-GAAP EPS is a midpoint of $3.26 per diluted share with the range of $3.22 to $3.30, which is up from our initial midpoint guidance of $3.18 per diluted share. Additionally, we continue to anticipate annual adjusted EBITDA margin to exceed 24% and annual free cash flow to be approximately $175 million. That said, our organizational design initiatives are expected to initially result in higher temporary expenses to provide longer-term cost efficiencies, along with improved focus, speed and effectiveness.

To assist with modeling, please note the following: purchase of PP&E is expected to be approximately 3.5% of revenue for 2026 due to a global data center refresh. Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count and taxes as well as GAAP to non-GAAP reconciliations. With that, I would like to ask our President, Andy Dignan, to join us for Q&A and open the call. Operator, please go ahead.

Okay. We will begin with Siti Panigrahi from Mizuho.

Great. Thank you, and Congress on a good quarter. Amit, thanks for outlining all those 4 priorities. Just wondering, what are the 2, 3 most concrete measurable milestones you think investors should track over the next 12 months to assess the progress of each of those areas.

Yes. Thank you, Cindy, and thank you for the question. Look, one, I think as we are going through as I'm going through deeper into the business, I think the #1 thing that I mentioned in the script in the call is I'm spending time on really diving deep into the market, into our tech, into our products. And where Five9 should be positioned. So I think one of the benchmarks that I think you all should be looking for is in the near future of me coming out and laying that out to you all and being very clear with how that is progressing and where we are taking the business.

Two, I think there are 2 other -- 2 or 3 major other areas that I've been diving into. One is culture, like how do we actually drive more accountability, more ownership, more organizational design improvements within spans and layers within things like faster location strategy. and reducing a lot of the bureaucracy and processes internally. And I think the right measure of that should be reflected in the pace that we bring to the market in terms of delivery, in terms of delivery of some of these things that are underpinning such as margin improvements such as growth improvements. I think that's probably the best way to hold us accountable, and we'll be laying that out for fuel.

That's helpful. And then one more follow-up. You must have talked to customers and partners over this quarter. And AI is moving much faster than any other trend we have seen before. What are your customers doing in terms of adapting to this faster pace. And what's your assessment of Five9 opportunity there? And why you think Five9 is well positioned versus some of the other emerging vendors?

Yes. Another good question. Thank you. So look, as I've been talking to customers, it is pretty obvious that everyone is excited about AI, what it can do and where it is going, particularly in the contact center. I think the one big thing that customers is under realized is that AI is truly allowing for greater interactions to happen. And really driving an increase in their ability to connect with customers who are maybe Tier 2, Tier 3, who they had relegated into different channels because of OpEx. So Customer experience, CX is a reflection of your OpEx. I know how to make call times go to 0 or whole time to 0 double your OpEx, it's challenging. So as these -- as AI comes in, I think there is one big thing that is happening.

One, as AI replaces seats, those dollars are not leaving the contact center. It is actually getting reallocated towards software. And companies are looking to platforms like us that can actually marry voice, digital and AI and presented in a format where it is all connected under one roof and it actually allows them to get far larger outputs in increases in efficiency through that system. So that is really where AI is going. That is why I think pipeline is really well positioned because of the shift. And by the way, I think you all may know this, but the TAM for CCaaS plus support AI is nearly 2x the displacement of seats that will happen. And so we now get to play in a much larger market as we evolve and build into this platform.

Our next question will come from Terry Tillman from Truist.

John Carlo on for Terry. You mentioned see counts. And we were wondering how has the end market been for contact center seat counts. Are we seeing it stay stable, growing or declining? And I guess what are customers sharing in terms of their plans for seats as we look into the next 6 to 12 months?

So let me start on the Asia count, and then Amit can chime in as well. So we mentioned that the seat count continues to grow at a healthy rate, relatively in line with the CCaaS revenue growth that we had provided. And that was a commentary we provided last quarter, and it continues to be the case. And so from a -- if you look at the backlog of our customers that we've already won, there's actually a large portion that CCaaS oriented, a smaller portion but fast-growing portion that's AI.

So definitely, the seat growth from a customer perspective internally has been growing at a healthy rate. And I think to the second part of your question around what customers are telling us, it's what I mentioned to Siti, which is as they see the ability for them to get more efficient, with their human agents. What they really want to do is start investing into software tools, platform tools, AI tools that allows for the overall efficiency to grow and for them to actually increase the overall interactions. And a number of customers that we are working with today is exactly in that use case.

Our next question will come from Raimo Lenschow from Barclays.

Congrats, great start, Amit. Quick question. If you think about the industry at the moment, there's all this thing about AI disruption. But the 1 thing that we pick up when we talk with guys in the field is like how much still is in -- how many of the of the call centers are still actually on-premise and how we've actually kind of need to think about first cloud migrations. And then we can do AI. What have you picked up in your customer in your client conversations or the first 3 months on that whole dynamic? Because many years, you were the cloud provider that had the structural kind of tailwind in theory, that should be coming your way even more now given that people have to modernize finally.

Yes. Thank you for that question. And I'll chime in and let Andy add any additional color. Look, what we are seeing is there are a number -- there's still a vast majority of customers that are still on-prem. And eventually, we'll have to make that decision of moving to the cloud. A lot of them are actually testing out AI right now and saying, can we just go deploy AI on-prem. And candidly, it's been -- and we've seen a pickup of some of those requests where they want to come in and test AI first.

But also, I can tell you that the results have been a little bit of a mixed bag, right? Because when you are on-prem, the chiles heel of AI working seamlessly is data and architecture and how it is connected to the rest of your ecosystem. And in some cases, it works in some cases, it doesn't. And so I think you will see a lot more of customers testing AI on prem. My hunch is some for some may be okay, but a lot of them will start realizing that you have to move to the cloud for this to be the best of breed and full adoption and the scalability that they want. And so that's my kind of first read into it. Andy, anything to add?

Yes. The only thing I would add would be we're seeing more of those conversations. I think throughout the kind of process of working with -- on an opportunity, they realize that they can move -- there's this concern that you got to take a year to move to the cloud and then start getting AI. We've done a lot both within our product and our processes around how we deliver that we can deliver AI at the beginning, but also migrate them at the same time. So they can kind of get the best of both worlds is really what they're looking for.

Okay. Perfect. Yes. That's very clear. And then, Brian, first of all, thanks for the kind of tightening up disclosure, et cetera, that's really helpful looking forward to working for that. The other thing is like if you think about guidance, it's Q1. Usually, people kind of think it's Q1, do I change my annual guidance or not. Can you talk a little bit about the puts and takes for you to change what to change annual guidance a little bit as well and about why you took that level.

Yes, absolutely, Raimo. Thank you. So let me take that in 2 parts. Let me actually talk a little bit about the first quarter, and then I'll talk about the annual guidance. So in Q1, subscription was the key driver of revenue growth. there was a second quarter of acceleration to 13%. And that was -- if you break that down between CCaaS and AI, CCaaS was stable at 8%. And AI accelerated to 68%, primarily driven by backlog, the strength of backlog converting to revenue. And then if you -- and by the way, before I go to guidance, for modeling purposes, I do want to point out something around the AI revenue because this time, the disclosure is different from the past periods in the sense that we're including enterprise and commercial to give you a full picture of our AI revenue as well as total subscription.

And that AI as a percent of total subscription revenue going back a year ago for Q1 '25, it was approximately 8% of total subscription revenue, and it stepped up 1 percentage point each quarter to 10 in Q2, Q3, Q4 until the most recent quarter was 13% of total subscription revenue. So I hope that helps from a modeling perspective. But now going forward into Q2 and the rest of the year, it's really driven by the backlog that we've been talking about. It's growing at a very healthy rate. We have great visibility into it. It's comprised of both new logo and installed base bookings that are converting into revenue. And every customer has a unique ramp schedule.

And it just happens to be back-end loaded, which is what's driving that acceleration to double-digit growth in the second half. But it's the visibility that we have that gives us that comfort to actually increase the midpoint of our annual guidance from $1.254 billion to $1.26 billion which essentially covers all of the Q1 a little bit more.

Our next question will come from Catherine Trebnick of Rosenblatt.

Yes. Thank you very much. Nice quarter. You hired a new Chief Marketing Officer, it is really happy to see that Jay Lee. Can you explain -- I noticed you had a really strong data background, so it doesn't look like your typical branding type of marketing person and give us some details on why is a particular hire with that background?

Yes. Thank you for that question. And yes, we're super excited to have Jay here. And as you rightfully called out, we also adjusted his title to reflect what he is here to do, which is Chief Marketing and Growth Officer. Look, Jay brings a tremendous amount of experience not only in the marketing realm but also in analytics data and piecing those things together. And from my view, I think as we look at driving a unified go-to-market as we look at driving improvements in efficiency and how we serve our customer, you have to look at the full life cycle.

And that implies that you have to all be working off one sheet in terms of the data in terms of the funnel, in terms of how it actually translates into revenue operations and all the strategies that ties to it. So this is one example of some of the changes that we are making, which is, I think, beneficial to the company where under one roof, you're going to have one go-to-market strategy, 1 more go-to-market delivery mechanism and one go-to-market measurable data set that drives all of that.

Our next question will come from Michael Funk of Bank of America. Michael, you can go ahead and unmute at this time. Okay. Our next question will come from Scott Berg of Needham. Scott, you can go ahead and unmute at this.

Hopefully, you can hear me. Nice quarter here. Amit, in our 4 priorities, one of them was winning in AI, your fourth one. It's obviously the key question most investors are asking on Five9 given what the state of the contact center environment is. But how do you see the company today? And do you think you're winning effectively? Is this product item? Do you think you need to lean into product or potentially lean into maybe distribution more to continue to drive and really capture what's a pretty interesting AI opportunity today.

Thank you, Scott. Look, I think the answer really is, if I just start with the basics and say how are we performing today with REI capabilities, I think just looking at the performance of what we've delivered with 68% year-on-year growth. acceleration and just a whole year view of where that's going. I feel like we've got some pretty good jobs in what we are doing today.

That being said, I do think the market is moving fast, and we have already announced some new products that are in data that will be coming out in the next quarter or so into general availability. And so for me, the real viewpoint is how do we stay on top of that, how do we speed that up? And near term and long term, I do think at the end of the day, which I mentioned on my first call, look, to be disciplined, I cannot serve every piece of AI and -- and we will have to be selective as to what the platform requires and where our advantages are and where -- whether that is done organic or inorganic, and then where we partner with other players to fill gaps that we may not fill or things that are vertical or certain CX centric that we may need.

So I don't -- Scott, I don't think the answer is one or the other. I think it's going to be a combination of how do we continue to deliver and build faster bring more products tied to where our platform is going and where we want to own the market and where partners play a role to fill gaps that would make it easier for end users to just say, hey, I'll work with Five9 because it's all available in one place.

Helpful there. And then my follow-up is actually for Andy as a follow-up to that question is what are you seeing in sales pipelines today? What's the team seeing in Q1 maybe versus a year ago on that fast-changing environment perspective. Is the composition of deals is substantially different in terms of, I don't know, feature functionality, et cetera? Or I guess, is a state pretty steady?

Yes. I mean, I think -- so we track, obviously, our RFP and pipeline levels. They've been at elevated levels that we've talked about for the last 2 years, and that continues forward. In terms of the makeup, I would say, similar to what we talked about earlier, we are seeing more conversations around that sort of AI first. And again, I think we have a strong go-to-market around that as well as a product strategy. So I think that's going to continue to play to our strength.

Our next question comes from Rishi Jaluria of RBC. Rich, you can go ahead and you at this time.

Wonderful. I'll keep it just one. But look, great to see these continued results, continue to amend and appreciate the greater transparency. One thing we're all trying to figure out a little bit of is thinking about what exactly the impact of AI broadly, whether that's your portfolio DIY third party. And look, I appreciate that you're talking about, you can't do everything yourselves and partner where it makes sense.

But to what extent has that had an impact on the nature of conversations you're having with net new customers around migrating from on-premise to cloud, how has that changed maybe some of your competitive dynamics in the RFP process. Maybe just help us kind of understand all these pieces, how they're currently coming together and maybe -- is there a point at which AI and contact center starts to get not mature enough, but widespread enough that it actually starts to speed up some of the sales cycles.

Look, I'll take a stab at that question, and Andy may have more color. Look, I think in the on-prem solution or on-prem offerings, what we're getting a lot of requests for our AI apps that actually speed up a lot of the humans that are out there, things like age and assist some of our AI agents to help as they are contemplating voice change-outs. That -- look, the whole view for me, and I'll say this when I think about my role as a new set of eyes on this business.

What is happening in the CX space is as AI is replacing humans over time. As I mentioned earlier, those dollars are going back into the software, going back to make all of these humans and AI itself more efficient. If you just pass forward to your question, even 6 months, even a year, I think people think about point solution AI as, hey, here's a all -- most customers are basically saying, if I have humans that are going to be around, I need it all to be on one platform because there are certain functions I cannot do through point solutions.

Agent assist doesn't work unless it is in real-time conversations. If I've even talking about AI voice like Argenti, think about what a platform offers in the near future, right? You are going to have as someone comes in and says I want to speak to a human, you go into whole time. That whole time actually becomes a window in which AI agents actually perform maybe a check or get you ready for the human call. Those sorts of things cannot happen in point products, working on working independently for our platform. As humans get elevated, the other big thing that will happen is you will start finding that human agents will start monitoring a bunch of AI agents.

And if an AI agent is stuck on pronouncing month with us, my last name and does it 3 or 4 times, a human can see something go yellow and say, I'm directly stepping into that call and taking it over. That cannot happen with point products that has to happen on a platform. So I think the 1 thing that everyone is talking about Agentic. Here at Five9, we're talking about Humantic, which is the combination of humans and agents doing things that have not been thought about before. And so that is the direction we're going, and that is where I see this all coming together. So I hope that helps answer some of your questions.

Our next question comes from DJ Hynes of Canaccord. Okay. Our next question will come from Elizabeth Porter. Elizabeth, you can go ahead and unmute at this time.

Great. This is Jamie on for Elizabeth. Congrats on the strong results. is just going back to some of the earlier comments, I think I heard you guys say that some of the strength you saw this quarter was from more of that backlog coming in ahead of expectations. Just curious if you could unpack that a little bit more? Was that more attributable to strong execution on your side? Was it customers looking to accelerate those deployment time lines. And then as a result, just how has that sort of influenced your thinking for the path of those deployments for the rest of the year for what's still in the backlog?

Yes. So Jamie, it was a combination of a number of factors. So it wasn't just one customer, it was many customers. As you -- as I mentioned earlier in the year, we did have some contingencies built into our guidance as one. Part of it is that in terms of timing coming in earlier than anticipated. It's also -- we always say that our PS resource in terms of implementation is always there ready to deploy as quickly as a customer wants.

So I think there are times when the customers align faster internally on their end and the deployment cycle actually speeds up. And I think we saw some of that. And the deployment was the strongest on the AI side this quarter, which is why you saw that acceleration from 49% to 68% year-over-year growth. Now going into Q2 and beyond, I'll give a little bit more color in terms of CCaaS versus AI because they're all coming from the backlog here, but you'll see that we have our total revenue guide where we reported 9% in Q1.

We're guiding to 8% in Q2 and then double-digit growth acceleration in the back half. So the CCaaS portion from the backlog will more or less mirror that shape. And then AI on the other side will actually fluctuate up and down because of the varying deployment schedules that our customers have. But at the end of the day, for the annual number, we're anticipating AI revenue growth to exceed at a minimum 40% year-over-year.

Our next question comes from Peter Levine of Evercore ISI. You can go ahead at this time.

Maybe the first one, Amit, you made a comment pet remarks, not really selling seats anymore and more towards -- moving more towards the consumption model. So maybe just walk us through like what that progression looks like. What are you hearing from your customers? And then how does the model change over time? It does become more consumption.

And second, Brian, I know last quarter, we talked about the guide for '27 being anywhere from 10% to 15%. Is that still -- is that still the path forward as you think about the business now and as we go into the second half.

Thank you, Peter. Look, just to start, we have started to transition to with all our new logos as well as with our existing customers as they renew, is more to a -- like a fixed revenue model where they are committing to a revenue number. And what that brings is predictability to them and predictability to us. And what the whole thesis there is that as seats compress over time, potentially that our customers get the option to fill that revenue with RAI tools and others.

And why they love it is because it brings predictability and they have a -- and they're also betting on our road map, which says, hey, as new products come in, we're backing that. And we will keep consuming those AI tools to make our humans in the combination more efficient. And that is why, and we're seeing that start to happen. A lot of our business is starting to move. It's early days. So as I mentioned, that is starting to pick up. But when it goes towards Peter is the original comment I made that as seats compress, customers are saying, hey, those dollars aren't leaving the contact center, they will be utilized in other forms of AI and software tools, and that is what they're committing to. So I'll let Andy add in anything beyond that.

Yes. No, we've seen strong traction out of the gate customers have a great interest in sort of buying into that motion. And I think back to something that Amit said, the most important part is the oftentimes, they're making 3- and 5-year decisions, right? And so their belief in the road map, what we have today and what we're going to be delivering is what gives them the confidence to sign up for 3 to 5 years and make these revenue commitments. And going to help sort of protect our downside as well as easier for Brian to forecast.

Thank you. And Peter, I'll just chime in with the last part of your question. So we're not going to be providing 2027 guidance today, but you have our 2026 guidance, which keeps us on the path toward double-digit growth exiting the year and expanding EBITDA margin. And as you know, we're in the middle of deep dives across the portfolio, and we have our new Chief Marketing and Growth Officer, and we want to let that process play out before revisiting the longer-range framework.

Our next question comes from Jim Fish of Piper Sandler. Jim, you could go ahead and you at this time.

This is Ryan on for Jim Fish. One question I had was as you guys think about the guide going forward and your backlog that's driving that guide, how much upside do you guys have a view in the pipeline through the end of the year? How much of that left is go get versus what you kind of already have in that pipeline?

Yes, Ryan. So if you look at -- I think the best way to look at that is -- if you break down our guide for the last 3 remaining quarters, it basically implies we need to get $80 million of incremental recurring revenue. And I would say about 2/3 of that roughly will be coming from our DBRR, as we said, it's going to stabilize in the first -- in the second quarter, plus or minus 1 percentage point and inflect upward in the second half. So about 2/3 of that $80 million comes from that portion.

The remaining 1/3 is coming from new logos, but it's all new logos for our backlog that's converting to revenue. And as I mentioned earlier, there's different schedules for each customer and happens to be much more back-end loaded. So there's essentially no dependency on new logo go gets for the rest of the year.

Our next question comes from Tom Blakey of Cantor.

I just want to talk about that AI volatility. Brian, thank you for all the extra color, by the way. covering you guys over the years is very helpful. I thought maybe just maybe start with question number one. Can you just double-click on what's driving that? Kind of volatility in terms of obviously a dynamic inflection in terms of AI usage across the space.

Yes, absolutely, Tom. So this is really the way the bookings have come into our backlog from 2025. And is the deployment schedule of each of those customers. And because it's a fast-growing part of our business, but it's still small, right? It's still 13% of total subscription revenue. And so when you have these customers that are ramping at different times throughout the year, it does cause quite a bit of lumpiness. And that's really all it is in terms of when we say it's kind of fluctuate up and down throughout the year. We're really looking at bottoms-up every customer that's in our backlog and look at the schedule of deployment, and that's just how it's playing out for the rest of the year.

Was there an element? Just a follow-up to that. Was there an element of use cases or seasonality or like nonrecurring type of revenue in there in the AI line front?

No, not at all. So there's no seasonality whatsoever. It was actually all just -- it was new -- more on the new logo AI backlog that was ramping.

Okay. And then just -- I think it was to Peter's question about -- or one of the prior questions about this, the high visibility in terms of the back half acceleration we've asked about this in the past. I apologize to double-click here. But just conversions has been a bit of a sticking point as some of these deals have become increasingly more complex and expansive in scope given the importance of CX and organizations. Can you just maybe talk about how Five9 is executing, say, this year or in the recent quarters versus prior years in terms of ramping up these deals from backlog? That would be helpful.

Absolutely. I mean we have a wide variety of customers that we are actually deploying. The Fortune 50 financial services company is 1 of them. They started ramping in 2025, and then they're ramping more so throughout 2026 as well. But that's just 1 example. There are many other customers in our backlog that are actually continuing to deploy throughout the year. And as I mentioned earlier, we do have really good visibility into those. We work extremely closely with our customers to make sure that we're deploying on schedule. And it's really about the customers that drives sometimes the fluctuations in that. But generally, the potential services organization forecast very well, and we continue to stay right on track on that front.

Our next question comes from Jackson Ader of KeyBanc.

Great. Just one question really for me. We've seen in some other areas of software that -- just the pace of AI innovation has maybe led to some like spending paralysis. On the behalf of customers, they just feel like it's too early on, things are changing too quickly. They're like nervous to pick a winner, too early in the innovation cycle. And I'm curious, since customer experience was a relatively early environment for AI to kind of infiltrate I guess it's two questions from the same thing.

One is, Amit, do you feel like you saw that and that did play out in your market? And then second, if so, are we starting to get past that, where there's no longer this uncertainty about picking winners and it's time to actually act and spend and deploy.

Thank you, Jackson. If I think I've got the question right, I think you're asking about our customers and saying, is it -- are they starting to move? Are they saying, hey, we've sat on the sideline and it's now time to pick winners. The one thing I can tell you is given the use case for CX and AI, the number of start-ups in this space is mind-boggling. It's mindboggling. And for our customers, you can imagine every single day, they're being inundated by here of 500 voice AI companies, you're x amount doing something else. I think what we are seeing from our customers is, yes, there are some early adopters that go try a few things.

But when they start to really appreciate from companies like Five9 and I'm sure from others is, hey, what you are bringing us is tried and tested what you are bringing us is now with the security and governance. What you are bringing us is things that may not be, hey, the bleeding edge of everything, but it is something that we know will work and it is actually things that will drive meaningful and tested outcomes. And I think that is why you are seeing a lot of customers pick us over time versus all the hundreds of options out there in the market. And my sense is I think you're going to see a lot more of this, where the trust and governance, especially in large organizations becomes a more meaningful part of their decision making.

Our next question comes from Ryan MacWilliams of Wells Fargo. Okay. This concludes the Q&A portion of our call. I will now hand the call back over to CEO, Amit Mathradas, for closing remarks.

Well, thank you all for participating in our Q1 earnings call. Like as you all can see, we've had a good start to the year. But there's obviously more work to be done, and we continue to build upon this momentum and look to capitalize on the larger market opportunity for AI and CX. We look forward to updating you all as the progress unfolds throughout the year. Thank you.

All right. Good afternoon, everyone. Thank you for joining us here today at the Morgan Stanley TMT Conference. My name is Jamie Reynolds, and I'm here on behalf of Elizabeth Porter. Very pleased to have with us here today, Five9's CEO, Amit Mathradas, CFO, Brian Lee, and President, Andy Dignan.

Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please direct them to your Morgan Stanley sales representative. And with that, let's get started.

Amit, starting with you, you're new to the CEO role at Five9. So to start us off, can you walk us through just what drew you to this opportunity?

Yes, all of 4 weeks. Super excited. Look, there were two things that had me perk up when the opportunity presented itself. One, I think, is, obviously, as you all may be seeing, like what is happening in the CCaaS and the CX space, right?

My belief is very squarely that humans, agents, software systems are coming together to really transform what's happening in this space. And in fact, deliver new experiences, just like what happened with the Internet when retail came -- sorry, the retail when the Internet came along, which was, hey, new experiences like buy online, pick up in store, new kind of end-to-end capabilities that customers haven't even realized right now. And so for me, wanting to be a part of that new horizon was super exciting. And obviously, I believe interactions are going to rapidly go up because of this.

And the second component was doing it with a company like Five9, one that has pioneered a lot of what's happened in CCaaS and cloud, one that has already extended into the new world of CX and AI, and being a part of that journey, and we've already put points on the board with $100 million of AI ARR coming together with our CCaaS growth, that's an exciting place to be. And so those are the two things that brought me here.

That's great. And prior to Five9, you spent time at Avalara and Nintex. Can you walk us through what you did at those companies and how that experience is relevant to the opportunity you see here?

So very different experiences. Avalara was a company I walked into that had hit $300 million, had a strong product base, but really was one that needed the next inflection point, right? Looking at how do you take this business, go drive growth, scale and efficiency, and it was really about bringing the next level of focus, assembling the team, thinking about the right partnerships, thinking about the right ways to market and go-to-market. And next thing you know, we're close to $1 billion in 4 years and accelerating.

Nintex was a little bit different. That was a company that had a toolkit of automation tools, needed a fresh set of eyes on how do you actually adapt that for an AI world? How do you actually bring together a product platform with AI surging through the products and around the products to make it a magnifier, and a lot of that was shifting the business from being automation into orchestration. And that was really the work that had to happen.

And so when I think about Five9, to me, I think it's a little bit of a combination of both of them. Right? We've got to be thinking about how we take this business to the next horizon of scale, next horizon of efficiency and how do we do it with the changing world of AI around our product set and couple those together to build a durable business.

Got it. And so then just following up on that, what are your top priorities thinking out over the next 90 days?

Yes. Well, 30 days down. Look, the way I describe myself is, I'm a strategic operator, right? I didn't come up with Five9. I didn't come up with the CCaaS concept. In fact, I didn't come up with any of the companies that I've been at.

But as I mentioned, where I get brought in is really about the time when we need to look at the problem a little differently and say, how do you go drive scale, growth through an efficient model. And so another way of actually thinking about it is, I would say, capital allocation. How do we put our pennies on the things that really matter and are built to go drive growth and scale? And how do you make room for that from things that are not strategic or not important.

So where I've been spending my time right now is on three major areas. One, is the revenue acceleration. How do we continue staying focused on that? We've got a great set of customers, great set of products, AI products that have already taken off. And how do we continue to keep our eye on that. To be enabled to do that, the second part of that or the second leg of that stool is, operational excellence and discipline. Are we set up the right way? Do we have the right organizational design? Do we have gaps we've got to fill? Are there focus areas that we've got to go double down on such as our Google partnership or other pieces that we need to look at? And the third component of that is how do we then, once we've got these two pieces thought through and the framework thought through, then apply our capital into the areas that we need to double down on. And so really follow through on that capital allocation and think about it from that lens. So that's where my first 90 days is focused on.

Got it. So maybe transitioning to the business outlook. Your guidance implies a meaningful step-up in revenue in the second half of 2026. So Bryan, can you walk us through the forecast construct and what underpins that inflection in terms of what are you seeing in the core? And how does that compare to your expectations on the AI side? And then, Andy, perhaps you can provide some color on the deployment schedules and process that support that?

Yes. So I'll go ahead and start. So if you look at our backlog, it has grown significantly year-over-year going into 2026. And it's comprised of both new logo bookings and installed base bookings that we've already won and that's converting to revenue throughout the year. And every customer in that backlog has a unique schedule ramp, and it happens to be much more back-end loaded, which is why it's underpinning that acceleration to double-digit growth in the second half of '26.

And if you break that down between core CCaaS subscription and Enterprise AI, we exited Q4 '25 at 8% growth for core CCaaS, which is an acceleration from 7% the quarter before. And we expect the shape of the curve to be relatively similar to the total revenue guide that we gave for the year. And then if you back into the Enterprise AI subscription piece of it, that grew -- accelerated from 41% in Q3 to 50% in Q4, and we expect that to continue growing at a very fast clip, although it may ebb and flow a little bit throughout the year.

Yes. I can add in, we always like to say we run our deployment process kind of like a sales forecast, right? Our services teams that are out there in the field, you could be running 10 projects. You have to forecast for the quarter, what that ramp schedule looks like. And that's how their bonus, that's how they're focused. They realize how important the forecasting is, and they have a very tight process with the finance team. So we feel really good about that methodology that's been in place for quite some time now.

Got it. And so then, Andy, you saw really impressive momentum in fiscal '25 on the bookings side with installed base bookings hitting all-time highs, I think, for 3 consecutive quarters. Can you walk us through what's driving that strong performance in your existing customer base? And then more broadly, as you look at the strong bookings you delivered throughout the year, particularly the Q4 record, how should we think about the sustainability of this momentum as we head into 2026?

Yes. So look, if you go back to Q2 '24, we talked about changes that we made in our installed base sales motion. We put more hunters into the base. We kind of retooled our customer success motion. And that was really intentional from the fact that what we saw was, our product and engineering innovation, we are starting to bring more products to bear, right? Our customers were asking for more of our solutions, wanted us to focus more on outcomes. And so it takes time when you make those changes, and there's obviously a sales cycle that happens.

I think it was perfect timing rolling into record bookings in the installed base for 3 quarters in a row, right, in Q2, 3 and 4 in 2025. And so we feel good about that continuing to go forward. What gives me even more confidence is the fact that our product teams continue to innovate further. We continue to double down on partnerships like our Google partnership. So we feel good about the momentum in the installed base business continuing to be strong in the future.

And so sticking with the go-to-market side of things, I think you mentioned that more than 80% of Five9's business is partner influenced today. The partnerships with Salesforce and ServiceNow seem to be on firm footing, but you also just announced an expansion of the Google relationship. So it'd be great to get a sense of how you view the opportunity for the expansion with Google? And then more broadly, where you see the biggest incremental opportunity within the partner set over the next 12 months?

Yes. Look, if you look at Google, going back 7 years ago, we made a bet on modernizing our platform to the Google Cloud Platform. And we've continued to innovate our products on top of the Google solution. And then if you go back to Q2 '25, we announced that we got into the Google Global Marketplace, right? And ultimately, what we saw in the market is joint success. So originally, we were sort of bumping into each other in opportunities. And then it became with the Google Marketplace partnership, that accelerated even faster, which then led to our big announcement this January of an even deeper joint partnership.

And so if you look at the press release, it was very intentional that we said we're focused on our joint opportunities in the pipeline that we're building in the large enterprise. Right? If you look at the 60% of the CCaaS TAM that's out there, right, a lot of it's large enterprise. And so we've already seen success. And so we think that's just going to be an accelerant to growing our core business, but also the AI business. And that's probably the biggest partnership we're going to double down in 2026.

Got it. And so then from a vertical perspective, healthcare and financial services seem to be strong verticals for Five9. Are there specific vertical markets where AI adoption is moving faster than others?

Yes. I mean our three biggest verticals are financial services, healthcare and retail. But really, financial services and health care are where we see the highest adoption from an AI perspective. I think it's for a couple of reasons.

Anyone who's been in the business for a while, if you just look at classic self-service companies like Nuance, a lot of these large financial services and healthcare deployed, I would call them, not great experiences of voice bots, chat bots. And what they're seeing now is as they're moving off of on-prem self-service solutions, they're looking at, hey, how do I move this entire workload that I've been doing for quite some time. We've all used to -- at a financial services company, a voice bot or a chat bot hasn't been great historically. So they're really focused on moving off of those prem solutions to cloud AI solutions. And that's kind of step one. And then that allows them then to move into other workloads from an AI perspective a lot faster. So those are the two verticals that are coming along nicely.

Got it. And so then going back to some of the outlook part of the discussion, Bryan, I know you mentioned given some detail on the organic growth in concurrent seats. But is there anything we need to factor in when looking at the impact of the Acqueon acquisition that might have lifted things above kind of the typical growth rate? And then, Andy, what are you seeing in the competitive environment broadly and then especially on pricing, both for the AI side of things as well as the core?

Yes. So I'll go ahead and get started. So in Q4 '24, we disclosed that we had concurrent agent count of 432,000, and that was including the inorganic contribution of Acqueon. Now fast forward to Q4 '25, we said that concurrent seat count grew healthily quarter-over-quarter, year-over-year, relatively in line with core CCaaS subscription revenue, which grew 8%.

So I think the best way to contextualize that is if you look at subscription revenue per seat on a year-over-year growth basis, going back historically, a vast majority of the periods grew consistently in the single digits year-over-year. And that includes Q4 '25 as well as Q4 '24, if you look at it on an organic basis.

Yes. And in terms of pricing in the competitive market, I mean, look, pricing is always a strategic lever in a SaaS company, right? And we actually just came back from our Customer Advisory Board last week and some of our largest and most longest tenured customers. And what we're seeing in the market from some of these point AI solutions there's a lot of testing of different models, right, outcome-based, interaction-based. That's -- I think one of the areas where obviously us being a CCaaS company, a lot of domain expertise, it's really around predictability, right? And so we feel good about our pricing models now and it's predictability with upside and value. And so a couple of things that we've done here recently.

We launched new bundles to give our customers access to the full portfolio, right? Our classic CX Solutions as well as our AI Solutions. And then what we did is couple that with moving to -- and this is both for our new logo business and our installed base, moving to a minimum revenue commit model. And what customers like about that is a lot of our -- we've talked about this in our earnings calls the last couple of quarters. We're seeing customers that purchased 3 to 5 years ago, they're coming up for renewal. They're making a decision on their next 5 years of CX and AI, right?

And so they're moving to this minimum revenue commit model, which then allows them to have a level of comfort that if over time, there are some reduction in human seats, right, that will naturally then get filled with AI seats. And we feel good about that, the protection that will give them, but also gives us upside. And we didn't -- it's not sort of just a pricing play, right? It's really value. And so if you're a large enterprise company and you're making a bet on CX and AI over the next 5 years, you have to really believe in the AI solutions that we're bringing to market today and the road map into the future. So I think that's all coming together and setting us up for high upside and better predictability for Bryan.

Got it. And so then following up on that point, as it relates to competing against the AI native start-ups in the space, what's your pitch to a CIO who's concerned one of these newer point solutions versus building on Five9?

I mean, look, this is -- we talked about the platform advantage of having a CCaaS solution also being your AI solution. I mean, look, depending on the side of the aisle that you're on, if you believe that humans are still going to be involved, I mean, we certainly believe that it's more about AI agents and human agents working together, right?

Amit talked about our core belief is that interactions are going to go up with AI. And when you think about interactions today in the future, it could be -- it starts with a human, goes to an AI agent, might come back to a human agent. And having all of that on a single platform allows you to have a single data set, a single governance model. A lot of our -- a lot of companies have come off of what we call the SaaS sprawl, right, a lot of point solutions out there. They're trying to not recreate that same problem to have to unwind with 15 different AI point solutions. And so we feel good about the path we're heading down towards the future.

And then we're also starting to see, we've talked about this as well in some of our earnings calls, is we're starting to see companies who made a decision to go with someone's point solutions AI a couple of years ago. They're now coming to wanting to put more workloads in AI and they're realizing that, hey, that platform [ advantage ] are coming back to moving to our AI solutions. And so that's kind of how we're dealing with the market.

Got it. And then Bryan, turning back to you. How should we be thinking about DBRR here? It sounds like it picked up a little bit in Q4, but I think the reported number was down 2 points granted that, that is like a trailing 12-month number. So just any puts and takes there?

Yes. So if you look at the spot DBRR rate in Q4, it actually stepped up quarter-over-quarter, and that was mainly driven by the conversion of our installed base bookings and backlog into revenue during the quarter. Of course, if you look at it on a last 12-month basis, it did step down from 107% to 105%. In actuality, it was a little bit over 1 percentage point. And that was mainly due to the LTM calculation where we're dropping off Q4 '24 that had benefited from really strong seasonality, especially on the telecom side.

At that time, it stepped up as a percent of revenue by 1 percentage point. If you fast forward to Q4 '25, it was anticipated that it would be much weaker, and it did step down as a percent of revenue by 1 percentage point there as well. But if you look at DBRR going forward, we expect stabilization in the first half with some minor fluctuations in either direction, but then an inflection upward in the second half of the year.

That's great. And so then, Amit, turning back to you. In your first few weeks meeting with customers, what are you hearing about their priorities and how they're thinking about their contact center?

As Andy just mentioned, I was really fortunate last week to be down in San Diego meeting with our CAB or Customer Advisory Board, and that's our largest as well as some of our longest tenured customers. Look, our customers are in two buckets.

One, a lot of our midsized customers have already tested out AI. They may be kind of expanding with their POC or adding the next component of it. And the second bucket is our larger enterprise customers who are now finally lifting their heads and saying, okay, I'm over -- like the hype cycle is over. Let's start thinking about what AI looks like and what that first deployment is?

What I found really fascinating is, and one of my thesis coming in was, the unifying factor for them both was they don't want to do this through multiple, multiple vendors. Look, a lot of the CIOs there were like folks, we have just coming off a post-COVID SaaS sprawl cleanup. We don't want to go back into an AI cleanup with 15 different vendors doing point solutions. The other big thing that once we talked about the platform and the power of the platform, you had a bell go off or a lightbulb go off because think about what the platform really allows you to do with AI.

We can go launch AQM or Agentic Quality Management. The output from that becomes the input for Agent Assist, right, all running on the same data. So you've got a customer that says, "Hey, all these agents are struggling with this piece, and we see that in quality management. Next time Agent Assist goes up and serves up a solution to an agent, make sure they answer this part of it because we just caught it. You can't do that with point products, especially as they're sitting on different unification in different platforms and data pools.

The other big thing that is coming up is really about them wanting us to invest both in CCaaS and in the AI play. And when I talk about CCaaS, not the bells and whistles and the functionality, sure, there is some of that. But it's really about how do you integrate and build the connection points so that your CCaaS engine can support all this AI tooling around it to be the 1 plus 1 equals 3. And so that was a clear feedback that we got and what -- where they want to see the investments going.

Got it. And so realizing you're still new in the seat. But when you look at the product road map, what excites you the most looking out over the next year?

Look, when I first came in and the product was presented, I was like, hey, this sounds exciting. But now coming off what customers are saying, it really is exciting because the team has already started investing in AI feature functionality for core CCaaS, such as things like AI agents for voice, agentic routing and investments into the new CX space such as AQM, analytics and all the pieces coming together.

And so what really excites me is, hey, we're already off to the races. And this is not theoretical anymore, right? We've already generated $100 million of ARR in our AI features, and it's actually growing at a really healthy clip. And so you couple that and start adding things like orchestration and other pieces around it, and it's an exciting space to be.

And so to pick up on the $100 million of AI ARR detail, and I think it accelerated to 50% year-over-year growth in the fourth quarter. Bryan, can you break down what types of products kind of comprise that mix? And then, Andy, how do you expect that to evolve in 2026 relative to 2025?

Yes. So if you look at the $100 million of annualized subscription revenue for Enterprise AI, the biggest portion of that is AI Agent, followed by Agent Assist. And then we have a number of other products that are smaller but growing very quickly in that portfolio.

Yes. How I look at it playing out in 2026, we announced in November at our CX Summit, our new Agentic AI agent solution. To Bryan's point, that continues to be the biggest TAM or the market, right? We also announced our Agentic Quality management solution coming in the second half. So we think that will start to have a more meaningful impact.

And if you look at both AQM and AI Agent as well as our AI Insights product, which is we go to our customers, we can turn on, AI listening to all the conversations, which allows us to understand where are the key pain points happening in the business and deploy that quickly into an AI agent and what I guess the quality management allows you to do is manage those interactions across AI agents and human agents. So it really comes back to we think the future looks like AI agents and human agents working together. And our R&D focus is really around that connectivity issue.

Got it. And so going back to some of the model-type of questions. Obviously, Q4 solid quarter, reiterated 2026 guidance. Bryan, can you -- I think you noted how the guidance does not require any go-get revenue. Just can you elaborate on that a little bit more?

Yes, definitely. So if you look at our guide, it implies $105 million of incremental revenue to get to the midpoint at $1.254 billion. And I talked earlier about LTM DBRR exiting the year at 105%, stabilizing in the first half and then inflecting upward in the second half.

So let's just conservatively assume that DBRR on average is 106% for the year. That basically contributes 2/3 of that $105 million. And the remaining 1/3 is fully covered by the backlog that we have, which we have great visibility into, which essentially means that there's no dependency on new logo go get bookings in 2026. So that's what's underpinning our guidance.

Got it. And so then on the margin side, I think the 2026 adjusted EBITDA margin guidance is around 24%. That's a little bit more of a modest pace of expansion after you drove margins about 4 points higher in 2025. I guess just what's driving that slowdown in the pace of margin expansion?

Yes. If you look at 2025 on an annual basis, it did step up over 400 basis points. We did have two workforce reductions that were impacting 2025 margins. One was in August of '24, so you got the full year benefit of that as well as another one in April 2025.

Now we remain laser-focused in terms of going after different cost savings initiatives. Some of the key ones include increasing the mix of offshore hiring, automation throughout the organization, third-party spend renegotiations and the list goes on. But at the same time, we are surgically investing in key areas like AI and go-to-market to drive top line acceleration and continued long-term growth. And when you net all of that out, our guidance comes out to at least 24% EBITDA margin for the year.

Got it. And so then sticking with profitability, you achieved positive GAAP earnings for the first time on a full year basis in fiscal 2025. How should we think about the trajectory of GAAP profitability and stock-based compensation as a percentage of revenue going forward?

Yes. So GAAP profitability on an annual basis in '25 was positive for the first time, as you mentioned. We are expecting that momentum to continue, which is why if you look at the midpoint of our GAAP net income guidance, it's expected to double year-over-year to $80 million. And there are really two components to it.

One, is the cost savings initiatives that we've been executing on. The other is stock-based comp, which we have been very much focused on bringing down as much as possible. So if you look at the annual stock-based comp as a percent of revenue in 2024, it was 16%, then it dropped to 13% in 2025, and in our guidance, we're expecting 11% in 2026, and we'll continue to focus on bringing that down further in the long run.

Got it. Maybe take a moment here to pause and see if there's any questions from the audience.

Okay. Amit and Andy, just maybe a higher-level question for you guys. Investor sentiment towards the CCaaS sector has been under pressure for a while, even as Five9 and some of your peers have spoken positively about the AI opportunity. When we do our checks, we consistently hear steady optimism from the channel partners. I guess where do you think that disconnect is coming from? And what needs to happen to bridge that gap?

Look, I'm not going to speak on behalf of what investors are getting right and wrong, but I can tell you what my thesis is and why I am here.

I think there are two things you have to believe for this space to be really vibrant. One is that human agent, systems, software, AI are going to work together to actually deliver outplaced experiences for end users and new and efficient ways of go-to-market. You have to believe that calls may start with AI, move to a human, come back to AI, go back to digital, and that in itself, that orchestration is going to drive interactions dramatically up. That's one.

And two, you really have to believe that a customer is not going to go solve that with 15 different point solutions of AI, where they have -- where all these vendors have different methodologies, different back ends, different ways of solving the problems, and you're leaving it up to the customer to stitch together the CX experience they want to bring. This is the power of the platform. This is truly where agentic software systems come together to unlock something that you will not be able to get. That are the two -- those are the two big pieces that I think from where I sit, you have to believe.

And if for companies like Five9, if you can play in the traditional CCaaS space and you can play in the AI space, the combined TAMs are growing. And just like what we are showing, which is, hey, you're seeing core CCaaS being healthy and ticking along and you're seeing AI really pick up. And so the models that Andy is talking about on minimum revenue commits really pays off because as and when customers see human seats flatline or come down, it's made up by the other side, which is catching, which is AI. And if you're solving both of them together and connecting it, it just is a robust long-term business. And so that's the piece for me, which -- where my head is at and why I'm so excited about what we're doing in this space.

Yes. And the only thing I would add, I mean, look, I've been in the space for 27 years. We've sort of navigate a lot of the CCaaS or contact center space with pre-routing to on-prem to IP on-prem to cloud. and now AI through all of those transition points, the one thing that remains true is, interactions have gone up. And I think that, coupled with we're one of the software spaces is that's the closest to our customers and customers. And I think that's a powerful place to be, a lot of domain expertise, and it requires both tech and experts and partnerships. And again, I think that is playing out again in this kind of AI wave with interactions going up and delivering both human agents and AI agents, is a strong point of our focus.

Got it. And so then just to follow up there. I mean, like where do you think the argument is most flawed today in terms of either the number of agents that potentially get cut or kind of the CCaaS provider that eventually benefits? And then why do you ultimately believe that Five9 is best positioned relative to competitors? I know we talked about some of the AI native start-ups, but thinking about some of the larger scale peers in the space.

Look, I'll take a stab and Andy add a little bit. Look, one of the things we have already started to see is, some of our customers that started on point solutions coming back when we have launched our AI capabilities. So we're already starting to see that the shift back towards a platform has already started for all the reasons we are flagging.

The other piece that I think when you're talking about flawed -- look, I have to believe that over time, human agents will come down and AI will solve some of the pieces, not all, some of the pieces. In fact, in some industries, it's regulated that it has to be tied to a human. But I think the -- for me, it's not the flaw. I think it's a model you have to believe in, which is it's not a zero-sum game, and that humans will be around whether in standard capacity or oversight capacity, AI will serve a purpose, digital will serve a purpose, humans are going to serve a purpose and the connection of what happens there is really the unlock. And so I think that's really what you have to get comfortable and get your -- our heads around. And for me, that is what we are building towards.

Yes. Look, we can get a lot of feedback from a lot of listening posts, but I always put the most focus on what our actual customers are telling us both with words as well as what they're doing in terms of purchasing our applications and leveraging it. And I go back to what we've been talking about is our existing customers, yes, they're making bets on us for the next 5 years. They're making big bets on how they engage with their customers, how they use CX, how they use AI.

And what they're telling us is, yes, over time, they're modeling in 5% to 15%, I think, is the general number out there, again, over time. Many of them aren't seeing that happen out of the gate. But I think we're building the right products, and we have the right go-to-market that's allowing our customers to go on that journey with us to ultimately allow them to have the outcomes that they need and that will ultimately bring us the outcomes we need as well.

And just to follow up on that point, I think you guys have provided some pretty compelling examples in the slide deck in terms of the amount of sort of incremental spend that you capture even when a customer kind of meaningfully reduces the seat base. Can you just remind us sort of like what the average kind of uplift is in more of those like 15%, call it, seat reductions?

Yes. So usually, we've actually given several examples over the last 3 or 4 quarters where Typically, a customer that purchases AI and deploys it for over 1 year, their overall ARR growth has been somewhere between 20%, 30%, 40% type ranges. So they see the value, and that's what's driving that ARR increase regardless of what the human seat count may be versus what the AI portion is. And I think to Andy's point, the revenue commit model really gives them that flexibility going forward as well, which is very well received by our customers.

Great. And so if we step back and just look at the overall market opportunity, I think third parties kind of cite that 40% of enterprise contact centers have made the shift to the cloud, leaving the remaining 60% to go. I guess just are these customers getting easier or harder to move? And is AI accelerating their decision to migrate? And are you kind of seeing any competitive displacements when those decisions happen?

Yes. Look, if you look at -- so 60% of the market is still out there, right? And what everyone -- even if there is a reduction in seats, we're a winner of every seat that moves over, right? And if you look at what makes up the largest portion of that 60%, it is the larger enterprise, right? And so yes, there's naturally -- there is a switching cost that's there.

Now some of those switching costs are coming down, but largely because of tools that we've built because we understand how to integrate to some of these on-prem solutions that are out there, kind of pull out the configurations and then move those into on-prem -- or sorry, into our cloud platform. One of the things we are starting to see, but in a kind of a smaller percentage of customers say, "Hey, maybe I'll wait for that transition, and I'll go with your AI-first movement".

And so we've had deals lately where we have landed the AI-first, but with a fast follow of the on-prem to CCaaS migration. But I would say in the majority of the time, there are customers who start there. But historically, the model was let's move you to the cloud, then let's start letting you take advantage of AI. We worked really hard with our -- within our products, within our processes and our services teams and our partners. They can move from on-prem to cloud and take advantage of AI at the same pace. So at the end of the day, they're not getting security patches and new features and new functionality, managing these on-prem platforms. So I think that's still going to be the majority of customers will make that decision. But we're also able to handle customers who say, I want to start with AI first and then follow with the transition later.

And Bryan, maybe for you, it'd be great to just kind of get a sense of what your latest thoughts on capital allocation are? Particularly in the context of the accelerated share repurchase program that you announced in the third quarter.

Yes. So we announced an inaugural share repurchase program of $150 million expiring over 2 years. We just completed the first $50 million through an accelerated share repurchase program that ended in February. So going forward, we'll continue to have that optionality to buyback shares, but we'll look at it from the context of a balanced capital allocation strategy between organic and inorganic investments as well as buybacks to maximize shareholder value.

And then maybe one for the group to just close it out, going back to some of the things we were talking about earlier. What is the biggest thing you think investors are kind of misunderstanding about this market opportunity and kind of like what has you most excited for the rest of the year?

Yes. I mean, look, I think we've been talking about it, right? I mean there's -- we have a big CCaaS TAM. And if you look at the AI TAM coming together, I think that our overall TAM is sort of a 1 plus 1 equal 3. And I think with our focus on our customers being able to take advantage of CX and AI and really leveraging our road map of products that are going to help them deliver their outcomes, I'm excited about the space. Like I said, I've been in it 27 years and hope to be not another 27, but excited to see the outcome that we're going to see.

Look, I'll just echo that. As I've said, I think the big opportunity, and this is not theoretical anymore, right? It's being backed up by what you're seeing in the numbers with the CCaaS part of the business, not only from us, but in the market growing, AI growing and customers taking both solutions from unified platform vendors.

And so it's -- to me, that is really what is starting to happen. It's starting to be proven out over and over again. And for us, it's just how do we string together the next x amount of quarters to make sure that everyone else sees what we are seeing and come along for that ride.

Terrific. We are at time. So thank you to the Five9 team for joining us as well as to the audience.

Thank you.

Thank you.

Thank you for joining us today. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance and cash position of the company, expected improvements in financial and related metrics, expected ARR from certain customers, certain expected revenue mix shifts, expectations regarding seasonality, customer growth, anticipated customer benefits from our solution including from AI, our AI and CCaaS revenue opportunities and current estimations regarding the same, including the ability to leverage data in support of AI revenue opportunities, company growth, enhancements to development of our solution, market size and trends, our expectations regarding macroeconomic conditions, company market leadership positions, including the effective onboarding of our new Chief Executive Officer, business initiatives, pipeline, technology and product initiatives, including investment in R&D and AI, including a recently announced suite of our AI solutions as well as other future events or results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are simply predictions, should not be unduly relied upon by investors, 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, including the impact of adverse economic conditions, including the impact of macroeconomic challenges, including continuing inflation, uncertainty regarding consumer spending, high interest rates, fluctuations in currency exchange rates, lower growth rates within our installed base of customers and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, Management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our investor deck that can be found in the Investor Relations section of Five9's website. Also, please note that the information provided on this call speaks only to management's views as of today and may no longer be accurate at the time of a replay. Lastly, a reminder that unless otherwise indicated, figures -- financial figures discussed are non-GAAP.

And now I'd like to turn the call over to Five9's Chairman, Mike Burkland.

Thanks Tony, and thanks, everyone, for joining our call this afternoon. Before we discuss our strong finish to the year, I want to acknowledge that this is my final earnings call at Five9 after 18 years with the company. It has been the privilege of my career to lead this organization, and I'm incredibly proud of what we've accomplished together. We've grown Five9 from approximately $10 million in annual revenue to a $1.2 billion run rate while enabling some of the largest brands in the world to transform their customer experience. These achievements are a testament to the talented team of Five9iners and our vision to be a leader in AI-powered CX.

As you know, Amit Mathradas started as CEO on February 2. And before we dive into the business results, I want to take a moment to formally welcome Amit to his first earnings call. After a comprehensive search process, we selected Amit for his deep experience in product innovation, AI and operational excellence at scale. His leadership style and his proven track record of leading through evolving market conditions aligned perfectly with Five9's culture and the tremendous opportunity ahead of us. I have the utmost confidence in Amit's leadership and all of us here at Five9 are extremely excited to start this new chapter with Amit at the helm.

With that, Tom, I'll turn it over to you to share a few of your initial thoughts on Five9 and our opportunity ahead.

Thanks, Mike. I am thrilled to join my first Five9 conference call and would like to express my gratitude to the leadership team and the Board for putting their trust in me as Five9's next CEO. I officially started on February 2, and in the past 2 weeks, I've spent time meeting partners, customers, listening to employees, reviewing road maps and getting deeper into the operational cadence. And what I've seen so far has reinforced why I took this role.

I joined Five9 for a simple reason. That is, I believe we have a large opportunity in front of us and that we have the right foundation to capture more of it. I strongly believe that over the long term, customers will look to Five9 for a unified CX platform that can solve our Agentic and traditional human needs. This multi-agent world uniquely positions Five9 to drive efficiency, elevate customer experience for all our customers.

From a communication standpoint, you should know that I will be clear on what's working, what is not and what we are doing to improve it. And with that, I'll turn it back to Mike to discuss our fourth quarter and full year performance.

Mike?

Thanks, Amit. We're pleased to report solid Q4 results. We had an exceptional bookings quarter achieving a Q4 record highlighted by enterprise AI bookings more than doubled year-over-year, contributing to healthy increases in backlog. In terms of top line, we finished the year strong with fourth quarter total revenue coming in at $300 million. Subscription revenue, which now makes up 82% of total accelerated to 12% year-over-year growth in Q4. This was driven by enterprise AI revenue growth accelerating from 41% to 50% year-over-year, and core CCaaS subscription revenue growth accelerating from 7% to 8% year-over-year.

I'm also excited to report that our enterprise AI annual run rate revenue surpassed $100 million in the fourth quarter. On the bottom line, we achieved all-time records in the fourth quarter with adjusted EBITDA increasing to a margin of 26% and free cash flow more than doubling year-over-year to a margin of 22%. These results demonstrate our commitment to balanced growth and operational excellence. I'm incredibly proud of our team's execution and with our strong positioning in AI-powered CX, we believe we're set up for continued success in 2026 and beyond.

Turning now to our business updates. Today, I'd like to focus on 3 key topics: First, our large and growing market opportunity; second, our differentiated position in AI-driven CX; and third, our strong partner momentum. We're in the early stages of a long-term transition in the CX industry with multiple secular growth factors driving a significantly expanding addressable market for our platform. As a reminder, Gartner forecasts the market for traditional CCaaS to grow at a 9% CAGR and the Gen AI customer service market to grow at a 34% CAGR through 2029 and to combined annual spend of $48 billion. We believe that both of these growth drivers will create a powerful tailwind for Five9 as we continue to execute against this durable multiyear opportunity.

Importantly, we believe Five9 is well positioned to lead in this new era of AI-powered CX. At the core of our advantage is data, more specifically, conversational data we capture every customer interaction across voice, digital and AI-driven channels. Therefore, our platform remembers every conversation, whether it was with a human agent or with an AI agent through voice or digital. This creates what we call a relationship-based experience where every engagement feels personal, contextual and connected. Our end-to-end platform serves as a real-time orchestration engine for customer interactions, whether handled by a human agent or by an AI agent, enabling seamless collaboration between the two. Each interaction strengthens the next, and this continuous learning loop compounds over time, creating a powerful data flywheel that drives higher performance, accuracy and personalization. This is a significant advantage that only an end-to-end platform can deliver.

Our platform advantages are also driving significant momentum in product innovation. At our CX Summit in November, we announced a suite of new AI-powered solutions designed to help enterprises elevate their CX, including our AQM, which is a next-generation Agentic quality management solution, our AI-powered genius routing engine, our OneView unified analytics and reporting platform and our no-code adaptive digital engagement solution. These innovations showcase how Five9 continues to lead in AI-driven CX and further strengthen the power of our end-to-end platform.

In addition to our product innovations, we continue to double down on partnerships as a key driver of differentiation in both our products and our go-to-market. That's why we're excited about the expansion of our partnership with Google Cloud and the launch of our joint enterprise CX AI solution, which we announced in January. We were an early adopter of Google's AI technology, and it continues to pay off for us by accelerating innovation across our CX and AI portfolio. Our joint solution brings together Five9 AI-infused Intelligent CX platform and Google Cloud's Gemini for customer experience to deliver faster time to value, seamless end-to-end orchestration across the customer journey and more personalized interactions. Customers can move beyond pilots and deploy AI and production faster, grounded in real customer context and built for enterprise scale. That's why we're already seeing strong traction with some of the largest brands in the world, leaning into the combined power of Five9 and Google.

And before I turn it over to Andy, I want to thank our incredible team of Five9iners for your passion, dedication and commitment to excellence throughout my tenure as CEO. Together, we've built something truly special. As I transition the CEO role to Amit, I'm more excited than ever about Five9's future. We have a differentiated platform, proven expertise, strong customer momentum, and the right leadership to capitalize on the significant opportunity ahead.

And with that, I'll turn it over to our President, Andy Dignan, to share more details on our go-to-market performance. Andy?

Thank you, Mike, and congratulations on your well-earned retirement. And Amit, I look forward to working with you as we build on Five9's strong foundation. We were pleased to deliver an exceptional quarter of bookings. As Mike mentioned, total bookings represented a Q4 record driven by enterprise AI bookings more than doubling year-over-year in our installed base bookings achieving another all-time high for the third consecutive quarter, driven by ongoing strength in upsell and cross-sell activities.

In addition to strong execution by our sales teams, a key driver of our success is our partner strategy. Partners expand our reach, they bring us into more enterprise buying motions and speed up time to value for customers. Five9 has been partnered first for years. And today, more than 80% of our business is partner influenced. Our balanced route-to-market model is working. Partners are leading complex transformations, accelerating AI adoption and delivering outcomes faster than ever. In 2025, Five9 doubled year-over-year, the number of partners certified to implement Five9 services, showing just how mature and essential our ecosystem has become. Building on Mike's comments about the multiple secular growth vectors expanding our market, we're seeing customers lean into both sides of that transition at once, modernizing on CCaaS while accelerating adoption of AI.

The first example is a global power management company with over 85,000 employees that selected Five9 to modernize from an on-prem platform to a CCaaS foundation. They chose us based on our native integrations with Salesforce and ServiceNow and our AI agent and agent assist capabilities to improve self-service and drive higher agent productivity. We expect this initial order to result in approximately $2.8 million at ARR. Another example is a life, health and financial services provider that chose Five9 to move from on-prem to cloud and improve work performance. They selected Five9 for our tight integration with their health care CRM and our comprehensive suite of AI solutions. We expect this initial order to result in approximately $1.1 million in ARR.

The third example is a hospitality technology company migrating off of a cloud competitor. They chose Five9 for our open platform approach, which allows deep integration with their hospitality platform, their core business. They view this integration as a differentiator for their customers, including some of the highest-end hospitality brands in the world. They also chose Five9 because of our joint partnership with Google Cloud to accelerate AI-driven CX. We expect this initial order to result in approximately $3.4 million in ARR.

In addition to customers choosing us as their core CX solution, we continue to see our customers expand their use of Five9 AI capabilities and make long-term commitments to Five9 as their CX AI provider. One example is a health care provider that expanded their Five9 commitment from approximately $6 million to over $10 million in ARR along with the 3-year commitment. They are doubling down on AI with clear focus on leveraging AI agents to drive meaningful cost savings across the business. Looking ahead, we remain encouraged by the momentum of our business fuel the pipeline and RFP activities, sustaining elevated levels.

And with that, I'll turn it over to Bryan to take you through the financials. Bryan?

Thank you, Andy. Before I dive into the financials, I want to thank you, Mike, for your exceptional leadership and incredible partnership over the years. Your vision and execution have positioned the company well for the future. And Amit, welcome aboard. I'm excited to work with you as we advance Five9 to the next chapter.

Now turning to our financial performance for the fourth quarter. We're pleased to report strong Q4 results with total revenue coming in at $300 million, representing 8% growth year-over-year. Subscription revenue growth accelerated to 12% year-over-year in the fourth quarter primarily driven by: first, enterprise AI revenue growth accelerating to 50% year-over-year, now making up 12% of Enterprise subscription revenue; second, core CCaaS growth accelerating to 8% year-over-year; and third, continued momentum market where 228 of our 1 million-plus air customers grew subscription revenue 24% year-over-year, now making up 59% of subscription revenue.

Additionally, our concurrent seat count continued to grow at a healthy rate, both quarter-over-quarter and year-over-year, relatively in line with our core CCaaS revenue growth. Subscription revenue represented 82% of total revenue, up from 79% a year ago. And we expect this mix shift to continue as we focus on high-margin subscription revenue, increasingly led by our AI solutions. Telecom usage represented 11% of revenue and professional services made up the remaining 7%. With regard to seasonality, as affected, the sequential uptick in our consumer and health care verticals in Q4 was meaningfully less than last year for telecom usage. For subscription revenue, sequential growth was better than anticipated, but still less than Q4 of last year.

Our enterprise business represented approximately 91% of total revenue on an LTM basis. Within this category, LTM enterprise subscription revenue grew 15% year-over-year. Our commercial business represented the remaining 9%. As a reminder, this part of our business underperformed in Q3, but the immediate action we implemented drove favorable results in Q4, and we expect LTM year-over-year growth to return to normal historical levels next quarter.

With regard to our dollar-based retention rate, our spot rate increased sequentially, while the LTM rate stepped down from 107% in Q3 to 105% in Q4, as anticipated. This is primarily due to tough compares as Q4 '24 benefited from strong seasonality and our largest customer completing its multiyear ramp. In 2026, we expect LTM DBRR to remain range bound within a small band in the first half and a flat upward in the second half.

Turning now to profitability. Q4 adjusted gross margin was 63%, down by approximately 40 basis points year-over-year, primarily driven by lower gross margins in telecom usage and PS. Adjusted EBITDA margin increased by approximately 260 basis points year-over-year to 26% as we continue to focus on disciplined expense management. Additionally, we continue to boost productivity as demonstrated by our revenue per employee increasing 14% year-over-year. Q4 GAAP EPS was $0.23 per diluted share. representing 5 consecutive quarters of positive GAAP earnings, while non-GAAP EPS came in at $0.80 per diluted share. In terms of cash flow, we generated $84 million or 28% of revenue in operating cash flow. Additionally, we generated free cash flow of $67 million or 22% of revenue which represented over 10 percentage points of margin improvement year-over-year. As a result, we ended the quarter with total cash and investments of $697 million.

And now for a closer look at key full year 2025 income statement metrics. 2025 total revenue came in at $1.15 billion, growing 10% year-over-year, with subscription revenue growing 13% year-over-year. 2025 adjusted gross margin expanded by approximately 110 basis points year-over-year to 63%, while 2025 adjusted EBITDA margin expanded by approximately 470 basis points to 23%. 2025 GAAP EPS was positive for the first time on an annual basis at $0.45 per diluted share, while non-GAAP EPS came in at $2.96 per diluted share. 2025 operating cash flow finished at $226 million, and free cash flow came in at $162 million.

Now turning to our full year 2026 and first quarter guidance. For 2026 revenue, we're initiating our guidance at a midpoint of $1.254 billion, which is in line with the high-level outlook we provided last quarter. For Q1 revenue, we're guiding to a midpoint of $299.5 million, which is also consistent with the high-level outlook of relatively flat sequential change we shared last quarter.

In terms of quarterly progression, we expect Q2 revenue to increase slightly quarter-over-quarter, followed by momentum building further throughout the year. As a result, we continue to expect revenue to return to double-digit growth in the second half of 2026 driven by our strong backlog of both new logo and installed base bookings. With regard to the bottom line, we're guiding 2026 non-GAAP EPS to a midpoint of $3.18 per diluted share, which is higher than the high-level outlook of $3.14 per diluted share that we provided during our last earnings call. We're also guiding to continued GAAP profitability in 2026 with a midpoint of $0.91 per diluted share for GAAP EPS. For Q1 non-GAAP EPS, we're guiding to a midpoint of $0.68, which reflects a typical sequential decline in the first quarter of the year. As for the remainder of the year, we expect relatively flat sequential move in the second quarter and large improvements in the second half.

Also for other key profitability metrics, we expect at least 24% in annual adjusted EBITDA margin and approximately $175 million in annual free cash flow. Additionally, we plan to host an Investor Day in late 2026 where we will provide additional details on our strategic priorities and long-term financial outlook. We look forward to sharing more with you at that time. Finally, on our share repurchase program, we completed a $50 million accelerated share repurchase on February 2, buying back approximately 2.6 million shares. We have $100 million remaining under our authorization through December 2027. This reflects our strong cash generation and confidence in Five9's value creation opportunity.

In closing, 2025 was a transformational year for Five9. We delivered strong financial performance, expanded our AI capabilities and strengthened our strategic partnerships, and we believe we have positioned the company well for sustained profitable growth. With Amit now leading the team, we're energized about our opportunities ahead and committed to executing our strategy to deliver long-term shareholder value.

And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Raimo Lenschow from Barclays.

This is Amy Godin on for Raimo. Congrats on your retire, Mike, and congrats, Amit as well for the new role. Great to hear the continued strength with the AI portfolio reaching $100 million ARR [indiscernible] 50% year-over-year. Can you help us understand some of the breakdown between what is greenfield and then what is within your existing customer base? And then what is factored into the 2026 guide just from that portfolio?

Bryan, feel free to chime in. But look, this is a combination of us having a lot of success with new logo attach of AI and also penetration into our installed base. I don't think we quantified the breakdown between the 2, but I can tell you both are growing at a significant rate and very strong.

Yes. And if you think about the 2026 revenue guidance, we've kind of given you the shape of the curve on a total revenue basis. And this is the first time we've given you the breakout of growth rates between enterprise AI as well as core CCaaS. So core CCaaS, obviously, that's a big portion today, and that's going to follow the shape of the curve for the total revenue guide, which means that if you back into the enterprise, they had its going to still be growing at a very fast clip, but it will ebb and flow through the quarter. but still going to be the fastest part of our portfolio.

Our next question comes from Siti Panigrahi from Mizuho.

Great. Mike, it was great working with you and wish you good luck for your next phase. And Amit, congratulations and look forward to working with you. Great. I mean, I want to ask you, you have a great product experience cooperation and even you look at AI outside the industry. As you look into Five9, and I know you talked about opportunities huge, how do you see to navigate Five9 when it comes to product? Or where do you think you can bring some changes or what do you think it's working? Or do you think it is too early to talk about that?

Thank you, Sitti, for that question. Look, I think the answer is a combination of what you laid out a little bit. Look, one of the reasons I took this role is I am really bullish on a transformation that's going to happen within the CX space as humans, agents, systems, software all come together. I actually think this turns allows our end users and customers to have more efficiency, greater experiences and in some cases, new experiences that haven't even been factored in as yet, right, just like how the Internet per se, transform retail. And so for me, I am really looking forward to unlocking that. which is how do we actually increase the TAM by doing new things with AI and traditional CCaaS and providing customers new opportunities. .

To the second part of the question on where do we go from here and which pieces. It's a little bit early. I'm still getting my feet around our product and our road maps. But what is really exciting is the stat we put out, which is we've already done $100 million in ARR of AI, and it's growing. So we have proof points to back up this thesis. The AI is growing, it's happening fast. And it's happening both in our new logo as well as in the existing base.

Our next question comes from Ryan MacWilliams of Wells Fargo.

This one's for Mike. Mike, I mean, what a great run and congrats. I mean I just think back to probably 15 years ago when people said that the biggest context of the neuro would never move to the cloud, right? And now you guys have customers that are over 10,000 seats and some of the largest Fortune 50 companies that are out there. So people have been wrong before in the context in our industry about what's coming next. I mean as you kind of take a step back today, what do you think people are missing right now in terms of the contact center opportunity? Like I know it feels like the [indiscernible] or question and like where some of these interactions will be. But like what do you think the contact center of 5 years from now means for Five9?

Yes. Thanks, Ryan. I appreciate the comments. And look, I think you're absolutely right. I mean I remember when we went public in 2014, how everyone really just question whether or not large enterprise would shift to the cloud. And obviously, we're 40% cloud today, 60% still are on-prem, and it's going to be a multiyear opportunity for us to continue that trend. But look, things have changed. The AI opportunity is massive. We've invested. We were early in this investment with our Inference acquisition. We've built a lot of capabilities on top of that. And I think what I think what people are starting to realize, and I'm not sure -- I think we're just at the very beginning of this realization, quite frankly, across the investor set and across -- I think our customers already see this, but I think the investor community is starting to learn that this end-to-end platform advantage that we have and some other players have. Think of, again, Five9 is the system of engagement of the system of interaction, the system of Acqueon as opposed to, say, a CRM system, which is kind of a system of record. And I think it's important to understand that we're on the front lines, we're right there at the moment of truth with a customer and a brand. And we have an unfair advantage because of that and providing both AI-driven solutions as well as solutions for the human agents in an orchestrated fashion. That is our power, that is the power of our platform and results in, again, these personalized contextual and connected experiences that only a platform like Five9 can deliver. And I think that is what -- it's showing up in the numbers, but I think we're starting to talk more explicitly about those numbers, Ryan. And that is our core CCaaS revenue growth accelerated from 7% to 8%, and our AI revenue accelerated from 41 to 50. And that is the recipe for success. I'll stop there.

You really want to trust the system to give you the right answer because it's not fun to be on the other side of the wrong answer. But thank you, guys. I appreciate it.

Our next question comes from Terry Tillman of Truist.

It's John Carlo on for Terry. And I appreciate the question. Congrats on the strong quarter. And I think you guys were talking about the strong adoption for the newer features that you guys rolled out. And I was just wondering, what sectors we're seeing the highest uptake for those features? And maybe can you talk about what customers are kind of saying was our biggest pain point? And like how is that showing over the last few months?

Yes, I can take that one. So we're seeing a lot of success in health care and retail. And we've talked to a lot of expansion within our customer base. And so I think what -- really what we're seeing is customers wanting to take that next evolution from their CX strategy to AI. And the challenges that most of them or have historically seen is data is not in a good spot, right? We've talked about this for a while. You actually do is only good as your data strategy. And so we put a lot of effort into focusing on making sure that our customers understand where their data needs to be to go deliver on those use cases. And over time, as we've talked about, like the customer example today, a customer expanding their AI. We've proved that time and time again over the last couple of years. And so now they're making their bets for 3- and 5-year renewals based on what we demonstrated and our success and their confidence in us going into the future.

Our next question comes from Catharine Trebnick of Rosenberg.

Congratulations, Mike and Amit and back to the AI question. So what percentage of your enterprise base is adopting the AI, especially looking at AI agent assist and genius routing. What I'm trying to really understand is what's the runway going forward for enterprise adoption?

Yes. I'm happy to start, Catharine. Look, I think it's early days in terms of kind of end-to-end full penetration within our base. Almost every single one of our customers is obviously, right? Every enterprise in the world is looking at AI and making AI decisions, but it's early in terms of the rollout in a lot of these cases. And again, I talked about our end-to-end platform a lot. And the fact that our customers are rolling out our AI and our CCaaS in production environments. Not just in proof of concept, not just in slick demos, but in real production environments. And -- but it's still early days in this opportunity. As I talked about, we've crossed $100 million in ARR and AI, but it's -- we're just getting started.

Our next question comes from Peter Levine of Evercore.

Mike, best of luck and I'm on the board. Maybe how do you think about the risk that the LLM native platforms bypass the traditional CCaaS architecture entirely, right? Like in what scenario does an enterprise build their own AI agent directly on top of like an OpenAI, Anthropic, right? And I guess the question is like what core functionality does Five9 provide that can't be replicated, meaning like what's the hardest to kind of disintermediate from you guys? Is it the workflow, the infrastructure, the compliance, the data? Like help us think through think the risk that these platforms are going to come in overnight and replace you guys?

Yes. Very good question, Peter, and I'll start, and you guys feel free to chime in. Again, we talk about our platform advantages, mainly the data advantage is #1, and it's conversational data and its historical and real-time conversational data. It's also this orchestration capability across all channels across any back end, whether it's AI on the back end, handling this interaction or whether it's a human agent being able to orchestrate across this entire interaction set is an absolute competitive moat. And look, we're going to continue to have advancements by LLM, but I've said this even 2 years ago. You cannot run a customer service organization on an LLM. LLM are a foundational technology that we're all leveraging to deliver applications, solutions for customer experience. And the bar is always going to be. There's an orchestration capability of these on-premise solutions that we replace. They're supporting thousands of human agents and now thousands of AI agents in the future. And that orchestration capability is really isolated to these end-to-end platforms like Five9.

Maybe, Bryan, can you just help us understand the $100 million in AI revenue? What percentage of that is like fee-based, usage-based. But just help us understand what makes up that...

Yes. So our $100 million of enterprise ad revenue is all consumption or capacity based. So the way it works is that we charge for a block of committed units, whether that's minutes or gigabytes or whatever it may be. And then anything above that would be overage. So it is absolutely consumption-based and yet and gaining a lot of traction there.

Our next question comes from Samad Samana from Jefferies.

I'll echo the words of my peers. So congrats, Mike, and great to be working with you Amit. Just I guess a question Bryan, as I think about the guidance and how you're thinking about kind of the first half versus the second half, how much of that is influenced by the timing of either large logos that were still in the backlog, whether -- let's call it the large pharmaceutical company or the large logistics company being fully live versus how much of that is AI revenue ramping? And have you made any adjustment to the guidance algorithm to account for maybe the change in revenue being more consumption-based versus seat-based? Just help us understand kind of the guidance mechanics.

Yes, absolutely. So if you think about point places revenue, we're guiding to a midpoint of $1.254 billion. So that essentially for the year implies incremental revenue of $105 million. So I'll kind of talk about that in the form of contributions from DBRR versus backlog versus new logo go gets for the year. So if you look at DBRR first, the LTM rate we exited 2025 at 105%, and we expect that to stabilize in the first half with minor fluctuations in either direction, but then inflect in the second half, right? And that alone makes up about 2/3 of that $105 million of incremental revenue.

So the remaining 1/3 is actually fully covered by the backlog that we have. And so essentially, there's -- and that has contingencies built in as well. So there's essentially no dependencies on the new logo go gets for the year. And the backlog, as you said, it is combined with both new logo bookings that we've already won as well as installed base bookings that we've got to have ramp associated with it. And those are turning into revenue throughout the year. We have great visibility into those, but every single customer in that backlog is a unique schedule brand. And it's this year happens to be much more back-end loaded, which is why there's an acceleration to double-digit growth in the back half of the year. And if you think about consumption versus seat based, so our AI portfolio is all consumption and capacity as I talked about earlier. And that's going to continue to be a significant driver of growth throughout the year. It's got ebb and flows as mentioned earlier, but it will be the fastest-growing part of our portfolio.

And then maybe just a follow-up. On the AI revenue, the $100 million for enterprise AR is very impressive. Can you just maybe help us understand how much of that is maybe allocated towards, let's call it, like next-gen solutions that you guys have rolled out and maybe like, call it, the last 12 to 18 months versus maybe what was foundationally from like an inference or something that you had kind of in a prior period, just to help understand where the momentum is inside of the portfolio.

Yes. I'm happy to start and then others can chime in. So if you look at the composition of our AI revenue, the 2 biggest ones are our AI agents as well as agent assist and then followed by workflow automation and a lot of other smaller products that are growing very fast. But still very small in nature. So -- and AI agents, of course, we're getting significant traction in terms of the Gen AI based as well as age and assist that's using Gen as well. So we haven't given the exact mix. But of course, there's really strong momentum and acceleration that is happening across the board.

Our next question will come from DJ Hynes of Canaccord.

Awesome well observed, Mike, we'll miss you on these calls, but I know clearly you still have an impact on the business from the Chairman seat. So look forward to that. Good to see you again. Look forward to working with you. I got 2 questions. Bryan, I'm going to start with you. The AI revenue growth acceleration, I suspect that's just a function of what we talked about last quarter, right, that lag between bookings to kind of when it hits the P&L. And if that's right, I mean, AI bookings have been growing quite a bit faster, right? I think 80% last quarter, 10% this quarter. That tells me AI revenue growth should continue to accelerate. So is a, is that correct?

And then the second question, I don't know if it's for you, Mike or Andy, but just talk a little bit more about the Google partnership, right? Like what that could mean for the business? What are they using from you? What are they -- what role does Gemini play on that? Just how do the pieces fit together and what it could mean?

Yes. So I'll start, DJ. So thanks for the question. So yes, you're exactly right. We've been talking about enterprise Ad bookings growing 80% plus for the last 3 quarters. And we've said if we string together multiple quarters like that, we'll start to see the acceleration happen and we are starting to see that in Q4, where it accelerated from 41% to 50%. And -- now going forward, as I mentioned earlier, there will be ebbs and flows, but we do anticipate that if we can continue that momentum on the booking side, they sit in backlog for a little bit, then they start converting into revenue, and that's what's baked into our guidance. And the acceleration that we're seeing in the back half of 2026, is driven by not just AI though, also by core CCaaS in our backlog that's converting to revenue as well. So we're seeing momentum on both sides.

And I'll start on Google, and Andy, please chime in. And I'll just give you one high-level comment. DJ, thanks for the comments, too. Look, it's been a pleasure working with you and the rest of the analyst community. Look, the Google partnership, in my opinion, is something very significant for Five9. And what I love about the partnership is it was born out of success that we were having together in the market with large enterprises. And it was more than just an alignment on paper. This was driven, as I said, by success in the market that we're having with them. And that's the -- in my opinion, at least those are the kind of partnerships that really flourish long run -- in the long run. So Andy, feel free to...

Yes. If I look at the technical side of it, the solution -- I mean this is a real joint solution. This is hands-on keyboard, engineers at Google and Five9 building this joint solution together. We've already had to Mike's point, success. And we look at the opportunity that feeling the pipeline from this coming together is really, really strong. And so you're going to -- obviously, it's going to be our CCA environment. We've been leveraging the Google and GEMINI application and foundational miles to build our own AI products, and we're going to continue to build out what that joint solution looks like together. .

Our next question comes from Will Power of Baird.

Great. This is Jane Simula on for Will Power, and I'll echo the congratulations to Mike and Amit. And I'd love to hear a little bit about what you're seeing across the different verticals that you serve if you could just discuss, if any, are the strengthening more than others or if there are any of that you expect to help power that second half acceleration more than others. And in particular, like for some of your bigger verticals like your health care vertical, maybe consumer, it would be great to get an update on what you're seeing and then what you're factoring into the guide for 2026.

So thanks for the question. In seasonality, if you look at our consumer and health care vertical in Q4, which are the 2 seasonally strongest ones, typically, now if you recall, we mentioned that we are expecting minimal seasonal uptick in Q4. In reality, what happened was the uptick was a little bit more favorable than what we were anticipating, but still weaker if you compare it to Q4 of '24. And if you break that down between subscription and telecom usage revenue, the usage portion -- telecom usage portion was much weaker than last year, which is why as a percent of revenue, you saw a step down by 1 percentage point quarter-to-quarter versus revising back to Q4 '24, it actually stepped up as a percent of revenue, right?

But these dynamics means that in Q1, the seasonal downtick that always happens in those 2 verticals are actually going to be a little bit more muted than what we saw a year ago. And that's exactly what's baked into our guidance. If you look at our Q1 revenue guide, the sequential change is flat this year. But if you compare that to a year ago, it was a negative 2% sequential guide, right? And so going forward for the rest of 2026 -- and by the way, the non -- all the other we track 17 verticals, the other 15, they're pretty much in line with typical sequential growth rates for -- and going throughout 2026, what we're assuming is that the seasonality, the macro conditions are all very similar to what we saw in the fourth quarter.

I can add in on some of the segments. I mean, our 3 biggest verticals are financial services, health care, retail, and we're seeing the adoption in those spaces, right? And I think what it points to is the platform advantage that we do have health care, financial services, just from a regulatory perspective, security integration, and we talk about the complexity of the CCaaS deployment. On average, we do 24 integrations, up to 100 integrations at times. And so I think the bar is really high for them to adopt AI. And I think it just shows the fact that we're building true scalable enterprise AI solutions. It's a testament to this causes the teams have built in the products.

Our next question comes from Jackson Ader of KeyBanc.

This is Jack Nicholson for Jackson Ader. I was wondering if you could talk about new logo large customer pipeline and how influential Five9 AI features help land new customers. And then as a follow-up, could you talk about how AI helps dollar-based gross retention and then the dynamics of upselling in renewal contracts?

Yes, we feel good about our -- in terms of our large deal pipeline, we feel good about the levels continuing to be strong. And obviously, AI is a big part of why they're choosing Five9. And so both in landing new logos. And then as you've heard us talk about $10 million-plus deals over the last couple of quarters that are expanding their spend with us. And so I think it's kind of across both segments.

Yes. And I'll just say from a financial perspective for DBRR, when we talked about enterprise a bookings doubling during the quarter. It wasn't just on the new logo side. It was both new logos and installed base. So we're seeing a lot of momentum there. And that's part of what's going into the backlog and then driving that acceleration on a total revenue basis, but also from a DBR perspective in terms of the inflection upward in the second half.

Our next question comes from Arjun Bhatia.

Right. Perfect. I had 2 -- I guess, 2 questions. First, just on the NRR uptick, how -- like when you're expecting to inflect in the back half, obviously, that's a trailing 12-month metric. But where exactly kind of are you seeing the upsell cross-sell. Is that coming through -- on the AI front, is it core CCaaS continuing to pick up pace or on-prem migrations, right, from legacy kind of Cisco, Avaya. And then just a follow-up on the Google question. Are you -- like is it exclusive with Gemini? Are you using multiple models? Can you just talk about how you built your stack a little bit? .

Yes, Arjun, I'll answer the first part of the question. So if you look at DBRR, I do want to point out that -- the spot rate in Q4 actually stepped up from Q3 to Q4. And that was driven by the conversion of installed base bookings and our backlog to revenue during the quarter. even though the last 12 months coming until last quarter, actually stepped down around the basis from 107 to 105, which in actuality was only a little bit over 1 percentage point. That was more of a calculation where that's an LTM figure like you said, right, where it was dropping off Q4 '24, where it benefited from very strong seasonality and our largest customer finishing is multiyear ramp at that time.

We're already going into the year with a step up from Q3 to Q4. And of course, it will stabilize and fluctuate in either direction slightly. But the driver of that inflation upward is really driven by both core CCaaS and AI. So we saw the momentum in Q4, we talked about the acceleration on both sides. And if you look at the backlog, yes, AI has been gaining significant momentum, and it's consistently been above 20% of enterprise net new bookings. But of course, it's always attached to core CCaaS in a vast majority of deals, and that's also sitting in our backlog. So really an acceleration will be coming from both.

And on the LLM question, the Gemini, I mean we made a decision 7 years ago, and that, that rings true that we believe that sort of a multiple engine, multiple LLM is the way to build the products. We sort of saw where this was going, which is these LLMs are continuing to kind of one up each other, right? And the other thing that's really important is each one of them sometimes deliver specific capabilities, right? You could have a single use case and use multiple LLM as part of that. Now certainly, as part of the joint go-to-market with Google. We're going to be leveraging Gemini, right? There's a lot of really strong performance. We have a team within engineering and our services teams that are constantly benchmarking the LLMs as well. And so that brings us really to allow us to really continue to innovate on top of what's going on in the market.

Our next question comes from Elizabeth Porter of Morgan Stanley.

And I just want to echo the congratulations to Mike and Amit. I guess the question from our side is, like I think in the past, you guys have described kind of an AI fog among enterprise customers that having kind of lifted through 2025. And I guess just in light of some of the splashing, now it's been from the Frontier labs or some of the upstarts in the space. Has that fogs stayed clear as we enter 2026? Or are you seeing any sort of lengthening in sales cycles as a result?

Yes, I'll start, Andy, please chime in. Look, I think it's safe to say that every company in the world is prioritizing their AI decisions, right? And that's not going away. The fog that we saw predominantly in the kind of middle of '24 is that -- or sorry -- yes. a while back was really just the lack of CCaaS decision-making because of that. But we still obviously every enterprise out there is thinking about AI first, and we're now part of those conversations. It's so important for us to be front and center in the CX part of those AI decisions, and our sellers have become the experts. We've got solutions that can -- we can lead with from an AI perspective. And it's a great way for us to go to market. to a market that is pulling a lot of attention around AI.

Yes, in terms of the lengthening of sales cycles, I mean, outside of that fog, which was a lot of times customers were coming off of doing a lot of proof of concepts, right, that weren't successful. We kind of saw that as an opportunity, like Mike said, to really help our game in terms of enabling our teams, but really more so very focused on having specific vertical-driven outcomes that we have customers who deployed it before. And so that really kind of came through. And so that's allowed us to, in my opinion, accelerate some of our sales cycles, both on the new logo side. And obviously, the installed base side of customers continuing to just buy more of our AI. .

Our next question comes from Gil Luria of D.A. Davidson.

This is Clark right on for Gil Luria. Thinking about the medium-term financial framework. You already are effectively in line with all the metrics, excluding gross margins and revenue growth. How do you think about the impact of AI adoption on revenue growth and the inferencing cost way on gross margins going forward?

Yes. So I'm happy to answer that. So if you think about enterprise AI revenue growth, what we've always said is that there is a significant opportunity out there. we've been very successful in terms of the bookings growth rate that you've seen. And if we can continue that is definitely upside to the revenue forecast and guidance that we have out there. And we -- it's a huge TAM expander for us, right? And we continue to execute very strongly there. Now in terms of margins, if you look at our AI agents, which is the biggest part of our enterprise AI portfolio, they actually we have gross margins in the high 70s and 80s. And so -- and that AI portion is because of a bigger mix of our revenue, we expect that to be an accretive part of our overall gross margin trajectory going forward.

This concludes the Q&A portion of our call. I will now hand the call back over to CEO, Mike Burkland, for closing remarks. .

[indiscernible] to be correct. Amit is our new CEO. And look, I just want to thank everybody for joining us. I also want to just say personally thank you to all the analysts and all our shareholders. It's been a pleasure. My pleasure to work with all of you. And Amit, welcome aboard again. I am so bullish on our future and a big part of that bullishness is because you're here as our next CEO. So welcome. Welcome. Thanks, everyone.

Thank you.

Great to have you here. Thank you. Thanks for joining us.

Thank you.

And it's funny, I'm asking that question because like we kind of have the announcement on you already. But like how do you think -- now that you hand eventually the reins over, how do you think about the growth algorithm for Five9 going forward? Any message?

Perfect question. Look, I mean, we've been a growth story. Raimo, you and I go way back to the early days of Five9. And look, it's a wonderful opportunity ahead of us. We are so excited about the future. It's really a two-pronged strategy in terms of how we're -- we're building products and how we're going to market, but it's also a two-pronged growth opportunity. There are 2 big growth vectors ahead of us that remain.

The AI for CX growth vector is significant. We all know that. Our AI business -- our AI growing 41% year-over-year. It's now 11% of our enterprise subscription revenue. So sizable and growing very rapidly. Our AI bookings in the quarter grew 80% year-over-year. So wonderful first vector of growth, if you want to call it that, they're the faster vector of growth.

There's also a really solid, durable growth opportunity in our traditional CCaaS market. Gartner projects -- again, remember that there are 40% of the contact center agents are in the cloud today and 60% are on-premise, if you want to think about it that way. And look, it's going to be -- 40% is going to become 80% over the next several years. We all know that. Regardless of what impact AI has on the total global population of human agents, that growth in cloud migration or the, I should say, the penetration of cloud going from 40% to 80% will more than offset any issues relative to cannibalization of human agents. And I think that's what people need to start to realize.

Our non-AI business is growing significantly, and it has been for a long, long time, and it will continue to grow at a very, very healthy durable rate. And then we've got the AI revenue growth on top of that. So I think of this as a layered revenue growth opportunity, meaning you've got the core traditional part of our market growing nicely over the next several years as we get to 80% in the cloud. And then we've got an AI opportunity that's growing much faster on top of that.

What do you see in terms of urgency because like that call centers being on-premise has been, as you said, been around for a long, long time as a discussion point. We've been talking about it for many, many years, and it never happened -- never really happened at the speed and scale that we kind of probably thought a few years ago. But now with AI, it's like how do you want to do AI if you're sitting on-premise in some old system? Like so how are your discussions kind of evolving there?

Yes. Look, AI is a huge tailwind for the migration to the cloud. But there's also been periods where it may not be that evident. But I also will remind you, you say it didn't happen as fast. It happened very rapidly during COVID. Look at our growth rates were in the 40s. And that was predominantly because of contact center agents in that period of time, scattering to their home offices, was the real only practical option for those at-home agents.

So look, there's just -- AI is a wonderful catalyst. I think most of these brands are coming to the realization that in order to really get the benefits of AI, they've got to move to the cloud. And so I do think it's going to be a nice tailwind for the growth in terms of cloud migration. But there were also periods of time like about a year ago, and we're coming out of that period where it was just decision-making around anything non-AI was just like there was nothing else happening. Everybody was focused on just go figure out AI. Every CEO in the world was telling all their CIOs of every business unit, go figure out AI and don't do anything else. And those days are also -- it's changing. The -- I call it the AI fog is lifted, and that's a good thing.

And then the -- how are the conversations going with your customers around the AI side? Like how is adoption? The reason -- and I'll give you more context. The reason I'm asking is like there's a lot of like -- there was a lot of POC. Now POCs are turning into kind of projects, but they're kind of very well-defined smaller projects because everyone is still nervous that something is going wrong. Like what are you seeing in your market?

Yes. No, it's exactly how it's playing out. I mean, look, this is all brand new to every brand out there. We're helping them come up the learning curve. There are a lot of point solutions that are available from an AI perspective out there. And what we're seeing is more and more brands coming to the realization that while a lot of the point solutions demo great, they may even do very well in a proof of concept.

But once it comes to rolling out in production across their entire enterprise and across their entire CX stack, it doesn't work unless it has connected to a platform like ours. And we've seen this in some of our customers. We gave one example on the last earnings call, the parcel delivery service company that's been a customer of ours and is a sizable customer of ours, was using a point-AI solution. And they realized in production that it wasn't delivering for them, and they've switched to our AI agent. And that was a $3.5 million ARR deal that we just did this last quarter, just for the AI portion.

So again, it is so important to be -- the brands we are seeing that it's important to have one end-to-end platform that can orchestrate interactions, whether they're digital or voice across AI agents and human agents on the back end of those and we're able to do all of that.

Can you just like -- for those of us -- and I call my -- I include myself now because I didn't cover you for a while. If you think about your AI projects like offerings, how do they fit into that value chain that we have in a call center? Like what are the products in a way?

Sure, sure. Let's back up a little bit. Look, there are several categories of AI solutions that we offer. On the front end, you can think of this as self-service. Those are AI agents, both digital chat or other digital interactions handled by a bot, a chatbot, if you will, or a voice bot, IVA is what we used to call that. But we now call this set of digital or voice AI agents. So those are our AI agents.

That's kind of at the front end of an interaction, sometimes fully contained within that self-service, sometimes used as a front end, just like the old IVRs were used where you start in an IVR and then eventually you escalate to another resource on the back end of that. But there are also Agent-Assist or copilot products that we provide, and there are several different SKUs within that category of Agent-Assist. It can be everything from interaction summarization to guidance cards, to -- there's a couple of other nuances in that, but I won't go into detail.

And then there are products that are really for the business, the overall customer experience, customer service operators. To understand their interactions, we have an AI Insights product that we use it almost diagnostically. We'll come into accounts, whether they're our accounts or new accounts, and we can kind of turn it on and let it run. And it will basically cluster interactions by use case and by sentiment and by a number of factors. It gives them the insight to understand where to deploy AI first, second and third as they go forward. We're now coming out even with additional AI products. So we've got a portfolio of AI SKUs that are contributing to that 11% of enterprise subscription revenue.

Okay. Perfect. Yes, that's really good. And how does it -- like in the olden world, you had not -- it's not old, but in a minute, you know what I mean. In the olden world, you were doing the plumbing and then it was the Salesforce, the ServiceNow doing like maybe the UI kind of front end. They are kind of talking about AI and you're talking AI. Like has the overlap kind of changed? Or like how do we need to think about that?

I would think about it this way, Raimo. Look, CRM platforms -- forget AI for a second. We'll get into AI in a second. But look, to run a customer service organization, we're all customers, we're all consumers, we interact with brands. That brand has a customer service department. In order to operate a customer service organization, you must have, must have both a CCaaS solution or a contact center solution. Think of that as the routing engine to deliver interactions to the right resources with all the contextual data to have a great interaction.

And then you have to have a CRM system, which is a system of record for every customer of the brand, what products they've got, et cetera. So we're always joined at the hip, integrated with a CRM solution, whether it's Salesforce, Dynamics, you name it. Their homegrown CRM is still about 50% of the market. So there's a lot of different -- EPIC in health care. We consider that a health care CRM.

So we're always joined at the hip. But look, when it comes to the AI opportunity, every solution in this equation, including the CCaaS, CX platform as well as the CRM platform will have AI abilities. Some of them infused in our core functionality by the way, and others in these areas like I just talked about with self-service and Agent-Assist and all those things.

And look, what we're seeing is more and more brands are coming to the realization that they want their AI from their CX platform vendor because we are the orchestration engine as opposed to the system of record for information. So -- and then we also -- because we're the orchestration platform, you have to have ability to orchestrate between AI and humans, for example.

The second thing is data. We have the conversational data. All the data, the billions of conversations that have occurred with that brand and all of their consumers are in our system of record, not in the CRM, okay? And the only way AI can do its job is if it has access to that conversational data, and that's gold, and that's in our platform. And I think what -- that's part of the reason some of -- I think our customers and many customers are realizing that you want this end-to-end platform, it needs to be the CX platform.

Now if you have point solutions that happen to take certain use cases, they'll want to integrate to our platform. And they do that, and we charge a toll.

Do you think that -- because I think from an investor perspective, that understanding of those data and being gold, I think that's still evolving. Is that the same on the customer side? And I would assume there are a few steps further than...

I think they're a little further along in the learning curve, but I think you're right on. I think there's -- we have to do a better job of helping investors understand that.

Yes, yes. Okay. And then -- moving on from the AI theme a little bit, like you had some very large deployments over the last few quarters. Can you speak to that, where we are on that journey there? And the thing I was hoping is like they give you referenceable kind of very large customers, which kind of usually then gets to the next one, the next one, and the next one?

And that's exactly what's happening, Raimo. I mean, look, we call them the mega deals or the whales that we've brought on to our platform over the last few years. And look, we've also said there are a few and far between. They're not going to happen every quarter and they're not, but they're -- the pipeline for additional megas is excellent. We continue to march up market as we call it.

But we've got very referenceable situations with the ones we've been talking about like the parcel delivery service and the health care conglomerate and the Fortune 50 financial services company that we brought on. From a booking standpoint in '24, it started ramping in '25. They're doing quite well and ramping and subscription revenue started in '25, but that's a multiyear journey, but they're all doing extremely well and very referenceable and that is why we're able to continue to win large deals.

Yes. Okay. Makes sense. And then related a little bit to the point you made before with the system of record guys, there was a little bit of a discussion like recently with -- how is your relationship with Salesforce, ServiceNow evolving? One is like who's doing what? The other thing is like investments in certain other companies. Like what's your conversation with Salesforce like what ServiceNow like?

Yes, they're better than ever. I mean ServiceNow, Salesforce, Google, we talked about on the last earnings call, all 3 of them as partners. And look, we've got a lot of other partners as well. But look, the momentum with ServiceNow, our bookings -- ACV bookings in the quarter quadrupled year-over-year -- quadrupled. Our bookings with Salesforce, we have thousands of -- over 1,000 customers, I should say, with Salesforce. The ACV bookings with Salesforce grew 60%, 6-0 year-over-year.

And with Google, who's a newer partner for us, but a wonderful partner and one that we believe is going to be very strategic for us as time goes on here. The pipeline of opportunities that we have with Google has tripled since Q1. So it's -- those partnerships are very, very healthy, doing really well in spite of -- I think there's a little bit of left hand, right hand in terms of corporate investments that happen, and that's just -- our relationships at both these -- all 3 of these companies are just very, very bullish on our partnership.

I mean there must also be a nice market share move towards you because like if I look at the numbers from those vendors, they're not quadrupling or growing at the rate that the Salesforce is. So within the relationship must be getting stronger for you guys?

Yes. I mean, look, within their base, right? I mean both those companies have huge installed base, right?

Yes, exactly. Yes.

So that's where we're getting growth into their base, so to speak.

Yes, yes. Okay. The other thing is, as we talked about AI and the AI products, how do we have to think about pricing there?

Yes. Look, we, like everybody else in this AI market have a consumption-based pricing model. So again, all of our AI SKUs are priced on a consumption or capacity basis. And that's just the wave of the future. That's the way customers want to purchase the software. And the good news is that with AI revenue growing 41%, you can -- rest assured that that's because our products are being used and consumed, if you will, by those brands that are driving that revenue growth.

And it's also an interesting opportunity for us. As we do a lot of new contracts with customers, and they're trying to figure out this balance and equation between AI and humans, we're starting to do contracts that are revenue commits that essentially think of us as a software provider for interaction management. And those interactions can be handled by AI or handled by human agents. The more interactions there are, as interactions increase, regardless of the mix, we sell more software and those minimum commits from our customers go up.

So we've done some very sizable contracts recently, and we'll continue to do revenue-based contracts as opposed to seat-based contracts.

Yes, yes. Okay. Makes sense. And then Bryan, I want to get you involved, and I apologize because it's going to be the tough question straight away. Like -- if you think about it, like when Mike and I talked in the past, growth rates were different, now the growth rates are kind of at a slightly different level. Like can you speak to the factors that impacted that? And how do you see that evolving from here?

Yes, absolutely. So I'm actually going to focus on subscription revenue because that makes up a large majority, 81% of total revenue today. So I think the key one that I want to focus on is if you look at subscription revenue year-over-year growth in Q2 was 16%, then it was 10% in Q3. So 5 of those 6 percentage point differential was actually driven by known tough compares that we've been talking about all year long.

So in 2024, we had our largest customer who is finishing their multiyear ramp. So it was contributing significantly to revenue. And then we also had a seasonality that was much stronger in '24 versus minimal seasonality in Q3, and we're expecting that to continue in Q4 as well -- in Q3 and then expecting it to continue in Q4 as well. So those are known items.

Now there was one unexpected item in Q3, which was our commercial business, which by design is not a growth vector for us. But typically, it declines in the single digits, but in Q3, it was in the teens, right? So that was a little bit higher than what we anticipated, mainly because we had underallocated demand gen spend toward commercial as well as we had a temporary gap in sales capacity as we promoted more commercial sales reps to enterprise. Both of those have been remediated.

Now in terms of the revenue impact, we'll start to see the year-over-year trends go back to its historical levels in the next quarter or 2. But these factors will continue into Q4 as we transition out of this throughout 2025. But we lap those tough compares at the end of this year. And going into 2026, what gives us comfort is, first of all, the tough comparisons are no longer there. And it's really the backlog.

And typically, when we start the new year, the backlog is comprised of new logo bookings that we already won. This time, we have new logo bookings and installed base bookings that we've won. And there's a new dynamic here in the sense that historically, our installed base bookings would be comprised of existing customers having deployed their platform already and just adding additional business on top of that. So you could turn that into revenue right away.

The new dynamic here is that we've been very successful in upselling and cross-selling new software. So brand-new software that they don't have like AI, for instance, or brand-new business units within the existing customer that we discovered and brought on. So it's essentially like a new logo ramp. And so those are starting to convert -- both the new logo and the installed base bookings side are starting to convert into revenue in Q4 and more so in 2026, which is what's underlying the shape of the curve that we gave where we have an outlook of double-digit growth in the second half of the year and what gives us comfort for the annual number of $1.254 billion for consensus.

Yes, yes. Okay. Makes sense. And then the -- if you think about it, like talk a little bit about that commercial versus higher segment, how do you define that again? Because I get every vendor has like a different dynamic there.

Yes, I'll start. Bryan, feel free to chime in. So commercial, think of it as SMB, it's our smallest customers, right?

That's 50 seats...

50 seats or below. And it's -- again, it's not a growth vector for obvious reasons, right? And look, if you think about our enterprise business is 91% of our subscription mix, commercial being 9%. And it's -- again, it's not a growth opportunity for us. So again, it's just a different market. You've got small businesses that come and go, go out of business, et cetera. You've also got more competition down market.

They don't necessarily need the full feature functionality of an enterprise-grade solution like Five9, and we don't sell a separate product down market. So there are other options from some of the UC players that are -- have lightweight contact center solutions that are just fine for some of those. So again, it's just a different market and the enterprise and upmarket is much, much more attractive to us.

And then the other thing I'm trying to kind of get an answer around confidence for next year, like it's obviously, it's easier comps, which kind of makes sense. What do you see also like in terms of like pipeline build, et cetera, around, like it's early-stage pipeline, probably like -- about pipeline build as you go into next year, like how do you feel about that change?

Yes. Our pipeline coverage is great. It's continuing to, I would say, perform very well. And again, part of this is RFP flow, right? This is kind of the leading, leading indicator of top of funnel activity. That continues to be at a high watermark ever since -- about 8 quarters ago.

So we're very bullish on kind of the demand side of this business and the pipeline. We've gone through some really great changes in terms of our sales segmentation as we've talked about in the past few quarters. Those are kind of fully in place, and I feel really good about our sales execution against that we're seeing.

Yes, yes. Okay. And then the -- Bryan, more for you like that, the offset is on -- well, there's growth and then there's margins. On the margin side, significantly better profitability in the quarter. Like can you talk a little bit about like what's driving it and how sustainable is that?

Yes, absolutely. So as you know, we went through our operational review at the beginning of the year, and there are many different cost savings initiatives that we're working on, whether it's related to offshoring or delayering and the span of control, automation, but the list goes on.

And so that's why if you look at our annual adjusted EBITDA margin, it was 19% in 2024. We have guided to 23% this year. And then we're guiding to at least 24%, which is a good step function into the beginning part of the range for our midterm target in 2027, which is 25% to 30%. So we continue to be very disciplined in our cost management.

But one thing I do want to point out is that we also continue to make sure that we reinvest in key strategic areas like AI and go-to-market so that we support double-digit revenue growth, which is what's in our midterm target in '27 as we target to exceed the Rule of 40 on an adjusted EBITDA basis and approach it on a free cash flow basis.

Yes, yes. Okay. And then is there -- because the cash flow is the other question that comes up a lot between EBITDA, like how do you think about that EBITDA to cash flow conversion?

Yes. So I mean, historically speaking, it's been right around that 11% range. If you look at EBITDA margin and look at free cash flow margin, [ a big ] difference of the 2, right? And if you do the math, we actually gave our outlook of $175 million for 2026. And if you take that against the $1.254 billion revenue that we said we're comfortable with, that's actually a 14% margin against the 24% EBITDA margin that we had provided as an outlook. So that's a 10 percentage point differential. So we expect to continue to get more efficient from a working capital perspective and CapEx perspective and have the conversion improve over time.

And is it like -- is it really working capital and CapEx that's kind of the delta -- that explains the delta?

Yes. So the delta is mainly in the working capital area, which we expect to get better and better, especially around deferred revenue because we have -- typically, our business has been much more monthly invoicing, which now that we're moving up market is transitioning to a lot of annual prepayments. And we're making that standard across the board for a lot of other customers as well. So that -- we're going to get some efficiency there.

And CapEx, there was a period when we were doing a lot more investments, but now we're getting much more efficient. We're going to be below 3% in 2025, and we'll continue to improve on that front as well.

Yes. Okay. Perfect. Last couple of minutes, I want to talk about like capital allocation a little bit. Like if you think where the shares are, like how do you think about buyback -- share buybacks?

Yes, absolutely. I mean this is something -- share buybacks is something that we've been evaluating very closely for the last couple of quarters, and we're excited to announce an inaugural program during our last earnings call, $150 million share repurchase program over 2 years with $50 million of it being accelerated through the first quarter of 2026.

And we felt like it was the right time to do this given the valuation where it's been as well as if you look at our balance sheet, our cash balance is over $675 million. We're generating a lot more free cash flow, and we expect to continue to improve that going forward. So we're going to have a very balanced capital allocation strategy where we continue to invest organically and inorganically in the business, but also buy back shares to maximize shareholder value.

Okay. Yes. And then the other part of the capital allocation is obviously M&A as well, like how are you guys thinking about that?

Yes. I think the best way to think about that, Raimo, is look at our track record over the last 5, 6 years, 7 years. We've made a lot of tech tuck-in acquisitions -- not a lot, but a handful, and they've been very successful, including our AI acquisition about 5 years ago that we've obviously modernized and built on top of. But I would not be surprised -- you shouldn't be surprised if we do additional tech tuck-ins at this point. But again, we're not going to go overpay for an asset that doesn't really move the needle for us.

It's going to be difficult to get at the moment, yes.

Yes. Well, but -- exactly. It's difficult with our market value where it is. But I also think there are lots of opportunities out there. There are going to be more and more opportunities out there for, I call them, downstream opportunities that are valued properly.

Yes, yes. Okay. Perfect. And then maybe last thing is like if you think about the organization? Like how do you think about like your success? Like what's the requirement? What's on the list?

Yes. We've said this publicly. And again, the Board and I are conducting this search. We announced it back in August. Look, we're looking for someone that has a very successful track record of product innovation. This is a new world that is very -- it's evolving rapidly, and we want to make sure we've got someone that can lead that charge. Someone that has operational excellence at scale, someone with a growth mindset and someone that, frankly, can carry on the culture of Five9. I just talked to another investor a few minutes ago about this.

Look, we're pretty unique, and we have a great reputation in the market with customers and partners in that we care so much about our customers and our partners, all of our stakeholders. And it shows through our customers -- and it's easy to say that. But when you go to an event like our CX Summit we had a couple of weeks ago in Nashville, you really feel it back. I mean they know that we care so much about their success on our platform. There's a reason our NPS scores are plus 85 in implementations because we truly care about their success. And I want to make sure that whoever leads this company going forward maintains that culture of just caring about our customers and putting our customers at the heart of everything we do.

Yes. Okay. Perfect. That's also a very good closing statement. Mike, good to see you again. Thank you.

Great to see you, Raimo.

Bryan, thank you.

Thank you.

Thank you.

Okay. Perfect. Well, for everyone tuning in we're ending the day with Five9. So I appreciate everyone for joining. And Mike and Bryan, thank you so much for being here.

Thank you, Taylor. It's great to be here.

Perfect. And for everyone listening and we have Mike who's the CEO of Five9. And we also have Bryan, who's the CFO. So maybe to start, and just to dive it in, Mike it would be great if you could just give a state of the union in terms of what's going on with AI and what's the latest trends that you're having with your customers? Are we at the point where this is a transition? Are you seeing any disruption right from AI, as people just evaluate what the future of contact centers look like? Maybe you could just give an overall update on what you're hearing in conversations.

Yes, happy to, Taylor. Look, what we're seeing is our platform advantage come through. A lot of customers are making their decisions around AI, knowing that they want an end-to-end platform that can orchestrate interactions, whether they're handled by an AI agent on the back end or a human agent on the back end. And that's what Five9 does. That's what we've been doing for quite a while. And I think there's been a lot of hype around AI point solutions. But if they're not connected, if they're not part of an end-to-end platform like Five9 they don't have 2 things: contextual data, conversational data, historical and real-time and also orchestration capabilities being able to go from an interaction that's AI powered to a human agent, for example. And that happens from time to time. And you need that connectivity, that orchestration capability.

And those platform advantages have been playing out in our wins that we're seeing, but also even in our customer base. We've had a couple of them -- actually more than a couple, but a couple of large ones replace point solutions with our AI, because they demo really well. They do well in proof of concept, but when it comes to large-scale production deployments, they kind of have a hard time because they don't have the data and they don't have that orchestration capability. So it's playing out quite nicely.

Perfect. And then just in terms of the sizing, when we run through the disclosures that you guys have given, we get that AI could be close to an $85 million in revenue business for Five9 today on a run rate basis. So about 7% of total revenue. So I guess, one, is that roughly a fair math? And then two, could you talk about just when you think about all of the different AI offerings you guys have, whether that's AI agents, Agent Assist, GenAI Studio. What does the breakup look like today? And then as the last third part of the question, it's been growing 40% plus the last like couple of quarters. Do you feel like there's still a lot of momentum to sustain that level of growth.

Bryan, why don't you start?

The first part yes. So that is a decent estimate that you said $85 million and 7% of total revenue. Now the 3 biggest products that make up our AI portfolio are AI agents and Agent Assist or copilot and then Workflow Automation. And then we have a number of other AI products that are much smaller but growing quickly as well.

And in terms of 40% growth in AI revenue. Is that sustainable? Look, it's been in and around that ballpark for the last few quarters. AI revenue makes up 11% of our enterprise subscription revenue mix. So it's becoming sizable. It's growing fast. I guess one more data point is 80% plus ACV bookings -- AI bookings growth in the quarter. And the way I look at our business and been doing this a long time. Bookings growth is a leading indicator for revenue growth. Now that -- look, that's 1 quarter. So we've got to continue to string quarters like that together. But if we do, AI revenue should definitely continue to grow at 40% or more.

Perfect. And let's talk about the competitive landscape a little bit. So there's a number of companies from different parts of the software landscape that are offering solutions in the space, whether that be the CRM players you -- there's talk of potentially the LLM providers, right, getting into the space. You have an OpenAI that's partnering with Twilio. So there's lots of different companies coming in all different angles. But in terms who Five9 frequently goes head to head with today. What does that look like? And maybe you could just talk about when Five9 does win, why is that? And are there other situations where an alternative solution might make more sense?

Yes. Look, that's a great question, Taylor. Look, we do win the end-to-end platform as I discussed earlier, that's a big part of why we win because we're providing that end-to-end platform. But look, our North Star is really what's best for the customer. And sometimes we have, for example, a large health care customer that in 1 business unit in 1 use case was a Medicaid application where a third-party point AI solution, they built a vertical solution, and it was the best thing for the customer. And so the customer wanted to connect that into our end-to-end platform, use our voice stream and transcript stream to get the data to that AI agent for the Medicaid application.

And look, we're absolutely fine with this being a team sport as long as we're taking care of the customer. We win the platform. We monetize our AI and our platform, and we monetize the connectivity between the third-party AI and our platform. And it's a requirement for the AI to do its job. So look, that's a long-winded answer, but we definitely see point solutions. But in the end of the day, I think, a lot of customers are seeing the value of the end-to-end platform.

Yes. And Mike, maybe you could elaborate a little bit further. You talked about monetizing the connection right points. I know Five9 has talked in the past about being able to charge for orchestration, data streams, integrations, even when it's not Five9 agents that are being deployed. So could you talk a little bit about how that's going? If you have any customer examples that you'd be willing to share and how you just sort of overall thinking about your monetization strategy going forward?

Yes. In terms of third-party AI connecting to our platform and being -- contributing revenue to Five9 through voice stream and transcript stream and AI connectors. It's early days, quite frankly. It's very similar to the use case that I just talked about with that Medicaid application. It's not the norm. The norm really is our customers want their AI from us. They want it, again, to be part of the platform, and it's becoming more and more of the pattern that we're seeing.

Perfect. And then let's talk about the recent event that you guys just hosted so your CX Summit in Nashville. There was a number of AI-powered capabilities that were announced, whether that be Agentic quality management, Genius Routing and more. So could you just give a little bit of a recap of the product announcement?

Absolutely. It was a great event in Nashville. We had a lot of customers and prospects and partners there, and Yes, we had some exciting announcement, AQM, Agentic Quality Monitoring and quality management is a game changer. That is allowing something that's been done in the legacy world of contact center for so long. And we've all been offering WEM solutions that incorporate QM.

This is a completely different approach of letting AI score those interactions based on whatever unstructured criteria, quite frankly, the brand wants that AI to evaluate that interaction on. Think about the power of that. And it's no longer a situation where you can only practically monitor and manage 20% of your interactions through call recordings and analytics. Now it's 100% of the interactions and they're done by AI instantly. And by the way, we're also applying that to not just human agent interactions, but also AI agent interactions. So it's a new world and AQM is going to be really, really big.

Genius Routing is the second big announcement we made, which is essentially taking something that our industry has been known for, for decades, which is routing interactions to the right resource with the right contextual data, whether that's an AI agent or a human agent, via digital or voice or other capabilities. And being able to instead of just having skills-based routing or attribute-based routing, which is a little bit more fixed in nature and formulaic. AI-based routing essentially takes the power of AI and applies it to that routing decision. So it's also a game changer for us.

Awesome, perfect, yes I am excited to see how a lot of those solutions evolve. So Bryan, over to you to pivot to the financials. So on the 3Q 2025 earnings call, we saw a bit of a deceleration in growth, which I think caught some investors off-guard just because it -- growth landed at the high end of the guide. So in terms of -- now you've been in the CFO seat for a little while now. So anything, I guess, one, to flag in terms of how you think about guidance philosophy, how that might be baked into your assumptions for the remainder of this year.

And then also, two, could you just unpack the deceleration a little bit? Because part of it sounded like there was one component that was expected. You had a big customer that was going through a multiyear ramp. Now you're starting to lap some of that, and that's been a tougher compare. But I guess were there any parts of the deceleration that you didn't expect that were a surprise? And how are you baking that into your go-forward assumptions?

Yes, absolutely. So I'll talk about subscription revenue since that's a large majority of our revenue today, 81% of total revenue. And if you look at the subscription revenue growth, it was 16% in Q2 and then 10% in Q3. And of that 6 percentage point differential, 5 points of that can be explained by expected tough year-over-year comparisons that we've talked about all year long. And to your point, the largest customer that was finishing its multiyear ramp throughout 2024, contributing significantly to revenue throughout last year. That was one tough comparison.

The other was the seasonal uptick in 2024 in the back half was very strong versus we were expecting minimal seasonality, which is what it turned out to be in Q3 as well. So those were known. The unanticipated piece was the commercial side. So commercial revenue, it's not a growth vector for us by design, but it's been declining in the single digits consistently over time, but then you'll see that in Q3, it actually declined in the teens.

So that was a little bit bigger than what we anticipated. And there were really 2 key drivers there. One was an underallocation of demand gen spend toward commercial. And the other was a temporary gap in the sales capacity as we promoted more commercial reps to enterprise. But we've remediated both of those. It will take a quarter or 2 for the revenue to normalize back to the year-over-year trends that we've seen on the commercial side in the past. But those are all factored into the Q4 guide as well because the tough comparisons that I talked about, those will last throughout 2025. And one last thing I want to point out is that in this growth environment that we're transitioning through in 2025, including Q4, we're not expecting big beats.

Perfect. And then when we break down that a bit further, and I think this gets into the lapping of the tougher compare and some of the things that you're saying around the commercial business. But by our math, it looked like growth for the non AI piece within subscription revenue. Potentially decelerated from low to mid-teens a couple of quarters ago, maybe to around 7%. And then when we look at the guide ahead and the trajectory that you've laid out for 2026 so far, it seems that we have to have growth stabilize, maybe around 7% of those levels.

So one, I guess, is that logically fair assumption. Are we thinking about that the right way? And then as a second part to that question, maybe you could just talk about the puts and takes that give you comfort with being able to maintain like growth at these levels. You mentioned that there was some parts of the commercial business that you've remediated, but any other additional color you could give, I think, would be really helpful.

Yes, absolutely. So those headwinds and the commercial portion that I just talked about, vast majority of that impacted non-AI subscription revenue, which is why your estimates are relatively in line. But what gives us comfort going into 2026 is that, first of all, those 2 tough compares, we're lapping those by the end of this year. Commercial, as I said, we expect to normalize back to historical trends in the next quarter or two. And then we're going into a new year with a backlog of not just new logo bookings, but installed base bookings as well.

So there's a new dynamic there in the sense that historically, we talked about installed base bookings turning to revenue right away if an existing customer adds a seat to an existing deployment then it turns to revenue right away. These days, we've been very successful in upselling and cross-selling software, including AI and discovering new business unit opportunities within our existing customer base. But what happens with those is that those are essentially like new logo bookings and it takes time to ramp into revenue. And that's what's reflected in Q4 as well as going into 2026. And that's what gives us the comfort. And that's not just AI, that's non-AI as well as AI. So it's core CCaaS as well as AI, both contributing to growth in 2026, which is what gives us that comfort.

Got it. And that was going to be my next question that you answered. But just in terms of the second half implied acceleration in the 2026 outlook, I think, back into the low teens roughly. So it sounds like that's really a function of the backlog, and it's not just AI, but it's a mix between those 2. Is that fair? Yes.

It is. It is. And we have a number of new logos. One of them is the Fortune 50 financial services companies that already started ramping in 2025, but it's a multi multiyear journey. So it's a very small portion of contributions this year, and they'll continue to ramp in 2026 and beyond. But it's that plus other new logos plus installed base bookings both in core CCaaS and AI that have different schedules of ramping, which is why the shape of the curve for the back half has double-digit growth. It reflects the different timings of the customers that we're ramping from our backlog.

Yes. That's really helpful. So I appreciate all the color. Mike, maybe one for you on the non-AI growth. I think one question that we're getting from investors across the software landscape and particularly within application software. It's just where are we on the maturity curve, right? So based on your conversations with customers and what you can see in terms of bookings and backlog, what inning do you think we're in? And how much runway remains for on-prem to cloud migration?

Yes. Great question, Taylor. And I think it's something that gets lost in the shuffle sometimes in our market these days with all the AI discussion. Look, we're around 40% cloud penetration, and that leaves 60% of this TAM in core contact center still on-premise. And those contact centers have to move to the cloud over time. Gartner projects that cloud migrations will actually way more than offset any degradation in the human agent count that may or may not occur over time with AI. To the extent that core traditional kind of human seat-based CCaaS is expected to grow at a 9% CAGR over the next several years, according to Gartner.

So I think that's a really good data point in that, look, we view this as a layered growth opportunity. That -- if you really want to break this into 2, it's all 1 platform and all one market these days. But if you really want to think about it as the AI opportunity and the traditional CCaaS opportunity. That traditional CCaaS opportunity is very attractive and will continue to be a growth vector for us. It has been and it will continue to be. And the AI revenue opportunity is a layered -- faster-growing layered growth opportunity on top of that. And I think as investors start to figure that out and realize that both of these components of the business are growing significantly. That's when I think things will change.

Yes. And then what are you guys hearing on seat expansions within your customer base? There's been a number of notable reps recently across the tech landscape and also more broadly as well, too. So I think it's making some wonder how much of this could be AI-driven, right, versus just normal macro and budget pressures. So what are you hearing amongst your customers? And Bryan, then maybe one for you here as well, too, which is I think you typically see within Five9's business, a seasonal uptick in seed activity in 4Q. So any assumptions you have going on there.

Yes, I'll start and then feel free to chime in, Bryan. Look, what our customers are telling us is this is mostly macro in terms of the lack of seasonal seat adds, for example, right, or the -- yes, just the muted seasonality of human seat adds. And again, it's more around macro uncertainty and budget constraints. I mean every company out there and across every industry is trying to drive more profitability in their business. And so I think it's a combination of macro/uncertainty with budget constraints. And look, there -- a lot of our customers are deploying AI with us, and you can see it in our revenue. But at the same time, it's not really impacting our kind of traditional CCaaS business either.

Yes. And from a seasonality perspective, we saw some interesting dynamics in Q3 in the sense that in July, we typically go to our top seasonal customers and survey them for their estimates of what they're expecting in seasonality in the back half -- in the second half of the year. And they all came back saying they're expecting no seasonality. And we saw that on the subscription side in Q3. But on the telecom usage side, we did see a slight uptick.

So we went back to the customers in the consumer vertical. They said they saw the same in terms of volume of interactions coming into the contact center, but they are still expecting -- monitoring closely, but expecting minimal seasonality in Q4 as well, which is what's baked into our guidance.

Now of course, in the back part of Q4, if there is a stronger uptick than anticipated, then that is potential upside, right? But typically, what would happen? You saw this in Q4 of last year is that -- you see it on the telecom usage side. And then to the extent they can, the customers will expand their seasonal business on the subscription side, but it will be a little bit of a lagging factor there.

Perfect. That's really helpful. Maybe let's shift gears to a big bright spot of the story, which has been the margin expansion. So Bryan, for you, this past year, we saw, I think, close to 500 basis points of adjusted EBITDA margin expansion. You guided to at least 100 basis points for 2026. So could you just speak to why 100 basis points is like the initial starting point, what are the assumptions to get there? Are there opportunities for potentially more leverage? Maybe you could just walk us through the scenarios.

Absolutely. So we did an operational review across the board in the first part of this year. And there are many different types of cost savings initiatives that we're continuing to execute on, whether it's increasing the mix of offshore, expanding span of control and also automation to increase efficiency and improving processes and also negotiating third-party spend, right? So there's so many different -- the list goes on. So there's so many different areas that we're focused on to expand margins. And so as you said, we gave an outlook of an estimate of 23% EBITDA margin in 2025 and then stepping up to 24%, which we felt was a good step function into our midterm target in 2027 of the beginning part of that range, which is 25% to 30%.

Perfect. And then maybe on the cash flow side. So you guided to 2026 cash flow of $175 million, which came in above the Street. So what's driving the improvements in working capital and also cash conversion as well, too?

Yes, absolutely. So in terms of working capital, we're working on a lot of different areas to gain efficiency. But one area as we move upmarket is that more customers, larger customers are on annual invoicing, annual prepayments. And we're actually proactively making that a standard across a broader base of customers as well. So that's one area. Another area is CapEx. You'll see that historically, it's been about 6% of revenue, and that's been stepping down every year. In 2025, we expect that to be below 3%, and we'll continue to make improvements there as well. So that's why we're comfortable giving that $175 million target for next year and expecting cash conversion rates to improve.

Perfect. And Mike, maybe on partnerships. So you have over 1,000 joint customers with Salesforce. You have partnerships with ServiceNow, Google and lots of others. So could you maybe talk about how those partnerships are trending thus far? Are any of those starting to become more needle moving to top of funnel or revenue? And just which of those are you most excited about when you look ahead?

Yes. Well, we did mention those 3, Taylor, for a reason on the earnings call, right? Those are 3 of our most important partners. And look, we also disclosed some metrics that I think show the momentum in those partnerships, ServiceNow, our ACV bookings in the quarter with ServiceNow quadrupled year-over-year. Our Salesforce -- we've been a partner of Salesforce for a long, long time. And those ACV bookings were 60% year-over-year. And when it comes to Google, which is a relatively newer partnership, we got onto the marketplace back in Q1, our pipeline with Google has tripled since then, and we expect a lot of great things out of the Google partnership. It's a 2-way relationship, and we're really, really excited about that.

Perfect. And a question for both of you to close that, Mike, we're very sad to see you go. It's been a pleasure working with you. But maybe you can just talk about as you're looking for a successor, any characteristics that you're very keen on. And then Bryan, one for you. I know you're not new to Five9, you've been at Five9 for a while. But just as you've been in the CFO seat for the last several months, any shift in terms of your priorities? Or how are you thinking about the business going forward in terms of your focus?

Yes. Well, thank you, Taylor. Yes, it's been 18 years, and it's been quite a journey. I expect to be involved at Five9 for quite some time as a Board member. But look, I'm excited about this next chapter for the company. I think we're set up. A lot of the things we've been doing over the last several quarters is really from my perspective, personally, has been to set this company up for the next 10 years. And part of that is also selecting with the Board and myself the next CEO of the company. And we're very focused on bringing someone in, quite frankly, with a proven track record of innovation. Obviously, AI chops is going to be important for this -- in this market going forward.

Someone with a growth mindset that's scaled and proven that they can lead significant growth in companies. And then someone that's just got an operational excellence at their core. As Bryan already articulated, and you asked great questions about this. Look, as we continue to drive efficiency in the business. I think it's important to have someone that's operationally excellent and able to drive that.

So those are some of the most important elements of what we're looking for, but a culture carrier is the other one. I mean Five9 culture is pretty unique. And I think how our customers view us that CX Summit was a perfect example. Our customers absolutely love that event because they know we care about them. We listen to them. We care about their success on our platform. And I think it's also important to make sure our next CEO is someone that carries on the culture at Five9. Bryan?

Okay. And the key areas of focus for me. One is around balanced capital allocation strategy. So we've been evaluating share repurchases for a number of quarters now. We just announced our $150 million inaugural share repurchase program. We're accelerating the initial $50 million of that through the first quarter of next year. And so it's the right time now because we have, number one, a strong cash balance of over $675 million. We're generating a lot more free cash flow and expect that to continue to increase.

So we want to make sure that we have a balanced strategy where we're investing organically and inorganically, but also buying back shares to maximize shareholder value. So that's one area. The other area is around the midterm target. I talked about the cost savings initiatives earlier. But we're also making sure that we reinvest in key areas like AI and go to market. to drive both top line and bottom line growth. So we are fully committed to returning to that double-digit total revenue growth range that we have in the 2027 target as well as expanding margins so that we're targeting to see the Rule of 40 on an EBITDA basis and approach it on a free cash flow basis.

Perfect. Well, with that, we're all out of time. So Mike and Bryan, thank you so much for attending the conference. And thanks for everyone tuning in. Let's give them a round of applause.

Thanks, everyone. Thanks, Taylor.

Thank you.

Awesome, yes, perfect, thank you guys.

Thank you for joining us today. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance and cash position of the company, expected improvements in financial and related metrics, expected ARR from certain customers, certain expected revenue mix shifts, expectations regarding seasonality, customer growth, anticipated customer benefit from our solution, including from AI, the extent of the anticipated TAM expansion and our ability to take advantage of any such expansion, our AI and our CCaaS revenue opportunities and current estimations regarding same, including the ability to leverage data in support of AI revenue opportunities, company growth, enhancements to and development of our solution, statements regarding our share purchase program, market size and trends, our expectations regarding macroeconomic conditions, company market and leadership positions, initiatives, pipeline, technology and product initiatives, including investment in R&D and AI and other future events or results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are simply predictions, should not be unduly relied upon by investors. 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, including the impact of adverse economic conditions, including the impact of macroeconomic challenges, including continuing inflation, uncertainty regarding consumer spending, high interest rates, fluctuations in currency exchange rates, lower growth rates within our installed base of customers and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon as well as in the appendix of our Investor Relations deck that can be found in the Investor Relations section of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today and may no longer be accurate at the time of a replay. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP.

And now I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland.

Thanks, Tony, and thanks, everyone, for joining our call this afternoon. We're pleased to report a solid Q3 with continued momentum in bookings, highlighted by enterprise AI bookings growing more than 80% year-over-year, contributing to healthy improvements in backlog. Subscription revenue, which makes up 81% of total revenue, grew 10% year-over-year, primarily driven by enterprise AI revenue growing 41% year-over-year in the third quarter. In terms of profitability, adjusted EBITDA grew 37% year-over-year to a margin of 25%. We also generated record free cash flow, which grew 84% year-over-year to a margin of 13%. The meaningful increase in profitability and cash flow is driven by the transformation initiatives we announced earlier this year.

We continue to take action to drive operational improvements while investing in AI and go-to-market initiatives, maintaining a line of sight to our 2027 medium-term targets as we work toward the Rule of 40 and beyond.

Turning now to our business updates. Today, I'd like to focus my commentary on 3 key areas. First, our significant and evolving market opportunity ahead. Second, how we believe we're uniquely positioned to win in this new market of AI-powered CX; and third, our momentum with strategic partners.

We are in the early innings of an industry shift in CX, where our market opportunity is being driven by multiple growth vectors. For instance, Gartner forecasts the market for traditional CCaaS to grow at a 9% CAGR and the GenAI customer service market to grow at a 34% CAGR through 2029 to a combined annual spend of $48 billion. We believe this growth will create a powerful tailwind for category leaders like Five9 as we continue to execute against this durable multiyear opportunity.

Furthermore, we believe Five9 is uniquely positioned to be the platform for orchestrating end-to-end customer experience across both AI agents and human agents. At the heart of our advantage is data. The contact center holds a brand's richest customer data, the full conversation history across every channel and every interaction. Our platform essentially remembers everything a customer has said, whether they spoke with a live agent or an AI agent through voice or digital. This creates what we call a relationship-based experience like when your favorite app [ reaches ] you by name, remembers your preferences and picks up exactly where you left off. Every engagement feels personal, contextual and connected. AI point solutions can't replicate that because they only see isolated transactions, not the full relationship.

At its core, our platform is a real-time orchestration engine for every interaction across all channels, whether handled by a human agent or an AI agent. In addition to our suite of AI products, which you're all familiar with, we also infuse AI within our core platform. For example, we now have AI-based routing, which leverages AI to dynamically manage and route every interaction with context to the best human agent or AI agent regardless of channel. Additionally, our platform is uniquely positioned to deliver experiences that will allow human agents and AI agents to collaborate in real time. This can include experiences such as in queue self-service, where during a time a customer waits in queue for a live agent, an AI agent can proactively help resolve the issue, turning hold time into resolution time.

Also, agent sidebar, where AI agents can quietly consult a human agent mid conversation to get help without interrupting the customer and AI barge-in, where a human can seamlessly step into an AI interaction to ensure the issue is resolved and the experience remains positive. These experiences showcase what only an end-to-end AI-powered CX platform can deliver. A continuous collaboration between human agents and AI agents, where each interaction enriches the next. That feedback loop compounds over time, creating a powerful data flywheel that strengthens performance, accuracy and personalization.

In addition, we're being recognized by industry analysts for our platform-driven approach. For example, Five9 was named a leader in the 2025 Gartner Magic Quadrant for CCaaS for the eighth year, and we were also named a leader in IDC's inaugural MarketScape for European CCaaS. Analysts are recognizing us for strengths in our AI capabilities, cloud-native architecture, global scalability and strong European market presence. This dual recognition validates our strong market position, innovation and consistent customer satisfaction.

These platform advantages are also driving momentum with our strategic partner ecosystem, including a major milestone we achieved in the third quarter. In September, we launched Five9 Fusion for ServiceNow, a turnkey AI-powered integration that unifies voice and digital interactions through real-time transcription and intelligent routing. This launch delivers 2 key capabilities. First, our transcript stream integrates directly with ServiceNow Workspace, enabling Now Assist to generate AI-powered summaries and resolution notes that dramatically reduce handle times. And second, our routing engine now directs ServiceNow digital channels and cases alongside Five9 channels for true omnichannel orchestration. This represents a significant milestone in our 8-year partnership with ServiceNow, and they're leaning in stronger than ever, demonstrated by our year-to-date ACV bookings with ServiceNow quadrupling with even greater acceleration in this third quarter.

We are also seeing strong traction with other key technology partners, including Salesforce, where year-to-date ACV bookings grew more than 60% and Google Marketplace, where our pipeline has tripled since the announcement of that partnership in Q1.

Our strategy of building meaningful partnerships remains a key strength as our long-standing alliances with key partners continue to differentiate us in the market. Additionally, we're seeing ongoing momentum, particularly upmarket, where enterprises are looking to create holistic customer experience strategies that seamlessly integrate with their core business systems.

In conclusion, we're optimistic about the foundation we are building for the next decade. At our upcoming CX Summit, we will be announcing new innovations that we believe will set the stage for the next wave of growth as we continue to lead the AI-powered CX revolution with our end-to-end platform to orchestrate interactions across the continuum of AI agents and human agents to deliver what we call the New CX. Importantly, we're doing so with a balanced approach by driving operating leverage and investing in what we believe are the highest return opportunities to drive innovation and durable growth for our business.

I want to thank our team of Five9ers for their unwavering dedication to strengthening our leadership position. I'm extremely excited about the future of Five9 and confident we have the platform and the expertise to drive long-term growth.

Before turning it over to Andy, I'd like to provide a quick update on our CEO search. As you know, we're focused on identifying a leader with experience and a proven track record in product innovation, a commitment to operational excellence at scale and a growth mindset to further capture market share in this expanding TAM driven by AI. I'm pleased to report that the search is progressing well with our ongoing goal of announcing a successor by year-end.

And with that, I'll turn it over to our President, Andy Dignan. Andy, go ahead.

Thank you, Mike, and good afternoon, everyone. We were pleased to deliver another solid bookings quarter in Q3. We won the highest number of $1 million-plus ARR new logos in 2 years, and our installed base bookings hit another all-time high, driven by ongoing strength in upsell and cross-sell activities. For example, a major U.S. card servicer chose Five9 in a $3.7 million ARR deal. A multistate hospital system selected Five9 in a $2.7 million ARR deal. A leading European mobile and broadband provider partnered with Five9 in a $1.3 million ARR deal. And a global parcel delivery leader expanded their relationship with Five9 in a $3.5 million ARR deal.

Looking ahead, we remain encouraged by the momentum of our business, fueled by pipeline and RFP activities sustaining elevated levels. In addition, we are increasingly winning competitive evaluation against AI point solution providers as enterprises recognize the value of our unified platform where AI is natively embedded across the entire customer journey.

I'd like to talk about 4 examples of customers experiencing AI elevated CX because of the Five9 platform advantages. The first example is the global parcel delivery leader already on our core platform who is moving off an AI point solution in order to take advantage of our contextual data for hyper-personalization plus our deep integrations to their third-party systems. In addition, the efficiency gain for being able to have real-time insights across human agents and AI agents was another key reason they selected our AI-powered platform.

The second example is a commercial vehicle financing provider who uses Five9 AI to support multilingual F&I servicing across North America, orchestrating seamless journeys from AI agents to human agents with deep CRM integration and omnichannel visibility.

The third example is a regional digital bank who monetized their services with Five9 AI-powered routing, Agent Assist for banking integrations, enabling real-time orchestration of financial interactions while preserving full customer context across channels. And the last example is a major academic health system who replaced legacy IVRs with Five9 AI to improve patient access and scheduling, using our end-to-end platform to orchestrate voice and digital journeys with shared context between AI agents and human agents.

And with that, I'd like to turn it over to Bryan to take you through the financials. Bryan?

Thank you, Andy. Before we dive into our quarterly results, I'm excited to announce our inaugural $150 million share repurchase program, which is an important milestone that reflects a deep conviction in our long-term growth opportunity. We believe Five9's current valuation does not reflect our intrinsic value, particularly when considering the total platform opportunity for both our core CCaaS and AI-driven growth. The structure of the program includes an allocation of $50 million through an accelerated repurchase program, which we expect to complete before the end of Q1 2026 and the remaining $100 million balance open for up to 2 years. This program underscores our commitment to a disciplined and balanced approach to capital allocation and delivering strong returns to shareholders.

Now turning to our financial update for the third quarter. Q3 revenue came in at $286 million, representing 8% growth year-over-year. Subscription revenue grew above total revenue at 10% year-over-year, driven by enterprise AI revenue growing 41% year-over-year, now making up 11% of enterprise subscription revenue. As anticipated, revenue growth was negatively impacted by approximately 5 percentage points due to a tough compare from our largest customer completing its multiyear ramp throughout 2024 and from minimal seasonal uptick compared to Q3 '24. As a reminder, subscription revenue reflects both customer growth and product expansion, including our AI solutions. Subscription revenue represented 81% of total revenue, up from 79% a year ago. And we expect this mix shift to continue as we focus on high-margin subscription dollars increasingly led by our AI solutions.

Telecom usage represented 12% of revenue and professional services made up the remaining 7%. By design, these 2 categories are not growth drivers and steadily becoming a smaller percentage of total revenue. On an LTM basis, enterprise contributed approximately 91% of total revenue with the subscription portion growing 18% year-over-year.

Our commercial business represented the remaining 9% and declined in the teens year-over-year as we continue to focus upmarket, which has better unit economics. The year-over-year decline in commercial is more pronounced than anticipated, but we're in the process of recalibrating and expect to get to historical year-over-year trends within the next couple of quarters.

LTM dollar-based retention rate came in at 107% in the third quarter, down sequentially from 108% in Q2, which is within the small band we spoke about last quarter. This was driven by the tough compare I mentioned a moment ago regarding subscription revenue growth. In Q4, we anticipate DBRR to continue to be range bound, but expect upside in 2026.

Turning now to profitability. Q3 adjusted gross margin was 63%, up approximately 100 basis points year-over-year, while adjusted EBITDA margin reached a record of 25%, up approximately 530 basis points year-over-year. This marks our fifth consecutive quarter of year-over-year expansion in both metrics. The consistent improvement is driven by our revenue mix shift toward higher-margin subscription revenue, combined with operating leverage as we scale and achieve cost efficiencies from our transformation initiatives. Additionally, we continue to boost productivity as demonstrated by our revenue per employee increasing 12% year-over-year.

Q3 GAAP EPS was $0.21 per diluted share, representing 4 consecutive quarters of positive GAAP earnings, while non-GAAP EPS came in at $0.78 per diluted share. In terms of cash, both operating and free cash flow reached record highs. We generated $59 million or 21% of revenue in operating cash flow and $38 million or 13% of revenue in free cash flow.

Turning now to guidance for the fourth quarter and full year 2025. For Q4 revenue, we're guiding to a midpoint of $297.7 million, which represents sequential growth of 4%. Despite our ongoing expectations of minimal seasonality, the 4% sequential growth is higher than our typical guidance pattern for Q4 due to revenue contributions from the backlog driven by both new logo and installed base bookings from past quarters that are starting to ramp. For full year 2025 revenue, we're maintaining our guidance at $1.146.5 billion, which represents double-digit growth for the full year. For Q4 non-GAAP EPS, we're guiding to a midpoint of $0.78 per diluted share, which reflects our ongoing disciplined cost management and an estimated 1.7 million shares being retired through our accelerated share repurchase, offset by lower interest income.

For full year 2025 non-GAAP EPS, we're raising the midpoint by $0.06 to $2.94 per diluted share. Additionally, we're raising our full year 2025 adjusted EBITDA margin expectations to approximately 23% compared to our prior outlook of 22%.

In summary, 2025 has been a year of transition, shaped by multiple financial and operational dynamics. However, I'd like to provide some perspectives on how we expect the business to inflect as we progress throughout 2026. It's important to understand the evolution we are seeing in how bookings convert to revenue, particularly for our recent installed base expansions, including more AI products. Deployment of these AI solutions and expansions into additional departments within existing customers have longer implementation cycles, typically converting to revenue over multiple quarters. This translates to a meaningful portion of the strong installed base bookings we've been achieving layering into revenue progressively throughout 2026 with the most significant impact in the second half of the year. And this is in addition to our new logos in the backlog ramping throughout 2026.

Given these factors, we expect the sequential change in Q1 '26 revenue to be relatively flat, followed by momentum building quarter-over-quarter throughout the year. From a year-over-year perspective, we expect revenue to return to double-digit growth in the second half of 2026. As a result, we're comfortable with the current Street consensus revenue of $1.254 billion for 2026. On the bottom line, our historical pattern is for Q1 to step down sequentially, representing our lowest quarterly EPS of the year. And we expect that same pattern to continue in 2026. We anticipate sequential improvement in Q2 with more meaningful acceleration in the second half, particularly Q4.

For the full year 2026, we expect to exceed the current Street consensus non-GAAP EPS of $3.14 per diluted share. Also, we expect annual adjusted EBITDA margin to expand by at least 100 basis points year-over-year to 24% plus in 2026. Lastly, we expect annual free cash flow to be approximately $175 million in 2026.

In closing, Q3 reflects strong execution on our transformation initiatives, which are driving bookings momentum and meaningful operating leverage. We remain laser-focused on achieving the Rule of 40 in 2027 with a return to double-digit total revenue growth, driven by bookings strength in both core CCaaS and AI, coupled with ongoing margin expansion. The share repurchase program we announced today demonstrates our confidence in the team's ability to execute and create long-term shareholder value.

Operator, please open the line for questions.

[Operator Instructions] We will begin with DJ Hynes from Canaccord.

Bryan, I'm going to start with you and just what happened in the quarter. I mean, look, Five9 has generally been known for being pretty measured with its guidance. I look at Q1 of this year, you beat the high end by $7.2 million. Q2, you beat it by $7.8 million. This quarter, we're only at the high end of the guidance range. So I guess it begs the question like what changed? What happened in the quarter?

Yes, DJ, thanks for the question. So just a couple of points I want to make there. First of all, we're in the current growth environment that we're transitioning through. We do not expect big beats, number one. And then if you think about the quarter, I'm going to stick with subscription revenue that represents 81% of our revenue. There are 2 components. So it grew 10% year-over-year in Q3 versus 16% in the quarter before. So that 6 percentage point differential, 5 of those 6 is made up by the tough compares that we've been talking about all year long, right? We have the headwind from our largest customer who is finishing its multiyear ramp throughout 2024, making a tough comparison as well as our seasonal uptick that was very strong last year, that was very minimal at this time in Q3.

And then there's a third component that was unanticipated in the sense that earlier, I mentioned the commercial revenue declining year-over-year in the teens. So that was more than what we anticipated. And there are really 2 key drivers there. One was we underallocated demand gen spend toward commercial during the quarter. And the other piece is that we had a gap in sales capacity as we promoted more commercial reps to enterprise than normal. So we're in the process of recalibrating that, and we anticipate over the next couple of quarters to kind of return the commercial revenue growth -- revenue year-over-year trends back to the historical norms. But those are kind of the puts and takes that went through the quarter.

And DJ, I'll just add, promoting those reps from our commercial team to our enterprise team, that happens naturally. That's our farm system for talent internally. So again, from time to time, we get a lot of promotions that happen. And then what you have is in commercial, you've got reps that are ramping, right? So that was part of it.

Our next question will come from Siti Panigrahi from Mizuho.

I just wanted to ask about this -- your installed base booking. Last quarter, it was record bookings. Again, another quarter of record bookings. Why it's taking so long to translate that to revenue? I understand it takes maybe a couple of quarters. But Bryan, based on your guidance, it appears now a little bit more like a year, like Q2 when we'll start seeing that. Can you help us understand and what can you do to further accelerate that?

Yes, absolutely. So Siti, the installed base bookings, as you've heard in the last 2 quarters, have hit all-time highs, which is great. And a lot of that is through upsell, cross-sell of software, including AI and new business units that we're discovering within our existing customer base. So these kind of bookings, and we're having more and more of those each quarter, they have a ramp converting from bookings to revenue, very similar to new logos essentially.

So that's why our Q4 guide, if you look at it, the sequential growth there is rounding up to 4%, which is higher than the typical guidance that we give for Q4. And that reflects the backlog of not just new logos, but installed base bookings that are starting to convert into revenue. And then not just Q4, but into 2026 as well. So this is a new dynamic, but one that we have taken into consideration for our guidance.

Our next question will come from Ryan MacWilliams from Wells Fargo.

And look, we'd love to hear about what the bookings environment in the third quarter was like and how that's evolved with all the attention on AI now. And I know this is less a part of your business at this point, but I still have to check in just on the holiday season usage in terms of how we could see seasonal hiring for seats there, both for open enrollment and retail customers.

I'll start, Andy, feel free to chime in and Bryan, too. But good to see you, Ryan. Look, some highlights for the quarter. AI bookings up 80% year-over-year. We're really, really pleased with that. And again, the momentum in AI is continuing. But I'll add that our non-AI bookings in enterprise was actually a Q3 record as well. And again, as these worlds come together over time, we're still breaking out kind of our AI products from our non-AI products for you all in terms of revenue and bookings commentary. But look, it's a good bookings environment. As we just talked about, there's a little lag in the engine given the character of the bookings. But look, highest number of $1 million-plus logos in 2 years, that's great and an all-time record for installed base bookings. So all in all, we're really pleased with the bookings momentum, but didn't mean to steal your thunder.

No, no, that's fully...

Let me touch on seasonality real quick, Ryan. So -- it was actually quite a few interesting dynamics that we saw. And I'm going to focus -- if you recall, we surveyed our top seasonal customers back in July, and I'm going to stick with the consumer vertical with those customers because it's a good proxy. So on the subscription side, we saw that it was minimal seasonality as they had anticipated. But on the telecom usage side, we did see a slight uptick. And so we went back to those customers, and they actually observed the same in terms of volume of interactions coming into their contact center where they saw a small uptick.

So they're in the process of monitoring that really closely to see if in the back part of November and December, we see a much stronger uptick then, in which case, they will, to the extent possible, expand their seasonal business with us. So right now, the way the guide is set up, we're still expecting minimal seasonality, but there is -- if there is that uptick, then that would be potentially a small upside for us.

Our next question will come from Catharine Trebnick from Rosenblatt.

Andrew King here on for Catharine Trebnick. Just wanted to double-click on the international really quickly. Good to see that IDC report out. Just wanted to hear what you see your differentiator as over in that market? And how is that BT relationship helping you progress over there?

Yes. The BT relationship continues to be strong for us. I mean, obviously, they bring to bear sort of the reseller type market. They bring their services to bear. And so we continue to have a lot of success there. And look, we've been saying it, international has a lot of upside for us, and we continue to lean heavily on the partner go-to-market. We still have direct business. And so we feel good about how that's tracking and again, continue to invest in that space, both obviously, in our core business, but then AI and digital as well. As many of you might know, in the international space, digital is sort of a key technology area. So if we continue to expand that business, it's going to pay off for us.

Our next question is from Terry Tillman from Truist.

This is Connor Passarella on for Terry. Just wanted to kind of follow up on the Salesforce relationship, particularly on the drivers of the booking strength that you called out there. Is there a way to maybe frame the performance across the 2 opportunities that you have within that ecosystem being Agentforce and Service Cloud?

Yes. What I would say would be -- so Service Cloud is obviously a key focus for Salesforce and us. We have over 1,000 joint customers, and we partner in every opportunity together with Salesforce to make sure that we're moving that forward. That's really why we came up with sort of the Fusion framework, which that Fusion framework is just sort of our framework for how we integrate the CRM, whether that's Salesforce, ServiceNow or others. And so we're having a lot of success in that route to market sort of the self-service arena. sorry, the Agentforce is the second opportunity.

Look, I think it's still early days for Agentforce. And when we go into an opportunity, we want to win the core CCaaS. Obviously, Salesforce has CRM and like the best solution for the customers where we align on. And again, back to that Fusion, it's really about customers wanting to understand what they get, what's the benefit out of us coming together. And I think that's been -- has helped drive opportunity because our sales teams and Salesforce sales teams are all essentially saying the same thing in terms of the benefits to the customer.

And I'll just add that the momentum with Salesforce and our joint customers is very, very strong. I talked about the 60% year-over-year growth in bookings year-to-date.

Our next question will come from Raimo Lenschow from Barclays.

A question from me. If I look into the data -- the call center space, sorry, there's a lot of -- there seems to be -- especially on the higher end, there seems to be still a lot of like on-premise old technology stuff. And I know everyone is focused on AI at the moment, but it does feel almost like we're doing step 2 before we do step 1. Can you see a little bit what you see in your conversations? Does that kind of -- are people realizing they actually need to move and you guys obviously have been moving kind of higher, you were a cloud vendor from the very beginning. Can you see that in the conversation and in the pipeline?

Yes, for sure, Raimo. And again, I'll let Andy kind of chime in after me. But look, at a high level, you're right on. I mean, look, we're still 40-plus percent cloud, and that means 60%-ish on-premise. You're right on. There's still a ton of kind of core contact center that's on-premise that has to move to the cloud. But as you know, I mean, AI has become so front and center for every CEO. And therefore, all their CIOs are out looking at AI and sometimes AI first is the way they're making decisions. And we're -- we've now adjusted our go-to-market motions to actually be part of those discussions with an AI-first go-to-market motion where we may start a sales cycle with AI and then pull the CCaaS through as a second decision. It's just an evolving market. But in the end of the day, look, these enterprise brands know that they've got to go to the cloud to get all the benefits of AI, right? And so they go hand-in-hand. But in some cases, the order of the decisions might change. And it's playing out just pretty much as we expected and very favorable for us.

Yes. I mean I think if you look at -- it's kind of like there's customers in 3 camps. You've got the ones who are already made the shift to cloud and they're looking at AI, then you have the customers that are -- they have an RFP from prem to cloud, looking at doing both, AI and CCaaS. And then some of the customers that we're seeing is they know they have to move to the cloud. But if they're looking to get that immediate benefit, to Mike's point, we do have an AI-first sort of strategy for those customers. Sometimes those customers go down that path and ultimately, they go, "Hey, look, it's just better to do this all at once." But again, we're starting to see more customers kind of lean in to say, "hey, let's do AI first" and we support that motion with a fast follow with CCaaS. And I think that's an exciting time for us because, again, we can support all 3 of those routes to market.

And I'll add one more thing. We're winning because of that end-to-end platform. It's not like these are 2 separate things. We talk about them separately as AI and core CCaaS. But look, we've got one platform that orchestrates interactions, whether they're handled across -- it's across the continuum of AI agents and human agents, for example, right? So it's not a separate thing. It's really one platform that most enterprise brands are looking for. And that's why we're winning. That's why we're winning in this market right now, and it's why we believe we'll continue to win in AI.

And sorry, to add one more. It's just like that parcel delivery company, right, that we -- they're a core CCaaS customer of ours, right? They chose a couple of years ago to go with an AI point solution. Here we are 3 years from now, replacing that solution. And that's again because they've got to the point where they see the value of, obviously, our AI kind of stand-alone. But to Mike's point, having that continuum of AI agents and human agents is the end-to-end platform that they're looking for.

Our next question will come from Elizabeth Porter from Morgan Stanley.

I was hoping to get an update on just the competitive environment. I think we've seen Zoom up a little bit more in our mid-market checks and Amazon Connect reportedly just crossed $1 billion of ARR. We've seen several splashy headlines around AI native companies. So curious if you're seeing any sort of change in behavior or win rates or buyer dynamics as these players start to get more headlines?

Yes. I mean in terms of the competitive dynamic, I mean, just pure CCaaS, it still continues to be us and our 2 biggest competitors. You mentioned the hyperscaler. We do see them. We like to say sometimes if we're in the same deal, one of us is probably in the wrong deal. Just 2 different kind of solutions customers are looking for. So not a huge change there. We do see Zoom in the mid-market, but our win rates continue to be strong, and we feel really good about where we're at in the core CCaaS platform. And obviously, when you look at both CCaaS and AI together and certainly our AI-first go-to-market, I think, we continue to have success. So not -- I wouldn't say any major changes in the competitive dynamic.

Next question will come from Jackson Ader from KeyBanc.

I had a question on the layering in, in of some of these -- of some of the -- either the enterprise deals or the AI deals. Is there anything that you can do? Is there anything within either your control or maybe partners' controls that you would say, all right, can we accelerate the time to actually get some of these products implemented and generating not just bookings, but revenue ahead of what's happening right now?

Yes. So as Bryan mentioned and Mike, we have this situation where a lot of the changes we've made in our installed base, we're selling 2 quarters in a row of record bookings. There is still that lag, right? And I think we've -- and we talked about this previously, we've added some new functionality certainly within our AI products where you're leveraging generative AI to deliver faster, right? It's less about the work -- building the workflows and more about just doing essentially prompt engineering. And so we can move faster, and we're certainly doing that. We're seeing that within our customer base.

A lot of times, though, we're part of kind of an overall AI transformation across the company. A lot of times they're doing -- they have to get their data to a good spot. And again, companies have gotten much better there. But we still see some of that dynamic where it is kind of like a new implementation. But I do think that as we get further into this, more and more customers are going to be more comfortable leaning further into that true GenAI agent versus some of the markets like health care and financial services that are still a little bit behind. But the good thing is we can service -- we talk about our trust and governance that the dial of trust. Some customers want to do just purely sort of workflow driven. We are seeing companies go faster towards the, let's go all in with generative AI.

So I think we're well positioned for it, but that's going to be the #1 thing is sort of adoption of customers wanting to go faster and have trust in the platform. And we've done a lot of things within the platform sort of reducing hallucinations and things like that. The team has done a great job. And so that will demonstrate customers starting to move faster in terms of deployments. But we always hit those challenges and customers just aren't ready to fully ramp yet.

Our next question is from Samad Samana from Jefferies.

This is Billy Fitzsimmons on for Samad. Obviously, the business is still growing at a good clip. You're adding revenue. You called out record enterprise bookings. If we go back a handful of quarters ago, there was a period where you had a string of kind of several quarters where you announced a variety of mega deals. There's the health care one, the logistics one. And correct me if I'm wrong, but now it's been kind of another handful of quarters since that $50 million ARR financial services deal. And just wanted to get your view on why you think that is.

Is there any impact at all from maybe like slower on-prem conversions or maybe even like decision fatigue because of AI? Or is this more just a function? I know there were some sales org changes about a year ago where -- and I'm paraphrasing here, there was more incentivization. You were incentivizing kind of dolphin sized deals over, call it, like the whales. And is it a function of, hey, we're just going after more dolphins now?

Yes. Billy, I'll start. Look, the pipeline for megas is still very, very good. These take time. I mean that's the answer. They just -- the sales cycles are long, and it's really a function of that. We've said this all along that it's going to be lumpy. And therefore, let's make sure that we have this flywheel of dolphins that are coming through our sales funnel. And we talked about it. It was the record -- not record, but highest in 2 years number of $1 million-plus new logo wins. So again, the dolphins continue to be the more important metric, I guess, is the way for us to think about it. But look, there's a nice pipeline of megas out there, and we're very well positioned, in some cases, with very, very strategic partners of ours, too.

And in terms of the sales changes, we didn't make any -- we put focus back on to the dolphins, but we kept a dedicated team. It's actually even bigger than it was before with not just salespeople, but solution consultants and experts and services team. So we continue to double down on the market. But to Mike's point, it's just lumpy and takes time. But we feel good about that space.

Our next question will come from Will Power from Baird.

Yanni Samoilis for Will Power. So I noticed that Q4 revenue guidance is a $6 million range top to bottom, which is a bit wider than the range that you normally give or guide to for a given quarter. And I was just curious if there's anything that might be driving the wider range of outcomes that you're forecasting there. And then on the flip side, I appreciate the color on your early expectations for 2026. But what's giving you the confidence to comment on next year with that level of precision giving the wider guidance range for Q4? If you could just help juxtapose that for us.

Yes, absolutely, Yanni. So the $6 million range for Q4 is mainly based on the fact that we beat Q3 by $1.3 million, and we actually held that back because of the commercial revenue decline that was bigger than what we anticipated. And so that was for prudent reasons. And while we're recalibrating and we expect the normalcy to happen over the next couple of quarters, and we're expecting some partial recovery in Q4, we just wanted to have a little bit of a wider range there to allow for that.

Now going into 2026, we have built contingencies into our outlook there. But if you think about 2025, there's -- it's been a year of transitions and a lot of operational and financial changes, a lot of tough compares that we were going through, which we expect to lap fully by the end of the year. But then we're starting out with a strong backlog of not just new logos, but installed base bookings that Mike and Andy talked about as well. So with those ramping starting in Q4, but mostly in 2026, that gives us that comfort around that Street consensus of $1.254 billion. But we'll provide more details next quarter when we give formal guidance for next year.

Our next question is from Rishi Jaluria from RBC.

Nice to see continued AI adoption. Maybe I want to think a little bit one step deeper and think about kind of the current state of enterprise adoption. Look, I get that you have a lot of the tools to be the trusted AI partner in terms of governance and security and data privacy, and you've been a trusted partner with critical data over the years. So I totally understand your positioning. What we've been seeing, and I'd be curious to hear what you're seeing is a lot of enterprises are maybe slowing down the rate of AI adoption as they try to figure out the right use cases and one of those being customer support.

But maybe just any color you can give in terms of what you're seeing broadly within your base of kind of the state of enterprise AI demand today versus how it had been maybe, call it, 6 months ago. And as we think going forward, right, getting that greater uptick in AI throughout your customer base, what are things that you have in your power and your control to work with those customers to just kind of get over a lot of those hurdles that are holding back AI demand in the enterprise?

Yes, I'll start, Rishi. Look, the AI demand is so strong. I think what we're seeing is just a continued improvement, quite frankly, in appetite and demand and willingness by the larger brands out there to do more than proof of concepts to actually deploy AI. It's being proven. And there -- again, their appetite is also shifting toward the platform players like Five9 for that AI. I think they're realizing the limitations of these point solutions in some respects, right?

So that's the flip side. But what they're seeing, and it's why Andy talked about that one case where one of our largest customers that had a point solution for AI basically is replacing it with our AI because it's all part of our platform. So I think there are 2 very different things happening here. I think the demand is very high across the brands for AI. They're getting more comfortable with it, but they're getting more comfortable with it from platform players like Five9, and that is a good thing for us.

And in terms of what's in our control, we've talked about in the past our AI blueprint strategy. So we have the ability to go into our installed base, right? We're having a ton of success, right, as you see in the numbers in terms of installed base. We know the types of calls they have. They have their recordings, right? We're working with the customers. Obviously, they have access to all of this. So our teams can come in and take a very data-driven approach on, hey, here's the use cases that we see that would have high ROI upside. And we've done a lot of work on the back end to have essentially prebuilt type both go-to-market and implementations to deliver on those quickly, right?

So I think that's an area where we continue to double down on. And we're -- the other thing is our product team and engineering team in terms of AI, they work closely with our services teams and our sellers and our customers to say, "Hey, like what are you seeing out of these blueprints? What are the things that we could build into the product to even accelerate some of that demand." So it kind of gets that flywheel going on the opportunity that we have the customers' data, right? Obviously, their data is their data, but we have the knowledge and working with them to be able to deliver that. So that's what we can control.

Next question will come from Peter Levine from Evercore.

Maybe to piggyback off of an earlier question around the competitive landscape is, I mean, are you seeing any pricing pressure on your core live agent seats at renewal, meaning as you see some of these competitors come in, trying to gain share, are your customers at renewal perhaps maybe fighting or pushing back for higher discounts? So maybe the question is just like what's your discipline on pricing for core agent seats given just the escalation in terms of the competitive landscape? And then second, can you just remind us how you charge for AI and the revenue recognition behind that?

Yes. So I'll take the front part of that. So what we're seeing at renewal time is we aren't seeing pricing pressure on our core business. What we are seeing with customers is they want to make sure that they -- that we have pricing models built in for them to take advantage of AI. Last quarter, we talked about a couple of big expansions to health care companies. And that was that renewal time where they said, "Hey, look, we've been leveraging our platform for multiple years, and we were able to renew at a higher level and then build into that renewal both AI and agents." So we don't see that kind of pricing pressure. But I don't know, Bryan, if you want to comment on the revenue side.

Yes. Definitely on the revenue side, the pricing model for our AI products is either capacity or consumption-based. And whichever model it is, it's usually a block of units that you're getting and then overage if you go beyond that. So it works pretty much like a commitment model plus overage charges.

Our next question will come from Arjun Bhatia from William Blair.

Okay. Perfect. Just took some time. Can we just go back to the commercial business for a second? Obviously, it seems like that caught you off guard a bit. What is sort of the remedy? Is it just allocating more sales and marketing spend? And then how do you think that might evolve next year? Like can that get back to growth? Or is that a little bit too ambitious for 2026?

Yes, Arjun, I'll start. Look, we did over rotate in terms of demand gen allocation to enterprise and majors, which, again, we're always trying to crack the code there because, look, it's 91% of our revenue is enterprise, and it's the bigger market opportunity and so forth. But I've encouraged the team to just be careful not to over rotate. We've already corrected some of that allocation of demand gen spend back to commercial. And the good news about commercial is it's kind of a real-time indicator, right? I mean it's -- things move -- deals move through the funnel quickly and they turn to revenue quickly.

So while we had the impact of that in Q3, we've rectified that, and I believe we'll be right back to where we have been in commercial within the next quarter or 2. Now at the same time, just keep in mind, that is not a growth vector overall for the business. But at the same time, we don't want it to become a headwind like it was in the quarter. And this sales capacity that we talked about earlier in commercial is also something that we've got to just anticipate. Again, sometimes it's going to be a little lumpy. In this case, it was lumpy where we had several promotions. We just got to manage that a little bit better. So in our control.

Our next question will come from Tom Blakey from Cantor.

Just wanted to maybe talk a little bit more about competition. I think there was a question earlier. Just looking at the dynamic growth of some of these conversational names like Sierra and Decagon. I mean, are you seeing these guys currently in the market? Are they disrupting in any way? I think just given the dynamic growth there, I think, we should address that. And just maybe a housekeeping item for Bryan. Was the 5-point headwind from the large customer from 3Q '24 like different from where you implied in the guide? Was it more of a surprise or kind of in line, that will be great?

No, the 5 points, that was in line. So that was exactly expected. But I'll turn it over to Mike.

Yes. And you can talk to Sierra and Decagon. I mean they're getting a lot of limelight these days, right? And limelight, they're not very large companies yet. But look, they're getting a lot of press. And this gets back to what I said earlier about kind of point solutions versus platforms. And most of these large brands, they want to look at the hot stuff, so to speak. They want to take a look. But in the end of the day, a lot of these decisions are made based on the end-to-end platform capabilities because providing that connected contextual personalized experience between AI agents and human agents is only possible. It's only possible if you have an end-to-end platform like ours. So again, I'll let Andy chime in, you want to talk about...

I mean we see them, I wouldn't say consistently, but we come across them. A lot of times, there's pilots. And certainly, we're in there, like it could be in one of our own customers, right? They've just made their way in. Obviously, they're getting a lot of publicity in the market. But this is where we lean into what we've been talking about, right? It's that sort of continuum of being able to deliver to both AI agents and human agents. And if you look at where they've started, and again, I'm sure they'll comment on they're going to go down the voice path. It's largely been digital, right? That's been the focus of a lot of these point solutions. Voice, as we've talked about, is a strength for us, right, and a very big strength for us that's hard to replicate. So you add those things together, we feel strong about where we're competing on those use cases, and we're going to continue to get better.

This concludes the Q&A portion of our call. I will now hand the call back over to CEO, Mike Burkland, for closing remarks.

Thanks, everyone, for joining us. We look forward to keeping you updated as we close out the year and enter into 2026. Exciting times. Thank you very much for joining us.

Thank you for joining us today. Certain statements made during the course of this conference call that are not historical facts, including those regarding the future financial performance and cash position of the company, expected improvements in financial and related metrics, expected ARR from certain customers, certain expected revenue mix shifts, expectations regarding seasonality, customer growth, anticipated customer benefits from our solution, including from AI, the extent of the anticipated TAM expansion and our ability to take advantage of any such expansion our AI and CCaaS revenue opportunities and current estimates regarding same company growth, enhancements [ to ] in development of our solution, market size and trends, our expectations regarding macro conditions, company market and leadership positions, initiatives, pipeline, technology and product initiatives, including investment in R&D and AI and other future events or results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are simply predictions should not be unduly relied upon by investors. 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, including the impact of adverse economic conditions, including the impact of macroeconomic challenges, including continuing inflation, global tariff increases and potential increases in announcements regarding the same, uncertainty regarding consumer spending, high interest rates, fluctuations and currency exchange rates, lower growth rates within our installed base of customers and the other risks discussed under the caption Risk Factors and elsewhere in Five9's annual and quarterly reports filed with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding a reconciliation of our GAAP versus non-GAAP results and guidance is currently available in our press release issued earlier this afternoon, as well as in the appendix of our investor deck that can be found on the Investor Relations section of Five9's website at investors.five9.com. Also, please note that the information provided on this call speaks only to management's views as of today, July 31, 2025, and may no longer be accurate at the time of replay. Lastly, a reminder that unless otherwise indicated, financial figures discussed are non-GAAP.

And now I'd like to turn the call over to Five9's Chairman and CEO, Mike Burkland. Please go ahead.

Thanks, Lauren, and thanks, everyone, for joining our call this afternoon. I'm very pleased to report strong second quarter results. But before we go into our results, as you may have seen in the press release we issued earlier today, I've made the decision to retire from the CEO role here at Five9. The Board has kicked off a comprehensive search for our next CEO. Meanwhile, I will continue to serve as CEO until my successor has been appointed. And then I look forward to continuing my service on the Board as Executive Chairman at Five9 to ensure a smooth transition.

It has been a privilege and an honor to lead this amazing team of Five9ers. While my cancer treatments continue to be effective, I recognize that it's not likely to continue indefinitely. After giving it a lot of thought, I believe it's time for me to pass the baton and get back to a more balanced lifestyle. That said, until we appoint my successor, I'm committed to working my tail off as we continue to transform Five9 to drive top line growth and bottom line profitability.

As you know, we have made a series of changes over the past several quarters to position the company for the future, and we are beginning to see the positive impact of those changes in our results, including strong bookings, AI momentum and increased profitability. So now let's dive into our Q2 results. As I mentioned earlier, we had a very strong second quarter, which exceeded our guidance across all key metrics. Subscription revenue, which now makes up 81% of total revenue, accelerated to 16% year-over-year growth. This was primarily driven by Enterprise AI revenue growth accelerating to 42% year-over-year in the second quarter, now representing 10% of Enterprise subscription revenue.

Additionally, we were very pleased to see strong momentum in our sales execution as we had the highest quarterly total ACV bookings in 2 years, excluding the 1 financial services mega deal we did in Q1 of last year. And Enterprise AI bookings more than tripled year-over-year in the second quarter.

In terms of profitability, adjusted EBITDA grew 63% year-over-year, reaching an all-time record margin of 24% in the second quarter, helping drive Q2 records for both operating and free cash flow. Our increased profitability is a direct result of our execution against transformation initiatives as we work toward the Rule of 40 and beyond.

And now I'd like to spend a few minutes on our AI success and innovation. Let's start with the 3 key drivers underlying our strong momentum in AI. First, enterprises continue to see Five9 as their core CX platform, including AI. For instance, 2 large health care customers extended their contracts with us during the second quarter to 5-year terms, with 1 expanding its anticipated ARR with us by nearly 40% to over $11 million. And the other expanding its anticipated ARR with us by more than 2x to over $5 million. Both enterprises decided to continue their partnership with us long term, as they view Five9 as their single comprehensive platform provider for CX.

Second, enterprises are turning to Five9 as they make their long-term decisions around AI, given that we are the core CX platform and we have the AI expertise, products and integrations. For instance, one of our customers in the airline industry worked with our AI experts to evaluate the potential ROI of increasing their self-service capabilities. As a result, they decided to expand their AI portfolio with us in the second quarter, increasing their anticipated ARR with Five9 by more than 2x to over $7 million.

Similarly, one of our customers in the pest control industry decided to add new AI capabilities on their platform in Q2, increasing their anticipated ARR with Five9 by more than 30% to over $4 million. And third, enterprises are achieving significant intangible ROI with our AI solutions. For instance, a customer in the health care industry who deployed our AI solutions a year ago has been achieving significant improvements, including an 80% reduction in abandonment rate, a 50%-plus increase in containment rate and a 60%-plus improvement in post interaction work time.

Another example is a digital health company focused on simplifying medical data to improve patient care outcomes who deployed our AI solutions 4 months ago. In this short period, they've already realized a 19% improvement in self-service containment. Not only was self-service improved, but critical CSAT metrics were improved as well, driven by a 50% reduction in abandonment rate and nearly a 50% reduction in hold time.

As you can see, we are well positioned to enable enterprises to unlock real value with AI, and we expect to build on this momentum as we continue to invest in driving innovation within our Genius AI suite. For example, we made big news at CCW in Las Vegas in June, where we launched a Agentic CX with AI agents that can reason, decide and take action. We also launched AI Trust & Governance, our solution to make AI enterprise ready.

Let's first discuss our new Agentic AI Agents. With this launch, the Five9 Intelligence CX platform now delivers Agentic AI Agents to drive CX and AI at scale. With powerful new capabilities designed to reason, decide and take action, Five9 ushers in a new era of Agentic CX for our customers. Part of our Genius AI suite, AI Agents provide accurate hyperpersonalized experiences for consumers that are secure, seamless and context aware. Our Agentic AI agents can do so much more than prior generations because they have flexible, advanced self-service capabilities that adapt at any stage of AI maturity through 5 key features, including: [ AI Summary Node ], which auto summarizes voice and digital interactions with language selectable summaries; intent detection and entity extraction, which enables seamless natural dialogues, ensuring the quickest path to resolution; [ Knowledge Node ], which uses retrieval augmented generation, or RAG, to generate contextual answers based on enterprise knowledge; prebuilt templates, which make it easy to deploy with starter kits that allow customers to quickly build new AI agents for their specific needs; and lastly, [ Code Crafter ], which leverages the capabilities of LLMs to generate high-quality JavaScript functions, reducing development and implementation effort from weeks to hours.

Additionally, our Agentic AI Agents are able to provide context and facilitate handoffs to human agents for those cases where it may be required. They can be configured to transfer to a human agent and quickly summarize the conversation in real time to promote a seamless handoff. This reduces handle time and is designed to eliminate the need for consumers to repeat themselves, reducing frustration and improving the experience.

Also, as our customers are learning how to operationalize AI within their CX solutions, we're developing new practices to serve as their trusted expert in building their agent ops capabilities. Agent ops is an emerging discipline for managing the deployment, monitoring and optimization of AI agents, and a critical component of deploying AI agents is to provide granular guardrails for agent ops personnel to tailor AI models and outputs for different use cases, keeping AI-powered consumer experiences reliable and safe.

This is where Five9 AI Trust & Governance comes into play. As we enter this new era of Agentic CX, Agentic AI is continuing to shape the entire customer journey from accurate and personalized self-service to agent assistance, process automation and managerial insights, and it is essential for Agentic AI to behave ethically and consistently. With our Five9 AI Trust & Governance suite, enterprises are scaling AI safely with capabilities such as granular guardrails to better customize AI behavior across channels, proactive monitoring and response to risks such as prompt injection attacks, better AI observability with comprehensive reporting and dashboards and hallucination detection to easily detect and correct AI behavior if needed.

As you can see, our ongoing investments in our Genius AI suite continue to fuel innovation and strengthen our leading position as the trusted partner to help enterprises navigate through this rapidly evolving world of AI. This is also why we were once again ranked as having the best AI solutions in the semiannual Baird survey that was recently conducted in July.

Now I'd like to touch on the momentum we are seeing with some of our key partners. In the second quarter, we had very strong performance across multiple routes to market. We also continued to gain significant traction with technology partners during the quarter. For example, with Salesforce, we're having a lot of success in the field, working hand in hand with the Salesforce sales teams through joint selling and value positioning. As a result, we saw a significant increase in bookings as well as a meaningful increase in the pipeline for Five9 Fusion for Salesforce. With Google Cloud Marketplace, pipeline once again doubled this quarter, and we closed multiple $1 million-plus ARR deals through this partnership.

With ServiceNow, we doubled our bookings quarter-over-quarter, and we also published our certification and alignment to their Yokohama release, their most recent platform update focusing on AI, showcasing our deep partnership. And lastly, with regard to Epic, we are excited to share that Five9 is now listed in the Epic showroom as a toolbox solution. Epic is one of the largest health care CRM providers and is a key partner for us as we continue to deepen our health care vertical integrations. We are offering a digital patient experience solution embedding our capabilities into Epic. And this is one of the many planned native integrations with them as we continue progressing our joint road map, which includes AI Agents, Agent Assist and other AI solutions.

In summary, we are very pleased with the momentum in our business and the progress we're making on our transformation initiatives for both top and bottom line. We remain at the forefront of developing leading Agentic CX solutions to help reshape the AI-driven customer journey and experience, and I'm extremely excited about the future of Five9. I'm confident that we have the platform and the experts to drive long-term durable growth as we continue to capitalize on our massive market opportunity.

And before I turn it over to our President, Andy Dignan, I would like to discuss some changes in our leadership team. For starters, following a comprehensive CFO search, I'm thrilled to congratulate Bryan Lee on his appointment. Bryan has been a key member of the finance organization at Five9 for 11 years, and he has been instrumental in helping us achieve our operational and financial goals, and I have so much confidence in Bryan.

In addition to Bryan's appointment to CFO, we made additional changes to our leadership team by realigning our Executive Board structure in order to maximize alignment ownership and operational efficiency. As part of these changes, we promoted Tiffany Meriweather from Chief Legal Officer to Chief Administrative and Legal Officer, where she will now also lead HR. In addition, we promoted Matt Tuckness to Chief Revenue Officer. Matt is a 12-year veteran at Five9 who has risen through the sales ranks, leading various sales orgs, and has had a significant impact on our go-to-market organization and our bookings reacceleration. In this role, Matt will also lead our marketing team.

And with that, I will turn it over to Andy.

Thank you, Mike, and good afternoon, everyone. As Mike mentioned, we are very pleased to see strong bookings across the board in the second quarter, reaching the highest quarterly total ACV bookings in 2 years, excluding the 1 financial services mega deal we did in Q1 of last year. Most importantly, we had triple-digit year-over-year Enterprise AI bookings growth in Q2, with Enterprise AI new logo bookings more than doubling year-over-year and our Enterprise AI installed base bookings more than quadrupling year-over-year. Once again, AI bookings made up more than 20% of Enterprise new logo ACV bookings, and we attached AI to virtually all of our $1 million-plus ARR new logos. Also, we continue to see significant momentum with our AI Blueprint Program, which is helping us accelerate expansion within our Enterprise installed base.

And outside of AI, our non-AI bookings grew significantly for both new logos and installed base. Additionally, we had a healthy mix of million-plus ARR new logo wins, along with robust channel activity, both domestically and internationally. That drove strong new logo bookings during the second quarter. And installed base bookings hit an all-time high, driven by continued momentum in upsell and cross-sell initiatives. Looking ahead, we remain optimistic about the future as our pipeline and RFPs continue to remain at elevated levels.

And now as we normally do, I will share some examples of key wins during the quarter in addition to the $2.8 million new logo we won in April, which we discussed during our last earnings call. The first example is a global data and analytics company who selected Five9 through a reseller to modernize from a rigid legacy platform that had stalled prior transformation efforts. They needed a scalable AI-powered CX solution to elevate customer engagement and drive operational efficiency.

With Five9, they're activating all digital channels, along with intelligent routing and post-call surveys to capture real-time customer sentiment. Agent Assist will empower their team with contextual guidance and automated conversation summaries. Deep CRM integrations, including Salesforce, ServiceNow and a proprietary CRM system are designed to ensure voice, and digital AI agents as well as human agents have instant access to the contextual data they need, reducing friction and improving resolution times. They will also use AI insights to uncover key trends, optimize both AI agent and human agent staffing and drive smarter business decisions. We anticipate this initial order to result in approximately $3.3 million in ARR to Five9.

The second example is a national mortgage services provider who selected Five9 through a reseller to modernize from an inflexible on-prem system that was limiting agility and contributing to client churn. They needed a cloud platform that can support inbound and outbound engagement, integrate with a complex CRM stack and elevate their customer experience. With Five9, they're enabling all digital channels and voice, integrating with both Salesforce and their proprietary mortgage platform to service customer data instantly.

Microsoft Teams gives agents real-time access to subject matter experts, while Agent Assist transcribes and summarizes conversations for continuity across interactions. They'll also use WFA to automate tasks like sending mortgage payoff statements, streamlining operations and improving both agent productivity and customer satisfaction. We anticipate this initial order to result in approximately $1.2 million in ARR to Five9.

The third example is a global veterinary services provider with over 2,000 locations across 20 countries who selected Five9 through a reseller to consolidate fragmented on-prem systems and elevate both the customer and agent experience. Rapid growth through acquisition had left them with no visibility into the full customer journey and no ability to proactively engage clients with reminders for appointments or refills, resulting in missed revenue opportunities. With Five9, they're unifying their contact center on a modern cloud platform, activating voice in all digital channels. Voice and digital AI agents will now handle common tasks like deployment rescheduling and prescription refills, while post-call summaries and Zendesk integration help both AI agents and human agents understand context and continue conversations seamlessly.

Microsoft Teams integration gives agents real-time access to noncontact center experts like clinic staff when a call requires specialized input. With AI Insights, they'll now have a clear visibility into performance trends, training needs and AI agent and human agent staffing, turning insights into action across the organization. We anticipate this initial order to result in over $1.1 million in ARR to Five9.

And now I'd like to share an example of an existing customer who expanded their business with us. A leading academic health system significantly expanded its partnership with Five9 by signing a new 5-year agreement. The organization initially deployed Five9 to support its patient access team, improving the patient experience using our AI agents. After 3 years of success, they committed to a long-term strategy built on flexibility, integration and scalability. This expansion is comprised of a new business unit and an increase in our AI agents, including the use case where Five9 and Epic are integrated to streamline clinical workflows as well as additional AI agent use cases.

Additionally, they are leveraging Five9 Fusion for Salesforce. They also expanded their use of technical account management to include specialized AI expertise. This extended agreement reflects a deeper value-based partnership focused on expanding patient access, improving operational efficiency and supporting long-term growth. With this add-on order, we anticipate the ARR to Five9 will increase from approximately $2 million to over $5 million.

And now I'd like to turn it over to Bryan to take you through the financials. Bryan?

Thank you, Andy. It's an incredible honor to take on the role of CFO. I'm deeply grateful to Mike and the Board for the opportunity, and I'm excited to continue working with the team to drive the company's next chapter of success.

Now turning to financial results for the second quarter. We're pleased to report Q2 revenue growth of 12% year-over-year, primarily driven by subscription revenue growth accelerating to 16% year-over-year. Subscription revenue growth was driven by first, Enterprise AI revenue growth accelerating to 42% year-over-year, which continues to be the fastest-growing category of our product portfolio. Second, strong revenue contributions from our backlog of new logos, which exceeded expectations. And third, as Andy mentioned, the highest ever installed base bookings. As a reminder, subscription revenue is the most meaningful metric for our business, as it reflects the growth in the number of customers coming on to our platform as well as the increase in the number of products they're purchasing, including our AI solutions, which are sold on a capacity or consumption-based pricing model.

While our [ sea count ] continues to grow at a healthy rate, we are laser-focused on driving high-margin subscription revenue dollars increasingly led by our AI solutions. I'd also like to remind you that we are strategically deemphasizing Telecom Usage and Professional Services, and we expect both to have growth rates lower than total revenue. For example, when it comes to Telecom Usage, larger customers tend to bring their own telephony, and channel partners like BT and AT&T offer their own telephony. For Professional Services revenue, our strategy is to enable our partners to take on more deployments.

In the second quarter, subscription revenue made up 81% of revenue, while usage revenue accounted for 12% and professional services made up the remaining 7%. Enterprise revenue from subscription, usage, and PS combined made up 90% of LTM revenue. Our commercial business, which represented the remaining 10%, declined in the single digits on an LTM basis. Also as a reminder, this trend is by design, driven by our ongoing focus on large customers.

Additionally, our LTM dollar-based retention rate increased to 108% versus 107% last quarter, driven in part by our AI revenue acceleration. For the remainder of the year, we expect LTM dollar-based retention rate to fluctuate within a small band, reflecting a combination of factors such as our AI momentum and expansions of larger customers being offset by tough year-over-year comparisons due to significant revenue contributions for our largest customer completing its [ rent ] throughout last year and our assumption that second half seasonality will be minimal this year due to macro uncertainty.

Turning now to profitability. We continue to generate strong year-over-year and quarter-over-quarter margin expansion across the board in the second quarter primarily due to our ongoing commitment to increase profitability and drive operational excellence. Q2 adjusted gross margin increased approximately 250 basis points year-over-year and 60 basis points quarter-over-quarter to 63%. This was primarily driven by subscription gross margin expansion and subscription revenue growth accelerating to become a bigger part of the mix. As a reminder, the revenue mix shift towards subscription from telecom usage and PS provides an uplift to total adjusted gross margins since subscription gross margin is in the 70s.

Q2 adjusted EBITDA margin increased approximately 740 basis points year-over-year and 520 basis points quarter-over-quarter to 24%, which is an all-time record. Second quarter non-GAAP EPS grew 45% year-over-year to $0.76 per diluted share.

Now I'd like to share some cash flow highlights. As Mike mentioned, I'm pleased to report that both operating cash flow and free cash flow represented Q2 records. We generated $35.1 million or 12.4% of revenue and operating cash flow and $21.6 million or 7.6% of revenue and free cash flow despite incurring $7.8 million in onetime restructuring costs for the April RIF. As a reminder, we also paid off the remaining $434 million principal balance of our 2025 convertible notes in cash when it matured on June 1. The next maturity of our convertible notes is 2029, so we feel comfortable with our cash position. In addition, we expect our free cash flow generation to improve more meaningfully, putting us on a path to being net cash positive near term.

And now I'd like to finish today's prepared remarks with a discussion of our guidance for the third quarter and full year 2025. For revenue, we're guiding Q3 to a midpoint of $284.5 million, and we're increasing the midpoint of our annual guidance by $5 million to [ $1.146.5 billion ], representing double-digit consolidated growth for the full year.

Please note the following items which are reflected in our guidance. First, we are prudently assuming minimal seasonality for the remainder of the year starting in Q3. Based on discussions with our top seasonal customers, we're anticipating continued macro uncertainty. Second, as we mentioned earlier, we have been successful in upselling and cross-selling more software into our base, which drove the highest ever installed base bookings in Q2, but there's a longer ramp associated with these types of bookings, which we'll layer into revenue during the fourth quarter and next year.

For non-GAAP EPS, we're guiding Q3 to a midpoint of $0.73 or a $0.03 sequential decline, which is in line with our typical guidance pattern for the third quarter and reflects lower interest income given the $434 million payoff of the 2025 convertible notes and cash as well as the reinvestments we're starting to make in AI and go-to-market initiatives. For the full year, we're raising the midpoint of our non-GAAP EPS guidance by $0.12 to $2.88. Additionally, we are raising our full year 2025 adjusted EBITDA margin expectations to now be at least 22% compared to our previous expectations of approximately 21%. Beyond 2025, we remain committed to our medium-term operating model and achieving the Rule of 40 plus in 2027, driven by both double-digit revenue growth and continued margin expansion. Please refer to the presentation posted on our Investor Relations website for additional estimates, including share count, taxes and capital expenditures, as well as GAAP to non-GAAP reconciliations.

In summary, we're very pleased with the progress we're making and the momentum we're seeing across the business. We will continue to be very disciplined in managing our expenses and allocate capital to opportunities that we believe offer the highest impact on both top and bottom line growth. Operator, please go ahead.

Thank you, Bryan. [Operator Instructions] With that being said, we will begin with Terry Tillman from Truist. Please ask your question, Terry.

Yes. Sorry about that. The -- hopefully, you can hear me okay. First of all, Mike, congratulations on being able to get to a more balanced life. That's awesome, and good luck with everything in the future. And Bryan, congratulations as well.

So my question is -- it's a tough question to answer, but the stats on your Enterprise AI business are impressive. So for me, I thought is the sustainability of this goodness. And so what kind of visibility do you have in your pipeline? And just -- whether it's the new logos that are attaching well your AI capabilities or the installed base and now you have the AI agent stuff, just how should we think about the sustainability of well above corporate average growth for just the whole portfolio of AI products?

Yes. Terry, thank you very much. Look, the AI bookings numbers were obviously very, very strong. The good news is it's on net new bookings as well as installed base bookings. So our Enterprise AI bookings for the net new side of our business, right, net new logos doubled year-over-year. And for the installed base, it quadrupled. So again, this is the result of a lot of things. Our AI platform being ahead of the competition, a lot of the enablement that we've been doing in our go-to-market motion. And things like our Blueprint Program.

So we've actually deployed some strategies that are designed to help penetrate our installed base with our AI solutions, and that's what this is showing. So again, we're really, really bullish on keeping that momentum. Again, it's -- these are big numbers, but look, we're really pleased with it.

Our next question will come from Siti Panigrahi from Mizuho.

Great. I also echo my congrats to both Bryan and Mike, our best wishes for your good health and retirement, Mike. Just looking at beyond AI momentum, it's good to see all the momentum you talked about. Last quarter, you talked about some kind of deal elongation in the Enterprise side and slowdown in international market. How is that momentum going this quarter? And what's your assumption for the second half? Especially when I look at your guidance, second half implies 7% to 8% growth. And Bryan, if you could cover your assumption on the subscription side, that will be great, and especially Q4.

Andy, do you want to take the first...

Yes. So on the Enterprise side, we didn't see the same kind of elongation we saw last time. There's always deals that slip at the end of the quarter, but nothing like we saw last quarter. And on the international side, we didn't see the same thing either. We saw strong growth through our partners internationally, which is the goal. And we didn't see the same thing we saw last quarter. So feel really good about where we're at.

Yes. And Siti, in terms of guidance, let me start off by making an overarching comment about it. So if you look at our Q2 revenue, it came in approximately $8 million above the midpoint of our guidance. And we put through $5 million of that to the annual guide. Now we kept $3 million back to be slightly more conservative given our assumption that we're expecting seasonality in the second half to be minimal. And that's based on our conversations with top seasonal customers who we survey at this time of the year generally. And they've all said that they're expecting minimal seasonality given the ongoing macro uncertainty. So that's one factor.

The other factor that I want to point out is we mentioned how we have the highest installed base bookings in Q2. Well, a large portion of that was through upselling and cross-selling software, and that comes with longer rents. So those will typically turn into revenue in Q4 and into 2026 as well. So if you kind of look at -- when you net all that out and you look at the sequential pattern of the guide, Q3, you'll see that the sequential growth is similar to how we guided last year. And then Q4 will actually show sequential growth at slightly higher than what we guided to last year, and that's driven primarily by the installed base bookings piece of it that I just talked about.

And then to your point about the year-over-year growth in terms of 8% for Q3 and 7% for Q4, there's 1 additional factor beyond the tough comparison of the seasonality because we had a strong seasonal uptick last year and that we're now expecting minimal seasonality. But then there's the other factor, which is our largest customer, who is finishing its ramp throughout last year and has significant growth. That also creates a layer of tough comparison.

Our next question will come from Raimo Lenschow from Barclays.

Yes, perfect. Congrats from me as well, Mike and Bryan. I hope me rejoining didn't cause Mike to kind of say I'm out of here.

Yes, nothing to do with it.

I wanted to more -- ask a topical question. We just saw a new flow of investment of some of the guys that you work with like a salesperson CRM in 1 of the players in your market. You could see it as a very nice strong endorsement of your industry because there's a lot of questions about it. Like those investment come, that's kind of a strong endorsement. How do you see it in terms of like -- but also still partnering with the other players to tell -- so maybe just kind of frame it more for maybe a bigger picture perspective?

Yes. Great question, Raimo. Yes, again, we saw the same rumor, if you want to call it that or print. Again, we'll see if it's real. And look...

They announced it, I think. Yes.

They did announce it? Okay, good. Look, it's a great endorsement of our space. Especially Salesforce, they've invested across our competitive set for quite a while. We're a public company, so they really can't do similar things with us, and they can buy our stock if they want. But that's really not their business, right? They tend to invest in private companies.

So look, it's nothing new in some respects. But look, it's -- they're going to continue to play the field. Our momentum with Salesforce and ServiceNow is stronger than ever. And quite frankly, our co-development work, our co-roadmap work, our co-selling efforts, our -- are working better than ever. So I don't think it will change anything in terms of our go-forward.

Our next question will come from DJ Hynes from Canaccord.

Good to see everyone. Congrats on all the milestones and the nice print. So look, Mike, you gave some great examples of customers kind of leaning in on AI. Those that are further along, what's happening with their human agency count, right? I mean, I think that's the million-dollar question that everyone's trying to figure out. Are you seeing those [ sea count ] reductions that the market seems to be expecting? Are you able to make up for that with incremental AI spend? Like how is this all shaking out?

Yes. Great question, DJ. Look, I mean, we've talked about this a little bit. Our non-AI business continues to grow nicely. You can do the math. You can figure it out based on the percentages we've given, our overall blended growth and the AI growth. So there is a good data point for you. Customers in general are -- what they're trying to -- and for the most part, the strategy that they're taking is leveraging our AI Agents and self-service to minimize the growth in their agents or potentially keep them flat. We just haven't seen a lot of our customers that are reducing agents. And again, it very much lines up with what we've been saying, which is they're trying to deflect a small percentage of interactions to self-service powered by AI. And they're doing it really, really successfully.

You heard some of the ROI stats that I gave. And these are customers that have been at the AI game, so to speak, for a while. There was one that I mentioned that just joined us recently and also had great ROI right out of the gate. But for the most part, we're not seeing that movie play out as the AI [ bear ] thesis as we've been talking about. So again, I do believe that there's a little bit of a revelation that's still to come. And -- but again, the proof in the pudding. And if you look at our numbers, our core business, our non-AI business is growing, and our AI business is growing faster, and that is the best data point.

Yes. I mean, we've heard some of the like digital channel native vendors talk about 70% deflection rates. I assume it's different in voice, right? It's got to be a lot lower. Like what is that percentage that they can deflect the agency do you think today?

Yes. They're looking at 5%, 10% of their voice interactions. And again, digital can be higher, but again, I think that's what we're hearing from our customers, and that's what we're seeing from our customers, too. So again, as AI gets better, that could go up, but that's their goal at this point.

Our next question will come from Jackson Ader from KeyBanc.

Great. Good to see you. So Mike, the last time that we brought in, I guess, an outside CEO, it came from a communications competitor, right, like in the space. So I'm just curious, is that something that's going to be high on the priority list? Like what type of background are you really looking for? And then I've got a quick follow-up.

Yes, it's a great question, Jackson. Look, we're kicking off the search. We've formally announced it, and we have a search firm retained, and we're excited to go attract the best CEO in the market. And again, it's going to be someone that has a great track record and experience of innovation, including AI. So it's going to be much more, I would say, AI and innovation focused as opposed to comms. Be great if they also understand the core comms space, too, but you can't have everything. And so again, it's about innovation, including AI, number one.

Number two is someone with a track record of delivering operational excellence at scale. We're a growth company. We're a $1 billion in revenue today. I want to bring on a CEO here that can take us to $2 billion and $5 billion and $10 billion and beyond over time. And so we want someone that's growth-oriented, has a growth mindset as well. So those are kind of some of the high-level characteristics and experience sets we're looking for. But again, we're going to go find the best CEO we can.

Got it. Makes sense. And then I guess following up on AI. When I hear about it -- you rattled off all these different AI capabilities, right? And some of them sound not like CCaaS, right? Like not like communications, like cogeneration, AI ops, right? So how much do you feel like you need to compete on a much broader set of AI capabilities versus like, hey, we're a contact center software company, and we're going to develop AI for context?

Yes. I would say, think of us as AI for CX, customer experience, today. Now again, we can go beyond that potentially. But what we want to go deep and be the best of breed, the best solution and customer experience. So think about that as kind of contact center plus other parts of the customer journey. And obviously, part of what we do is going to be automation around processes in the back office related to customer experience. So it may not be just real-time communication driven by AI, but it's also process automation that would fulfill a customer experience situation, right? And so it does span beyond just the comms and the real-time contact center interactions into the back office in those cases.

And I think, too, if you look at -- some of these are becoming table stakes to deliver AI, right, enterprise software companies and brands are looking for companies that deliver things like agent ops and [ Code Crafter ]. I mean, these things allow you to simply deliver AI. And obviously, we're focused on the CX base.

Our next question will come from Peter Levine from Evercore.

Congrats, Mike and Bryan. I mean, I guess, Mike, how would you assess, I think, the general level of like AI readiness across like your customer base, right? Is it technical? Is it organizational? Is it security that's maybe holding some of these customers back? It's clear there's an ROI that's been demonstrated shown. So maybe just one, just help us understand like what the hurdle is to get you from 10% of Enterprise revenue to 20%? Is that 4 quarters? Is that 2 years? Just help us understand like the ramp and maybe what's holding customers back.

Yes. Great question, Peter. Look, a number that I think everyone should kind of pay attention to is the mix of our bookings that are AI, right? So again, 10% of revenue -- subscription revenue in Enterprise today is AI, but over 20%, over 20% of our ACV bookings for Enterprise are AI. So that's a leading indicator for what that mix shift can do over time.

And look, this is new territory for a lot of customers. We're helping them through that process. But the adoption, you can see in our numbers, right? I mean, net new logo bookings doubling, installed base AI bookings quadrupling. There is great momentum picking up in our ability and then these customers' ability to actually make decisions around AI. And we're not talking about -- it used to be -- stick their toe in the water, try this stuff out. Now it's scaling. And you saw in our AI revenue growth acceleration based on our prior bookings, it went from 32% revenue growth to 42% revenue growth.

So there's a lot of -- I would say a lot of momentum picking up in terms of these customers being ready. I would say the one thing that we see as a common thread across most prospects and customers is they've got to get their data in order. AI is only as good as the data it has access to. And we have a lot of huge customers that -- frankly, they're very disciplined. Some of the CIOs that are on our Customer Advisory Board talk about this a lot, which is we've got to be sure that we've got our data in order. That will allow us to really deploy AI and get the ROI out of it. And if you don't have your data in order, it's a little more difficult. But again, we're helping a lot of customers figure out -- figure that out too.

If you can, can you provide some color? I know there's a lot of mixed messaging in terms of pricing that we hear from your competitors? Is it on a per-seat basis, usage basis, token basis? Given where you are in this journey, like what model is working best for your customers where you actually go into a sales cycle and it's accelerating? It's not as complex in terms of what customers are willing to pay and how they're willing to pay for it?

Yes. Look, when it comes to AI, we talked about this. Our AI solutions are mostly consumption-based pricing or capacity-based pricing. And the traditional products that we've been selling for years and years, the pricing model hasn't really changed. And frankly, our customers aren't looking for that to change. They really appreciate the simplicity of our pricing model.

So the good news is, I think we're in an evolving market, and we'll continue to evolve our pricing as necessary. And you'll see some small players in certain parts of our space try to break in with disruptive pricing schemes and outcome-based pricing. But again, as a large company, you don't typically see companies of our size change their pricing to that kind of model.

Our next question will come from Samad Samana from Jefferies.

This is Billy Fitzsimmons on for Samad. First, from a vertical perspective, anything to call out there in terms of strength or weakness? And any verticals growing faster in terms of AI adoption at this point?

Yes. So I'll take the verticals from a financial perspective, and I'll turn it over to Andy from an AI perspective. So if you look at our -- overall of the 17 verticals that we typically track, there really wasn't anything substantial to note. The sequential growth there was pretty similar to what we saw in Q2 of last year. And then consumer specifically, that also was growing slightly sequentially, and that's relatively in line with the historical trends that we've seen. I'll turn it over to Andy.

Yes. On the customer side and bookings, I mean, ultimately, what we're seeing is financial services, health care and retail are really where the opportunities have been. I mean, there's others. But when you look at those companies, back to what Mike said, it's all about the data. And many of those companies in those spaces have really been -- they've leaned into self-service for quite some time, and so their data tends to be in a better spot. So I think it's allowing them to go much faster, but those are the top verticals that we're seeing.

Okay. And then if I could expand a little bit. Anything to call out in terms of commercial customers? I know you guys give us the Enterprise as a percent of revenue on a trailing 12-month basis. If we kind of back that out and implies commercial has been down kind of the last 3 quarters on a rolling basis. And obviously, it's a smaller piece of the business, less important, Enterprise is growing faster. But just want to better understand what's kind of happening there?

Yes, Billy, good question. Look, as you know, commercial is becoming less and less of our mix over time. It has not been a strategic investment area for us. But we actually do pretty well there still. And you got to understand, too, we have graduations that occur. So some of our small commercial customers graduate into our Enterprise category. And that gets picked up in Enterprise revenue as opposed to commercial revenue. So there's a little bit of that going on, too, and it's a good seeding -- it's a way for us to seed the market for some of these growth companies. But we also, I think, do a very good job still of executing against that market opportunity with a pretty low cost of acquisition of those customers, too.

So anyway, again, we don't expect it to be a growth driver for us over time, but we also believe it's still a good business to be in.

Our next question will come from Taylor McGinnis with UBS.

This is Seth Gilbert on for Taylor. The acceleration in subscription revenue and inflection in NRR was solid. Can you -- maybe can you walk us through kind of what drove the upside and what the trend line in subscription revenue growth has been, excluding AI? And then maybe I'll press a little bit on some of the earlier questions on the AI side. Can you touch on what AI could scale to as a percentage of Enterprise subscription revenue growth over, say, the next year or 2?

Yes. So I can start. So in terms of subscription revenue acceleration went from 14% in Q1 to 16%. And then Enterprise AI, as Mike mentioned earlier, went from 32% to 42%. So the key driver of that subscription revenue acceleration was the Enterprise AI piece of it. And if you -- even if you take out that Enterprise AI piece, there was still acceleration in the non-AI subscription revenue. And then if you look at the Enterprise AI revenue growth accelerating, we have our top 3 products, which are AI Agents, Agent Assist and Workflow Automation. And across the board for all 3 of those, they accelerated. So it was a really strong quarter.

And in terms of percent of revenue, what it can get to, Mike mentioned earlier that our -- AI continues to make up more than 20% of Enterprise net new ACV bookings. So today, we're at 10% of Enterprise subscription revenue. So you can kind of assume that's the path that it's going to. But we haven't given specifics around exactly what it will get to in the next year or 2.

Our next question will come from Scott Berg from Needham.

Everyone, really nice quarter. Mike, 3x. That's what I heard a few years ago, 3x.

You got it. I'm going back there, Scott, but not right away. We got a lot of work to do, and we've got to find the right next person.

Agreed. And Bryan, it's been like 10 or 11 years, looking forward to the next 10 or 11 or whatever the number is.

Thank you, Scott.

I guess my question is probably directed a little bit towards Andy. You made a comment, I think pipelines are at elevated levels right now. But I think one of the questions I get frequently from shareholders and others is talking about the overall industry kind of pipeline activity. It's been a little on the light side or maybe a lot on the light side at different periods over the last 1, 2 or 3 years. But how does activity really kind of compare to maybe what you saw in '21 or really, '22 before the industry saw some slowdown? Are we back in a normal cadence? And obviously, AI is part of that? Or are we still trying to build up to those levels?

Yes. I mean, no, we've seen those levels consistently going back 2 years, and they've kind of stayed at the same level. Obviously, AI, as we've been talking about, does continue to be a tailwind. I think you're seeing obviously, that play out this quarter. And so we feel good about where we're at. And then obviously, as well, that's on the new logo side, we feel really good about the changes we made on the installed base side as well, both in the AI side as well as the non-AI side, we saw significant growth there. So I think we're -- like I said, we're in a growth business, both for our core business as well as AI. And so again, we feel good about the pipeline in the future.

Excellent. Congrats again.

Our next question will come from Rishi Jaluria from RBC. Rishi, please unmute and ask your question. All right. Our next question will come from Catharine Tremblant from Rosenblatt.

It's Trebnick, but who's keeping score? Congratulations to both of you. I hope you enjoy your retirement. Looking forward to working with you, Bryan. So my question has to go back to the decision you made regarding the 3 [ executives ] that let go on Monday. What went into that methodology and why at this point in time?

Yes. Catharine, really good question. Look, we've really realigned our executive team. We've had multiple promotions, which we talked about, right, with Bryan and Tiffany Meriweather and then Matt Tuckness becoming Chief Revenue Officer. So look, we've had some people moving up and some people moving out, if you want to think about it that way, we're trying to get efficient at the top. And look, combining marketing and sales under a Chief Revenue Officer created an opportunity for us to do that, right? So we just -- it's a bit about cost efficiency, but it's also about creating better ownership and alignment across these critical functions.

So again, we were very thoughtful about this, and it really positions us for the future. And that was part of the reason we made all these changes at once to really put the executive team in a structure, in my opinion, that we've got the best players and the best positions, so to speak, are the right players, the right positions for the future growth for this company. And that was -- that was one of my goals when I came back almost 3 years ago, Catharine, was to set this company up for the future. And I think that's what -- that was a big part of what we did here.

Our next question will come from Meta Marshall from Morgan Stanley.

Great. And I'll echo my congrats. Maybe I just wanted to spend a second on -- you guys had mentioned Professional Services becoming a smaller portion of the revenue. I know you guys have put an emphasis on kind of building out that channel and kind of utilizing them for Professional Services. But just any update on that, particularly since you noted that customers are starting to ramp faster than expected? Just kind of what traction are you seeing there? And are there leverage that can still be pulled to kind of speed implementations?

Yes. Great question. I mean, I'll start, and Andy, you can pile on. But we instituted a project pull-through, almost coming up on 2.5 years ago. And it's working really, really well in terms of the percentage of our implementations being done by third parties. And that means we're not having to grow our Professional Services capacity or and therefore, we won't necessarily our PS revenue anywhere near as fast as we grow our subscription revenue.

And look, it continues to increase internationally. It's a big mix of our implementations. And domestically, it's a growing percentage of those implementations. But we still got a lot of headroom in that regard. And look, we're getting, I think, a lot of contribution in terms of speed of deployment from our technology. So -- and when you start to leverage -- when we start to leverage our own technology, GenAI and these Agentic AI Agents are a perfect example, we can deploy them much faster. Then we could deploy an AI agent even 6 months ago or a year ago. But Andy?

Yes. The last thing I'd say, too, I mean, you saw 3 of the new logos we announced. I mentioned that they were through a reseller. A lot of those partners that deliver those services are resellers. So I think our kind of overall balance for [ opti mark ] strategy and our partner business is doing really, really well, and that's kind of hand-in-hand, right, driving top line opportunities as well as helping us on the bottom line with the services.

Our final question will come from Mike Latimore from Northland.

All right. Great. Thank you. Congrats on the strong quarter and the new roles. The -- on Agentic AI, can you talk a little bit about the potential ARPU impact there relative to kind of what you've had to even maybe more traditional conversational AI? And then just clarify what percent of AI is usage based? I know you said it's a strong portion, but is it 90% or the 51%? Maybe a little bit more ballpark on that would be great.

Yes. Mike, thank you for the questions. Look, I think an Agentic AI perspective and relative to ARPU, look, we're going to continue to deliver more advanced AI capabilities. And with that comes a slightly higher price point, I think we're [ 25% ] higher for our advanced AI agent than we were for our core AI agent. So ARPU should trend north on that. No pun intended, Northland. And look, we haven't really projected what percentage exactly.

But look, a lot of our -- we talked about the top 3 products in AI being our AI agent, what we used to call IVA, right, Agent Assist, as well as Workflow Automation. The first is capacity pricing. The second and third are pretty much consumption-based. And again, it's prepackaged consumption commitments. So it's not like our usage revenue that's kind of built in arrears, and you kind of -- we don't know what's coming. These are pre-committed blocks of consumption. So you can really think of them as subscription kind of predefined from a sizing perspective with some overage charges for those other 2 products. So hopefully, that gives you a sense. But again, our top 3 products, 2 of the 3 are consumption-based. One is capacity-based.

Thanks a lot. Best of luck.

This concludes the Q&A portion of our call. I will now hand it back over to Mike for closing remarks.

All right. Well, thank you, everyone, for joining us today. Thanks to our employees, our customers, our shareholders, our partners. We're excited about the future. I'm excited about the future for Five9, and we look forward to keeping you up-to-date as we progress through the year. Thanks so much.

Why don't we go ahead and get started. Thanks, everyone, for being here. For those of you that don't know me. My name is Arjun Bhatia. I am the analyst here at William Blair, who covers Five9. For a full list of disclosures, you can go to williamblair.com.

And with that, I'm happy to introduce the Five9 team. Thank you guys for being here. We have Mike Burkland, CEO; Andy Dignan, President; and Bryan Lee, who is CFO. Thank you, guys, for taking the time and being here.

Maybe if we can start just at a high level, and if you can give us a little bit of a background into where Five9 fits into the CCaaS market, what part of the market do you go after if you're going to segment the CCaaS space and where Five9 sweet spot is and then we can go from there?

Yes. Sounds good, Arjun. So by way of background, we're a $1 billion company, top line is growing in the mid-teens. And a lot of our growth over the years has come from our march up market. We're going after really the largest of the large enterprise part of the market.

If you look at our revenue mix, over 50% of our recurring revenue actually comes from customers that are generating $1 million or more in ARR to Five9. So -- and again, if you look back in time, I've been here 17 years with the company, either CEO or Chairman. And when we went public in '14, I think we had 3 customers over $1 million, and now it's making up more than half of our revenues stream -- our recurring revenue.

And so we're playing in that part of the market. For sure, that's growing faster than the rest of our business. That is our strategic focus. We're also growing internationally. But we're also seeing, the fastest-growing part of our business is our AI. And it now makes up 9% of our revenue mix, our subscription revenue mix for enterprise, and that is growing at 32% year-over-year.

So if you think about our overall business growing in the mid-teens, our AI business growing in the 30s, and it's very additive. There's a lot of narrative out there around the AI impact on contact center. We'll talk about that, I'm sure, a lot. But look, we see this in our customer base as an additive opportunity and expansion of our TAM, and it's proving out that way.

Yes. We'll definitely get to AI. I think a lot to talk about there. Before we do, maybe if we can touch on where we are in the last evolution of contact center because there's a big kind of on-prem installed base in this space, right? I think more so than other software markets, you have a lot of Cisco via on-prem. So -- and over time, those customers have been moving to cloud, and you've certainly seen the benefit of that.

But where are we in that migration? Are customers still moving? And I'm sure AI has a role to play there as well.

Yes. Great question, and thank you for asking that, Arjun, because it's so important for everybody to understand that. Look, we're in a $24 billion core CCaaS market, AI being an expansion above that and additional TAM. But if you look at that core CCaaS market, it is it's growing very nicely for us.

We're replacing these end-of-life -- in many cases, end-of-life on-prem solutions from these legacy providers where as an industry, as a -- globally, it's about 40% in the cloud, 60% still on-premise. So it is a massive opportunity.

If you think about it, it's -- in core CCaaS, it's still a 3-horse race in terms of who we compete with 2 other cloud vendors. We're all continuing to penetrate that core market and replace those legacy solutions.

And I think a really good way for everybody to think about this is, look, no matter what your philosophy is on this, AI bear thesis and AI replacing human agents, again, if you look at the Gartner survey that just came out to a bunch of large brands, they're looking to deflect and over time replace humans with AI to the extent of about 5% of the human agents, not 80% like the Klarna original story when it came out.

So again, this core CCaaS market is massive, it's very attractive. And if it -- if that $24 billion goes down by 5% or 10% because of AI, great, we're still -- it's still a massive market. We're $1 billion. Our 2 competitors are a little over $1 billion, adding up to, call it, $4 billion out of that $24 billion. If that $24 million becomes $20 billion, so be it. It's still a massive, massive opportunity. And AI is additive to that.

And I think investors are going to start realizing this, that this is really an exciting time because customer experience is still very, very strategic to every single brand out there.

We talk to our customers all the time. I talk to our customers all the time, and they're really excited about leveraging our AI to augment and make their human agents more effective, but also in some cases, drive self-service. And they're doing that with our AI agents, and it's working really well.

The ROI on the last earnings call, we talked about a few examples of some of our customers that are leveraging our AI agents. And they all -- you can see, the ARR with Five9 has grown significantly in each of those cases.

Can we -- so -- okay, let's switch gears now to AI because this is going to be the, I think, important topic, To start off, why in CCaaS, why is AI such a bigger maybe value prop than other markets? Because I hear it in other spaces. But I think in CCaaS in particular, it's much -- the potential is much greater. And is it the labor dynamics in the CCaaS space, is it the ROI? Maybe talk about that a little bit.

It is, Arjun. I think that's a great question, too, because look, AI is going to be deployed across all kinds of use cases across enterprises. But if you think about contact center and customer support, customer service, which is essentially what most contact centers do; it's a reactive motion in many cases, right? And it's a perfect fit for AI to do its job.

But again, let's be really, really careful not to over-rotate on that. As I said, 5%, 10% of interactions over time, over years are likely to be handled by AI agents. And what's great about this is that look, as AI advances, it allows us to really provide those applications on top of whatever LLM or other proprietary models that our customers have access to. So it really helps us deliver those AI solutions so much faster and so much more effectively with real ROI.

And we're very focused on the tangible ROI. We're very -- we talked about being customer obsessed, and that is our focus. Our focus is helping our customers deliver great customer experience, self-service when necessary and when it's a good use case. But again, the contact center is a very, very good place for AI. But it's not going to replace 80% of the agents -- human agents. So I think people are starting to realize that.

And I think, look, our customers know it, our employees know it. I think the Gartners of the world know it, but I think the investor community has completely over-rotated and is -- when that herd mentality flips back...

Well, I think there were a few anecdotes in market, mostly from Klarna, I guess, that have quickly reversed back. which has been a pretty interesting reversal...

I'd also add that the bar in the contact center space is extremely high for self-service and automation, right, because of that labor. You look at mobile apps, you look at self-service, you look at the classic IVR voice bots that were out there for the last decade, the bar is really high.

And I think that's why you look at players like us and some of the main CCaaS players out there. We can actually deliver on this because there's -- we have a lot of experience doing that.

Yes. And the industry has been, again, over the last several decades, has always attempted to drive more self-service. And this is just one more phase of that.

And what is your sense of -- I mean this is going to be a hard question maybe, but what is your sense of what the future of contact center looks like? Is it going to be the lowest kind of 30% of inquiries that are handled by AI and the most complicated 70% are handled by humans?

Because there is some level of unique humans in the mix still and that exception handling. And we'll get to that part because that technology, I think, is pretty important, where Five9 comes into play. But talk about like what is the right way to think about it.

Yes, I think the right way to think about it, as I said earlier, is look, we've talked to all of our customers. Gartners talked to a lot of their customers. And I think the consensus is, again, somewhere between 5% and 15% over the next few years of interactions will be likely handled by AI.

But look, there's no substitute for the human touch. We all know that. As good as AI is and as great as it's going to get, there's still a human touch that's necessary when it comes to customer service.

And I would also say that we've got opportunities beyond customer service that we're starting to expand our platform into. We acquired a company called Acqueon, which is an outbound platform, an outbound omnichannel platform. That's also a pretty good use case for AI, but it's also a use case where humans are very involved in.

Yes. And maybe in terms of Five9's capabilities from an AI front, what is in market today in terms of the offerings that you have? Is it full -- is it agent assist, is it full -- kind of full interaction with the customer? Talk through a few...

Yes, I'd like to think of it kind of in 3 phases. If you think about the front end of an interaction with a customer, AI agents, as we call them today, but we used to call them IVAs. And this is the self-service part of interactions. So they can be voice bits or chat bots. We have both.

We acquired Inference, the leading IVA provider, 4-plus years ago. It got us a huge lead in AI, and we've built on top of that. So think of it as kind of the first phase of self-service on the front end of interaction.

And then you think about Agent Assist, which we also have solutions there from -- for everything from transcribing interactions to populating CRM systems with that, to helping the agent have information at their fingertips through Agent Assist. And then you think about kind of post-interaction workflow automation, process automation. We acquired a company called Whendu a few years back, and that is also powering our genic AI.

So if you think about that spectrum from self-service to helping agents to be more effective in the contact center human agents, to after interaction automation; this is where Agentic AI starts to become really exciting.

And our AI agents were actually -- going to be announcing this very soon, our [ Agentic CX ] platform. And this is a situation where AI agents can work with other AI agents, whether they're our AI agents or whether it's [ Agent Force ], for example. And we're partnering very, very tightly with Salesforce and up ServiceNow and other platform players to basically make sure that this is a team sport.

We've always partnered well with Salesforce. We have 1,200 joint accounts. They're excited about our partnership. They want to leverage the fact that we're in the interaction stream, right? And if you think about Agent Force, it's going to mature, it's going to become an option for several of our joint customers.

And look, at the end of the day, it's going to be some of their AI and some of our AI working together. But they've got to be plugged into our platform. AI is only as good as the data, the contextual data it has access to.

And to get for Agent Force and other third-party AI to do its job, they've got to be plugged into our platform. We use transcript stream and voice stream to provide that through APIs, and we monetize that. So this is an exciting time for us.

And I think a big differentiator for us is if you go back 7 years ago when we got into the AI space, we made the decision to build our applications on the software side of AI and leverage the underlying engines, right?

We talked about that the fact that we can use multiple engines under the hood. And so if you look at how rapidly the space is changing, you had initially, there's GNI, now you're getting into Agentic.

And you're going -- to Mike's point, there's the velocity of announcements of features and functionality we can deliver because we built our AI around the fact that we knew this space would evolve. And so the velocity of innovation, I think, is going to be very high for us over our competitors.

And you're a little bit agnostic to what's underneath actually is what you're saying?

Yes.

And maybe not to jump the announcement a little bit, but it sounds like you're going to have Agentic capabilities in each of the 3 buckets that you laid out and then they will ideally work together.

So maybe, Andy, you might have a good perspective here, too, because when you're going to market with customers and you're talking to them about Five9 delivering their AI capabilities, within the 3 buckets that Mike laid out, would you lead with a particular one? Where are you seeing adoption first from customers that are looking to bring AI through Five9 into the contact center?

Usually, it starts with the voice bot and chat bot or the -- our voice and digital AI agents. Most customers historically didn't -- the cost and complexity to go do a voice spot, whether it was the classic nuance part of the world, was tough for most customers to do. So leaning in immediately with market-leading voice bot and chat bot is kind of that first step.

In the agent assistant or in some places, better known as copilot, that is essentially the human and voice bots and chat bots working together. Those are -- that's actually our fastest-growing product. Our #1 is our AI agent, our IVA that came from the Inference acquisition, fastly followed by Agent Assist.

And so that's just a good proof point of you're in -- there are a lot of use cases for voice bots and chat bot. But ultimately, then when there's escalations needed, a very seamless handoff to the agent to then allow AI with copilot Agent Assist to be able to help that interaction is a differentiator for us.

And we're continuing to innovate with additional AI products on top of this. We have a product called AI Insights, which is really for the overall business to get insight into the interaction flows in and out of the contact center, for example, and then helping them through this automation essentially.

We just basically turn it on, let it run for a couple of weeks, and then our customers have insight into exactly the mix of interactions, the sentiment of them, the capability -- the automation opportunities because it's use case-by-use case, that's basically what the clustering is.

It's a really powerful, just diagnostic front-end solution as we go in and work with our customer base to figure out where to go with AI for second and third. And our AI Blueprint Program is a great initiative that helps our installed base customers, how we help them basically define that blueprint, that road map for them as to where to go for a second. And we use AI Insights, for example, to get that insight to help define that road map.

So we're using our own AI technologies to actually help our customers deploy the other AIs.

Yes. Actually, that's a good kind of maybe segue into customer readiness because when I talk to customers, AI is 100% on their road map all the time, right, of -- they want to deploy at some point. But to your point, even earlier in terms of what the market experts and Gartner are saying about. It's going to happen over time.

So where are we in terms of customers having their own sort of data estate in order, having change management, all the process and maybe kind of blocking and tackling that we sometimes overlook? Is it there yet? Is it we're knocking down the blockers? How would you characterize that aspect of it?

Yes. I mean I think we talked about the AI fog middle of last year, and a lot of that was -- came down to two different things. One, customers, CEOs that all said, "Hey, you need to go figure out how you deploy AI within the company." But most companies, first off, they didn't have the expertise internally, right? And obviously, they're getting hit by vendors, probably 10 vendors a day saying they can do X, Y and Z.

And a lot of them, secondly, their own data wasn't in a place to really adopt AI. And so since then, most companies that we deal with now, pretty much when we go down the path of an RFP, they have a head of AI or they have an AI sort of committee within their company. And they're ready, right? And so customer readiness is there much further than it was.

And then the second piece is, we took a step back and we asked -- we talked to our customers, and they essentially said, "Hey, look, we want you to focus on what you can deliver now versus the hype." And this is where we invested in hiring more AI expertise within our customer success teams, our TAMs, our professional services, our sellers.

Enabling them, we believe we have the strongest CX sales force in the industry. We also think now we can have the #1 AI expertise in the industry. And so we took that and then did things like AI Blueprint, to what Mike talked about, to make it very tangible for our customers.

It's not just a case study, right? This is what this use case that we're seeing in your business, how it can deliver the ROI for you. And be able to have that demonstrated ROI as well as every customer that wants to have references, right, from within verticals, and so that was really our focus.

And we've seen that sort of fog lift essentially because customers are more ready. And then certainly, we're meeting them where they need to be met.

Yes. And what role do you think partners can play in this in your go-to-market broadly, but especially in kind of addressing this?

Yes. If you look at partners, I mean, we call it our balanced route-to-market strategy, right? And if you look at it, there's the -- we still have that $24 billion CCaaS opportunity. A lot of that is coming from Cisco on-prem, Avaya, Classically, there were resellers, right, in that space that's sold than that. They're still part of that mix. And so we've doubled down on resellers. Then there's a classic referral kind of partners.

And then we obviously have our ISV and tech partners like our ecosystem marketplaces as well as Salesforce. And then you have the service providers like BT and AT&T. So we're doubling down across the board. At the end of the day, having a strong ecosystem is a key part of this.

But you get into the SIs, we look at -- we just announced that -- in February, Deloitte was our digital AI partner of the year. They're usually in these opportunities, helping customers define their digital transformation, CX transformation and big time in that sort of the data changes.

And so allowing them to have access to APIs to be able to differentiate what they do and provide those services, that's how you get them to be able to build a practice on Five9. And again, we see a lot of them leaning into that.

And so they're right on the front end, making sure that they can -- that when they think about delivering the customers AI strategy, they know exactly what we bring to the table and they have the capabilities to go deliver that as well.

Okay. Very good. Maybe last topic on AI and then we can -- there's some other topics I wanted to talk about as well. But at pricing, have you figured out how to price each of your capabilities? Do you think that's an evolving sort of mechanism or -- and how does it compare to your core seat-based pricing model?

Yes. Yes, I'll start. Andy, feel free to chime in.

But look, all of our AI SKUs are pretty much consumption-based pricing, but those are pre-committed consumption bundles. So you can think of them -- what -- customers do like predictability. We are -- look, we're in some early opportunities where we'll, on a case-by-case basis, let prospects turn on AI and kind of pay as they go for a period of time.

But at some point, they like to know how much they're going to spend on products, software products, and we obviously like the visibility as well. So -- but they're based on consumption bundles. So sometimes it's data. Sometimes it's other throughput. Sometimes it's capacity based across the AI set of products that we have. So -- and again, I think it's right down the fairway in terms of how most AI solutions are being priced these days.

So you're like you're buying a pack of consumption, it expires at some point, and it sort of use it or lose it up until...

Yes. And if you go over that, you also pay the [ overage ].

Yes. Perfect. Okay. And then do you -- sorry, in your early customers that are adopting, do you have a sense of how -- where are customers adding it, to your point, is that it's additive to their core seats, and it's an uplift to the overall ACV?

Yes. So on the last earnings call, I talked about 3 examples of many across our customer base. And what most of them are doing is look, they're building a business case based on labor arbitrage. So they're going and getting budget based on AI, allowing them to have less humans in their contact center.

But when the rubber meets the road, they actually deploy our AI agents and they typically just don't grow their agents like they were planning to grow. So instead of increasing their agents -- again, these are -- a lot of these are growth businesses. Normally, they would grow their human agent count in good times and especially in good macro environments, which we're not in.

So there are essentially these three examples that I talked about. Many of the -- I think you could think about it as mostly keeping their agent count relatively flat, maybe a slight decline, but they're redeploying these humans.

They're also -- even if their call volume is reduced slightly because of AI doing its job in containing self-service interactions, they're redeploying some of those humans, they're allowing those humans to have longer, more meaningful, more strategic conversations, more upsell conversations with those customers as opposed to trying to get them off the phone as fast as possible.

So that's where the reality is. And again, those three examples, I think our ARR increases. With each of those, we're anywhere from 37% ARR increase to [ 5 9 ] over the last couple of years as they've gone through this journey with us to 100% growth in ARR.

So it's working really, really well. And again, part of it is we're delivering ROI in these businesses. And these are some of the largest brands in the world, as you know.

Yes. Okay. Well, I'm sure we could keep talking about this forever. But maybe for the benefit of everyone here, if you -- so you mentioned at the start, Mike, that there's kind of 3 major CCaaS players in the space that are kind of going after the opportunities. Where do you kind of think about Five9 fitting in competitively? And what are your kind of core differentiators versus the other two that you would point out?

So I would just say, look, at a high level, we're the only of the 3 that is a pure cloud company, a SaaS company from day 1, right? Those are -- both of our competitors have legacy parts of their business.

Sometimes they're getting -- migrating their legacy customer base into their cloud solutions. We don't have a legacy installed base where winning, quite frankly, against them in some of the largest opportunities like the $50 million ARR plus financial services company we won.

And look, it's because of reliability. Our name is Five9 for a reason; scalability, it's because of our AI leadership. And I would say, very importantly, it's our people, our expertise and our customer obsession.

We are very well known. And our reputation compared to our direct competitors is night and day. Our customers know we care about their success on our platform. And we are going to deploy the people necessary to help them make that happen.

And we're just different in that regard. And they know that, they learn that through the sales cycle. We spent a lot of time with these megas especially through that long sales cycle, and they get to know us and they get to know what our culture is all about and how obsessed we are to help them drive that success.

Yes, these are complex. These very large enterprises are complex and the megas multiyear deployments, right, moving off of on-prem oftentimes multiple on-prem systems within the customer. And we're just well known in the industry that we have perfected the migration off of prem to cloud. And I think that's a big reason why we're winning.

And maybe, Andy, for you, we've had some sort of go-to-market adjustments and changes over the last year or so. And part of it has been balancing how do you go after big deals versus your kind of core. So maybe talk about where you are in those changes and how you are managing that balance at this point.

Yes. So if you go back going into 2024, we made some major changes initially in how we go after our installed base, some changes in our customer success. If you look at Q1, we announced that we had the largest year-over-year growth in our installed base in the last 3 years. So that was kind of step 1, make sure that we get upsell and cross-sell all of our solutions, obviously, with AI that was really important. So that -- the success of that is there.

Then in the midyear last year in our new logo side of the business, we talked about it. We had our sales teams were kind of whale hunting a little bit, right? You start to win bigger and bigger deals, that happens within sales organizations.

We didn't have the discipline to sort of make sure that each team was focusing in their lane, right? You had our megas and our large enterprise deals. That's our major part of the business. So we've now a much stronger discipline in terms of the bulk of our resources. Our sales teams are in that bell curve going after the dolphins, as we call them, those $1 million to $5 million deals. And we still have a team that's focused on those megas.

There's still a lot of very, very large opportunities out there. We're well positioned and going after them, but much more disciplined in terms of how we do that. And so you're seeing that play out in a more predictable forecasting our business and overall, continue to then invest in things like I talked about, enabling our resources to be the best AI experts out there, being more vertical-focused, right?

Historically, CCaaS was always sort of vertically focused, but AI has really pushed you to make sure that as you go in and you approach a health care company or a financial services or retail that you have all of the use cases and the experts to be able to go deliver that.

Okay. Perfect. And then maybe if we can focus on the near term a little bit here because there is certainly a lot of questions about macro and tariff impacts. So I'm curious, how -- what you're seeing in terms of pipeline and how your customers are engaging with you?

And then Bryan, I don't want to leave you out. But how would you account for that in guidance? Because that is a big question, I think, right now, especially given visibility into the back...

I'll make a quick comment on tariffs, if I could. And then Bryan, I want to make sure you get some airtime.

Look, we talked about it on the last earnings call, we probably over rotated a little bit in the message. We had a couple of deals internationally, 1 in Sweden, 1 in Canada that mentioned directly the tariffs, and we're having trouble with our leadership. This is them telling us during the sales cycle that we're having trouble with our leadership getting their permission to do business with a U.S.-based vendor.

There was 2 deals. It wasn't a significant impact. But in our -- again, our approach is to be very transparent with everyone in terms of what's happening with our business. And it was -- this was something that was affecting a lot of companies, and we wanted to make sure that people knew that yes, we've had a couple of cases where it did affect.

But Bryan, if you want to talk about...

Yes, absolutely. So from a guidance perspective, if you look at our -- the macro environment in Q1, I would characterize that as being relatively stable. And of course, the uncertainty increased in April. And even though we didn't see material changes in our business, we decided to become slightly more prudent in terms of our guidance, which is why for the annual guidance, we kept unchanged at $1.14 billion or 10% year-over-year growth.

And if you kind of break that down between the new logo side of our business versus the installed base, illustratively speaking, if we assume that dollar-based retention rate remains at 107%, which is what we reported in Q1, that would generate about $52 million of incremental revenue for the rest of the year. And we need about $62 million to get to our guidance.

So then you're left with that $10 million that needs to come from new logos. And we have a vast majority of that would come from our backlog of new logos that we already won. And we have great visibility into ramp schedule those.

And then from the go-gets, new bookings that have to come in, it's a very small portion, and it's really only through June or so because everything else impacts 2026 revenue. So based on those components, we feel comfortable with where we are for the annual guidance.

Okay. Perfect. And Mike, maybe just to clarify on your comment, I would assume what you're maybe trying to say is it hasn't spread since those -- the concern on international doing business with U.S. vendors kind of been relate...

I haven't heard. But Andy, you are close to the sales.

As I said, we maybe over-rotated a little bit in terms -- but yes, just being transparent, we haven't seen that continue to play out kind of...

Okay. All right. Perfect. Well, we are up on time. Andy, Mike, Bryan, thank you so much for joining us. Thanks, everyone, for coming.

We are upstairs for Q&A in -- hold on, I will get you to -- we are in Jenny B. So if you have questions for the team, please come upstairs. We'll see you there.

Thanks, everyone.