Five9 Is a Growing Presence in the Cloud Contact Center Space

Senior Equity Analyst

Dan Romanoff

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. We see a long growth runway and significant market opportunity but also expect no-moat Five9 to require substantial investments as it squares off against larger competitors.

Five9's Virtual Contact Center, or VCC, platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist capabilities, and workflow automation. We expect VCC to become increasingly critical for enabling omnichannel interactions amid a secular acceleration of digital-first customer engagement.

With only 15% to 20% of contact center agents in the cloud, the residual opportunity around uncaptured communication data is significant. We believe the increasing automation of contact center labor also presents an additional opportunity for Five9 and expect the firm’s rapidly growing AI and automation portfolio to enable both scale and efficiency gains for customers’ call center operations. Attach rates for these solutions are rising within each tier of customers, and we observe higher attach rates in incrementally larger enterprises, a positive as the company advances its penetration within larger companies.

Reflecting the high utility businesses derive from the firm’s offerings, Five9 reports a net retention rate in excess of 120%, reflecting strong growth within existing customers. We also see Five9's success gathering new customers, principally driven by the migration of contact centers to the cloud. Nonetheless, we temper our positive outlook as we see heightening competition in the cloud contact center space with the emergence of natively built CCaaS offerings from key competitors such as Zoom, Twilio, and Amazon.

Business Strategy & Outlook

We assign a no-moat rating to Five9. It is our view that software, in general, is privy to switching costs, as software system installations are time consuming processes that generally require thorough upfront verification, have many touchpoints throughout an organization, are linked to various business applications, and often have new processes built upon them. However, while we believe Five9’s contact-center-as-a-service, or CCaaS, offering is high-touchpoint, widely integrated software that becomes increasingly valuable as the amount of data it can compile from touchpoints throughout an organization and its business applications rises, the rapidly intensifying competitive landscape mutes our confidence in Five9 being able to maintain excess returns on capital over the next 10 years.

Five9’s offerings address key trends within the communications space toward cloud-based digital-first customer engagement. Crucial to this, is the move of on-premises contact centers to the cloud. Five9’s cloud-native CCaaS offering, Five9 Virtual Contact Center, or VCC, delivers a channel-agnostic unified platform that enables omnichannel engagement routing, customer connectivity across all digital channels, workforce management and optimization solutions, and AI-based analytics, agent assist technology, and self-service chatbot functionality.

When VCC receives inbound communication, CRM integrations pull a complete customer history, enabling more targeted engagement with the customer. The cloud platform enables the contact center agent to then correspond with the customer through any communication channel (email, SMS, voice, WhatsApp, and so on) and all related business applications. Business applications are tightly connected to the CCaaS platform through out-of-the-box CRM and unified communications (UC) integrations, and custom-built integrations that leverage Five9 REST application programming interfaces, or APIs. We view this highly integrated platform as giving rise to emerging switching costs for customers, but again, think these need to be qualified by the intense competitive landscape. We are not confident that the software’s platform is sticky enough to materially hinder a move to a competing provider that may offer comparable or superior features and functionality.

VCC’s primary competitors in this space are legacy on-premises contact center vendors and other cloud CCaaS vendors. On the former, Genesys, Avaya, and Cisco each have a significant presence in the enterprise space with large on-premises installed bases. The communications industry has evolved significantly as the enterprise contact center space slowly moves to cloud-native platforms. What used to be a joint buying decision of unified communications (UC) plus contact center (CC), which is the way most on-premises leaders approached contact center sales, has diverged into two separate purchasing decisions. This split both divided and expanded the competitive landscape, creating more distinct and separate UCaaS and CCaaS industries, each with their own set of competitors.

Today, customers choose to follow one of two strategies to meet their communication needs: best-of-suite or best-of-breed. The former would favor UCaaS vendors such as RingCentral, that have integrated contact center offerings, while the latter would favor pure-play CCaaS vendors such as Five9 or Nice, that offer standalone contact center software. It is often the case that UCaaS and CCaaS vendors partner to deliver the greatest value to customers, and today, about one third of buyers are purchasing a CC solution alongside a UC platform to enable a converged solution, per management.

We observe most legacy vendors, like Avaya and Cisco, approaching cloud sales from the UCaaS angle, with solely Genesys emerging as a CCaaS competitor. Additionally, the emergence of natively built CCaaS offerings from other key competitors such as Zoom, Twilio, and Amazon both validates the massive market opportunity and brings additional competitive pressures. That said, we see some divergence in the buying decisions for build-it-yourself CCaaS toolkits like Twilio Flex and Amazon Connect, and out-of-the-box CCaaS solutions like Five9 VCC and Nice CXOne. 

As we assume that cloud transitions will steadily progress within the contact center space, the more relevant competitors become other cloud CCaaS vendors, namely Nice with its CXOne platform, Genesys with its Cloud CX platform, and Zoom Contact Center. Nice CXOne and Genesys Cloud CX have been market leaders in the CCaaS space for several years, per Gartner, whereas Zoom’s offering is brand new, having been launched in early 2022. Still, we observe Five9 steadily growing its top line and capturing a portion of the migrating value. We expect Five9’s decade-long expertise, sophisticated platform, and newer self-service AI offerings like interactive virtual assistant (IVA) to continue to drive competitive wins and ultimately expect multiple winners to emerge within this space.

We expect companies to continue to dual or even multi-source cloud communications solutions, a positive for CCaaS vendors, but we still expect pressure longer term from the benefits of unified solutions and the attachment of UC and CC in buying decisions. The latter dynamic would require Five9 to form strong, long-standing partnerships with UCaaS vendors to ensure its VCC enjoys the CC portion of these joint UC/CC sales. At this point, we note close competitor Nice has a preferential positioning as it relates to partnerships with UCaaS providers.

We find that Five9’s solutions have excellent user metrics. Dollar-based net expansion was in excess of 120% for 2021, indicating an increasing usage of Five9’s software by customers. We also see Five9 successfully gathering new customers, principally driven by the migration of contact centers to the cloud. These gains are impressive, but close competitors experience similar net retention rates and view those competitors as having stickier products with larger upmarket penetration. While 84% of Five9's customers were classified as enterprise, we view the company's definition as more analogous to mid-market.

We believe Five9’s workforce optimization (WFO) and AI and automation offerings will prove influential in driving ARPU growth and increasing module usage within enterprise customers. WFO is a natural extension of contact center functionality, tracking and optimizing staffing and workforce performance, and enabling cost-cutting and alignment between call volume and agent scheduling. Similarly, AI and automation offerings enable both scale and efficiency via self-service offerings, agent assist technology, and workflow automation solutions. Both solutions are experiencing rising attach rates within each tier of customers, and higher attach rates in incrementally larger enterprises. We believe the rising traction reflects shifts toward automation-based investments in contact centers but believe attach rates also show further room for expansion within existing customers.

None

Economic Moat

Five9

Five9, Inc. engages in the provision of cloud software for contact centers. It specializes in omnichannel routing, analytics, workforce organization and reporting. The company was founded in December 2001 and is headquartered in San Ramon, CA.

Earnings data Q2 2023

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