Five9 Inc (FIVN) Q4 2018 Earnings Conference Call Transcript

FIVN earnings call for the period ending December 31, 2018.

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Five9 Inc  (NASDAQ:FIVN)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, and welcome to the Five9 Inc. Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Lisa Laukkanen. Please go ahead.

Lisa Laukkanen -- The Blueshirt Group, Managing Director

Thank you, operator. Good afternoon, everyone and thank you for joining us on today's conference call to discuss Five9's fourth quarter and full year 2018 results. Today's call is being hosted by Rowan Trollope, CEO; Dan Burkland, President; and Barry Zwarenstein, CFO.

During the course of this conference call, Five9's management team will make projections and other forward-looking statements regarding the future financial performance of the company, industry trends, company initiatives and other future events. You are cautioned that such statements are simply predictions, should not be unduly relied upon investors, and actual results or results may differ materially, and the company undertakes no obligation to update the information in such statements.

These statements are subject to substantial risks and uncertainties that could adversely affect Five9's future results and cause these forward-looking statements to be inaccurate. A more detailed discussion of certain of the risk factors that could cause these forward-looking statements to be inaccurate and that you should consider in evaluating Five9 and its prospects is included under the caption Risk Factors and elsewhere in Five9's filings with the Securities and Exchange Commission.

In addition, management will make reference to non-GAAP financial measures during this call. Management believes that this non-GAAP information is useful because it can enhance an understanding of the company's ongoing performance, and Five9, therefore, uses non-GAAP financial information internally to evaluate and manage the company's operations. This non-GAAP financial information should be considered along with, and not as a replacement for, financial information reported under GAAP and could be different from the non-GAAP information provided by other companies in our industry. The full reconciliation of the GAAP to non-GAAP financial data can be found in the company's press release issued earlier this afternoon and is also available on the Investor Relations section of Five9's website.

Now I'd like to turn the call over to Five9's CEO, Rowan Trollope.

Rowan Trollope -- Chief Executive Officer

Thank you. Leslie and thanks to all of you for joining our call this afternoon. We close 2018, with our strongest quarter ever as a public company with $72.3 million in revenue, up 31% year-over-year and $16.4 million and adjusted EBITDA, representing a 22.7% margin, that's up 3.1 percentage point sequentially, which achieve our intermediate term target a full year ahead plan.

So I want to give you a few thoughts on these results. First, our stand-out performance is representative of the large market opportunity, we're addressing and our continued momentum in the enterprise. Our role as a trusted partner to increasingly larger enterprises continues to accelerate, as customer experience transformation becomes a strategic objective. Now our teams executed well and we have attracted top industry talent to our leadership.team.

Next, the enterprise segment will continue to drive our growth, with only 10% to 15% of the market transition to the cloud were just in the second innings. Our enterprise business grew to 77% of LTM revenue. Our enterprise subscription business grew at 36% on an LTM basis and importantly, customers over $1 million in ARR represent one of the fastest growing parts of our business.

In fact, we now have more than 40 customers generating over $1 million in Q4 annualized ARR, that's approximately doubled over the last two years and we're going to report this number to you annually. Finally, we continue to expand our existing customer relationships dollar-based retention rate accelerated to 103%, largely due to a recent record in enterprise, where it remains well above 100%; it's a simple equation really, we land the Five9 platform in a new customer and then begin to help them improve their customer experience and productivity. So, that in turn combined with the trust, that we built in terms of uptime and support helps us drive our expansion within that customer, as they look to add seats and buy more products and services for Five9.

Our progress with enterprises and our overall go-to-market and services support motion is led by our President Dan Burkland, who can give some specific examples of customer wins this quarter. Dan?

Dan Burkland -- President

Thank you, Rowan. I'm very proud of our team for executing unbelievably well. And four enterprise bookings hit an all-time record for any quarter and our pipeline reached another all-time high, while we continue to gain strong traction from our partners, who once again influenced over 55% of our deals. This quarter, we continue to see larger and larger deals coming in.

For example, the first is the cable, television, Internet, wireless and home security company serving customers throughout Canada. They were looking to modernize and outdated premises based solution from Cisco, along with several disparate solutions for email, chat, social, WFO and CRM. Once they evaluated the depth of the Five9 omni-channel solution including voice, email, chat, social, along with Five9, WFO powered by Verint and the powerful APIs, to integrate to their proprietary CRM solution. They chose Five9. They signed a five year contract estimated at nearly $2 million in annual recurring revenue to Five9.

The second example is a private university who also was using an on-premise solution, which was due for a large hardware and software upgrade along with the ongoing maintenance cost. The driving factors in their decision were Five9 end-to-end omni-channel solutions are flexible APIs and it is to customize and integrate to whatever solutions the university chose for their CRM and back office systems. They also purchased our visual IVR and visual customer feedback, both our mobility applications, that their students can leverage from their smartphone. This initial order is expected to result in nearly $1 million in annual recurring revenue to Five9.

The Third example is a national health insurance company. They were using our premises-based solution, which they acquired from their carrier several years ago that had become outdated. When they chose Five9 in addition to core capabilities like omni-channel quality and reliability were key factors and they implemented our MPLS Agent Connect to enable superior voice quality throughout all of their contact centers. We anticipate this initial order will generate over $1 million in annual recurring revenue to Five9.

Now, as we normally do, I'd like to share an example of an existing customer who continues to expand with Five9 as we help them who continues to expand with Five9, as we help them execute on their customer experience strategy. This financial services company has been with Five9 for over three years and is experienced unprecedented productivity from their workforce by leveraging Five9's unique, intelligent, blending for both inbound and outbound calling. They expanded in Q4 by opening an additional international contact center, which now bring them well over 1,000 agents and over $2.5 million in annual recurring revenue to Five9. They also have plans to continue with additional expansion in 2019.

I'm very pleased with our performance, as we continue to execute and create momentum up market by signing a larger customers, gain validation from leading industry analysts like Gartner and Forrester and build strong loyal customer base who looked at Five9 as their long-term strategic partner for their contact center.

So with that, I'll turn it back over to you, Ron.

Rowan Trollope -- Chief Executive Officer

Thanks, Dan. You guys did a phenomenal job this quarter and this year. Well done. It is great to see more large enterprises on the Five9 platform. And as I've been out on the road talking to executives and large enterprises, the consistent theme that I'm hearing is a recognition that the customer experience can be a strategic differentiator for their business. And consequently, there's an increased sense of urgency to drive that transformation. In fact, reflecting that increased urgency, in one recent survey of 100 contact center buyers, 88% of them said that they were very or somewhat interested in the cloud contact center for their next upgrade. Thus customer experience become a strategic priority, and as the market shifts toward the cloud, we believe Five9 is extremely well positioned to capitalize on this opportunity.

Talking with an executive from one of our largest customers recently and he told me he doesn't see Five9 as just another vendor. But as a trusted strategic partner, who has helped his company at every stage of the customer experience journey. In fact, he went on to articulate a shift that I've heard from many C-suite executives, which is that the contact center can be an invaluable center of customer data.

Now, as I shared on previous calls, we believe that artificial intelligence will put that data to work in new ways, and will have a profound impact on how businesses deliver service to their customers. So while many companies have metadata around customer experience such as satisfaction surveys and statistics around website usage and so on, Five9 has access to the best experience data because we have, what customers are actually saying in real time. As an indication of the volumes of data, we've got more than 5 billion minutes of customer conversations recorded and moving across our platform each year. With recent advances in real time accurate and increasing the economical automatic speech recognition, data such as voice recordings are quickly becoming a source for training machine learning models. Now that data at scale combined with machine learning makes the data useful and turns it into actionable insights and the ability to drive automation that's never been possible before. This puts Five9 at the nexus of a transformative opportunity for every business in the world and we plan to be a leader in the field of AI for the contact center.

Moving forward product innovation is going to be critical to capitalize on this opportunity and we recently filled two top technical leadership roles; Dave Pickering, our new EVP of Engineering, joined us in December from Intuit. Now, David is widely respected in Silicon Valley as a hands-on leader with a very long track record of success. And in January, we appointed Jonathan Rosenberg as our CTO and Head of AI. Jonathan is a well-known pioneer in our industry and he is the co-author of the SIP protocol along with many other technologies that are foundational to the modern Internet. And finally, to help us scale and grow our business, we hired Jim Doran to lead strategy and operations. I've worked with Jim for many years, helping transform numerous multi-billion dollar businesses.

Our go-to-market organization led by Dan continued to accelerate their momentum. I regard this team as the best in the industry and we are going to continue to invest aggressively and to gain market share. Our ecosystem of partners continues to grow attracted by our growing installed base. We plan to pursue these products and go-to-market initiatives while maintaining the expense discipline that we are known for and we're very fortunate to have strong revenue growth and unit economics, as well as continue with year-over-year margin expansion, which allows us some latitude to make those necessary investments.

Now to expand on our financial performance and guidance, I will turn the call over to our CFO, Barry Zwarenstein. Barry?

Barry Zwarenstein -- Chief Financial Officer

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

This was another excellent quarter. Revenue grew 31%, our fastest growth rate as a public company. This growth was driven primarily by our enterprise subscription revenue, which is the fastest growing and most profitable part of our business. Enterprise subscription revenue continued its multi-year performance of growing in the 30s, posting growth of 36% on an LTM basis under 606 and 38% on a more comparable basis under 605. Our Enterprise business in total which includes not just subscription but usage and professional services as well, made up 77% of LTM revenue. Additionally, for our commercial business, which represents the other 23%. The strength, we started seeing earlier in the year continued in the fourth quarter with year-over-year growth of over 10%. Recurring revenue accounted for 93% of our revenue, the other 7% of our revenue was comprised of Professional Services.

Fourth quarter adjusted gross margins were 65.1%, an increase of nearly 150 basis points year-over-year. Adjusted gross margins have now increased each quarter for the last 24 quarters. Fourth quarter adjusted EBITDA was $16.4 million, representing a record 22.7% margin surpassing as Rowan, mentioned our intermediate term target that year earlier than anticipated. The 22.7% was an increase of 10.3 percentage points year-over-year, of which is 3.4 percentage points were due to the accounting transition. Adjusted EBITDA has now increased year-over-year for 21 consecutive quarters, driven by the strong revenue growth, excellent unit economics, and the ongoing operating leverage. Fourth quarter GAAP net income was $3.7 million. This marks our first materially profitable quarter on a GAAP basis. Fourth quarter non-GAAP net income was $14.5 million a year-over-year increase of $10.5 million.

Before turning to our full-year performance, I would like to add some color to the average concurrent seat count for the fourth quarter, which grew to 105,320 seats. The 28% year-over-year increase is an acceleration from the annual increases in the last four years, which range between 19% and 23%. Please also note that we estimated this concurrent seat count equates to approximately 158,000 seats on a named seat basis. As a reminder, we are providing the seat count metric only on an annual basis.

And now a closer look at key full year 2018 income statement metrics. For the year ended December 31 2018, revenue was $257.6 million, up 29% year-over-year, driven by the high '30s growth rate in enterprise and complemented by the stronger growth in commercial. Adjusted EBITDA for the year ended December 31, 2018 was $46.4 million, an increase of $28.7 million over the $17.6 million earned in 2017. $8.4 million of the year-over-year increase in EBITDA was due to the accounting change and the remaining $20.3 million were due to an increased revenue and margins on a 605 basis.

Finally, before turning to guidance, some balance sheet and cash flow highlights. DSO for the fourth quarter was 29 days. Our operating cash flow for the year ended December 31, 2018 was $38.6 million, the year-over-year improvement of $27.5 million. We are optimistic about our potential for continuing cash generation given our long-term model and substantially NOLs and our low DSO. Capital expanding in the fourth quarter was $5.7 million, essentially all of which were paid for in cash.

I'd like to finish today's prepared remarks with a brief discussion of our expectations for the full year and the first quarter of 2019 and to reiterate our long-term model. For 2019, we expect revenue to be in the range of $298.5 million to $301.5 million. GAAP net loss is expected to be in the range of $22.1 million to $19.1 million, or $0.36 to $0.31 per basic share. Non-GAAP net income is expected to be in the range of $36.8 million to $39.8 million or $0.38 to $0.62 per diluted share. Consistent with our previous discussions, this bottom line guidance reflects expected increases in various growth investments, particularly in R&D and in go-to-market initiatives to go after this massive market opportunity that is coming toward us.

For the first quarter of 2019, we expect revenue to be in the range of $70 million to $71 million, this reflects the typical impact of the expected falloff from the strong seasonal tailwind in the fourth quarter. GAAP net loss is expected to be in the range of $5.7 million to $4.7 million or $0.10 to $0.08 per basic share. Non-GAAP net income is expected to be in the range of $7.1 million to $8.1 million or $0.11 to $0.13 per diluted share. This guidance for the current quarter includes the impact of the expected increase in growth investments, I mentioned a moment ago and the impact of the annual restart of the FICA obligations.

With respect to our expected revenue trends by quarter for the remainder of 2019, consistent with the guidance in past years. We do not expect sequential growth in revenue in the second quarter. However, following the seasonal business patents we have experienced in the past, we expect revenue to increase sequentially in the third, and particularly the fourth quarter, given the shape of this revenue curve and the ramping of expenses, investors should expect a bottom line to be weaker sequentially in the second quarter and stronger in the second half.

In short, our bottom line will not increase linearly during the year, most of the year upon year improvement will occur in the fourth quarter. To illustrate this point, in the different way, consistent that for each of the last four years, 53% of our revenues have been recognized in the second half of the year. And that we enjoy very high marginal profitability on incremental revenue. In other words, we have a natural lift in adjusted EBITDA margins in the second half of the year. Now that we have achieved the intermediate term model a year early, we would like to reiterate our long-term model, which remain to reach an adjusted EBITDA margin of 27% plus in about four years. We'd also like to mention that while the growth investments pressure the first half and likely the third quarter margins, we expect adjusted EBITDA margins to be at 20% plus in the fourth quarter.

For modeling purposes, we'd like to provide the following additional information. For calculating EPS, we expect our diluted shares to be 63 million and basic shares to be 60 million for the first quarter of 2019 and 64 million 61 million respectively for the full year 2019. We expect our taxes, which relates mainly to foreign subsidiaries to be approximately $75,000 for the first quarter of 2019 and $310,000 for the full year 2019. Our capital expenditures for the first quarter of 2019, are expected to total approximately $5 million to $6 million. For the full year 2019, we expect capital expenditures to be between $20 million and $24 million.

In summary, we are very pleased with our fourth quarter and full-year performance. Our customers, our partners and our employees placed a high value on consistent execution in all key areas of the business. We have a hard-earned reputation for showing up and delivering. We plan to guard that reputation. Operator, please go ahead.


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Questions and Answers:

Operator

Thank you. (Operator Instructions) We will take our first question from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow -- Barclays -- Analyst

Can you hear me OK?

Rowan Trollope -- Chief Executive Officer

Yes. We hear you Raimo.

Raimo Lenschow -- Barclays -- Analyst

Thanks. Rowan, like we had another very, very strong quarter on the enterprise side. And it looks like the deals are getting bigger. Can you talk a little bit about that adoption momentum you see on enterprise? Have we kind of hit some sort of inflection point there that your the customers come further around kind of seeking cloud solutions in the enterprise level in big and big accounts is coming through? And then a question for Barry. If you look through the investment, is it just -- can you talk a little bit about each of what it is so that we understand better why it's so back half loaded -- back end of the year loaded? Thank you.

Rowan Trollope -- Chief Executive Officer

Sure. So, I'll jump in Raimo. On enterprise strength, it's actually been fairly consistent as we've explained over the last probably several years. You have a consistent and steady move of enterprises and larger and larger enterprise is getting more and more comfortable and we're certainly seeing the benefits of that. We talked about, you know, I guess one of the data point will be the survey that was right at the beginning of the year of buyers who said that 88% of them said they were somewhat to very interested in switching in their next upgrade cycle.

So, there's definitely the interest is there and we're through that evangelism phase, but there's no question in leasing (ph) the people the big companies that I talked to, there is really no question about the viability of the cloud SaaS, contact center offer anymore. That question is off the table. It's just a question of when is the next upgrade cycle? When do they need to go make a move there? And increasingly, we are seeing pressure on the need for these businesses to modernize their customer experience. And so that's the one new wrinkle I think customers are feeling more and more, especially in the large enterprise that they've got to do something here. Barry?

Barry Zwarenstein -- Chief Financial Officer

Yes. So broadly speaking Raimo, the investments are in R&D and go-to-market, broadly described. In R&D to continue with innovation on the platform and prominent among will be the AI initiative, whether that's not a large investment, but it's a good example. And in addition to that the integrations with different systems, but particularly CRM are really key. In terms of go-to-market, Dan can fill in if necessary, but basically this is broadly speaking, that's on the direct side of the channel aside is developing additional business partnerships, ecosystem is very important and is growing. And also associated with that, our professional services people because as you know, we distinguish ourselves with on-site six step high performing professional services implementations.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Congratulations from me. It was great.

Barry Zwarenstein -- Chief Financial Officer

Thank you, Raimo.

Operator

We will take the next question from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks, guys. I just wanted to kind of get a sense of where is there anything as far as usage trends in Q4 that contributed to the upside or was that really just from kind of strength in bookings. And then maybe to kind of put a finer point on the previous question, should we expect that in 2019 like that margin leverage would largely come from gross margins in 2018, kind of looking at it today, that's where we should expect any leverage to come from as opposed to R&D or sales and marketing, where you're noting increases the investments? Thanks.

Rowan Trollope -- Chief Executive Officer

Yes, Meta. So in terms of the usage, Q4 was down the (inaudible) I think particularly the overall business permanently including that subscription remains strong. In terms of the leverage you put your finger right on it, the gross margins, a big dairy there. We've been increasing year-over-year gross margins now for basically four-foot 24 quarters, six years in a row, every quarter. We also continue to get that might not be every single quarter, might be a little bit lower for little while because in part of those professional services investments I talked about, but that would be the major era rather than sales and marketing, R&D.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. And if I could just sneak one more in, Rowan, you talked about kind of being on the road and meeting with customers. Is there any trends of as you talk to them about AI like specific areas where they're interested in or particular verticals that are kind of more interested early -- in early days. That's it for me.

Rowan Trollope -- Chief Executive Officer

Yes. Definitely there is very strong interest in AI. I think folks see that as a horizon two. There are -- a lot of them are sort of what we need to get on to the cloud, and increasingly, what they're saying is, getting on to the cloud gives us access to like -- we think that gives us access to the next wave of AI-driven innovations. And so we kind of help and get on to the cloud. And so, there's interest in hearing and understanding. Our folks -- we're doing proof of concepts with customers and the interest is in the area of interactive voice assistance.

So, instead of having press one for this, press two for that, essentially something you speak to and it answers you in plain English or whatever your language of choice is. That's one area. Another one is just getting insight; the contact center folks that I speak to see that there is tremendous value in the information that they have, specifically the the voice of the customer and how to extract that in a meaningful way to provide insight back to the business, so that's the second area. And then the third one is really about making agents more productive. A lot of the agents are today answering the same question over and over again, and it takes a bit of time to get people up to speed. So if there's a way that we could use AI to help train agents faster and sort of in that order. That's where I see the interest from our customers. Thanks, Meta.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks.

Operator

(Operator Instructions) We will take our next question from Brent Bracelin with KeyBanc Capital Markets. Please go ahead.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Thanks. Rowan, I will start with you and one for Barry. Wanted to talk about kind of international. I know today it's less than 10% of the business, but if I look back, it looks like you're starting to see some acceleration there, meaningful acceleration. You talked about a nice expand with a financial services firm expanding international. Could you walk us through kind of your international strategy? Do you think that could be another lever of growth in '19 or is that probably more likely a 2020 growth driver? Any color on international, I think would be helpful. And then again, one follow-up for Barry.

Rowan Trollope -- Chief Executive Officer

Sure. Thanks, Brent. On international, it's clearly an area of opportunity for us and it's just very early days at this point. From a planning perspective, one thing is fairly clear is the channel is going to play a very prominent role there, and if you look at the success we've had to date and clearly strong performance coming off a small number though, that is heavy involvement from the channel. And so, we're in the early days of planning. I would just reiterate that our US opportunity is still massive; we still haven't penetrated, you know, Pittsburgh and saturated San Francisco. We're just at the early days of that. So I think that is a long-term opportunity to shift into international. In terms of when that will have a material impact on our revenue and whether that would be in '19 or '20, in terms of an additional lever, we'll stick by our guidance on that front, just did we feel like it's still early days on an international for us. Got it?

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Helpful color. And then, Barry, just for you would love to get your thoughts just on the pace of investments and if I just look at OpEx 10% growth this year, you hit your long-term kind of or mid-term EBITDA target good work there. But as you think about the business here accelerating revenue growth back above 30% for the first-time in five years. What's the appetite to kind of reinvest in the business and is there plans to kind of accelerate specific investments and sales and marketing in R&D, it sounds like there is an appetite there, but give us a little more color on how you think about balancing kind of this accelerating growth profile, the opportunity and obviously still maintaining kind of that 18% EBITDA margin target that you have? Thanks.

Barry Zwarenstein -- Chief Financial Officer

Yeah. So in broad strokes Brent, we've within our guidance for the top and bottom line we're clearly anticipating meaningful increases at a faster pace than we've done in the past and particularly in product, in R&D and in go-to-market. We remain focused on giving a balanced approach to our business, that is why we made a point of saying that by the fourth quarter, the EBITDA margin would have a two handle. And yes, in the interim, in the first two, maybe three quarters, per our guidance, there will be some pressure on the bottom line, but something that we think is absolutely warranted given that the market is coming toward us. We've got an eminently scalable go-to-market machine, some people objectively say that if you exclude the verticals and the developer led models that we have one of the more efficient go-to-market machines in the industry, and we've got a expanded and very talented leadership team that Rowan has built and we feel we can do that.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Great, helpful color. Thank you.

Rowan Trollope -- Chief Executive Officer

Thanks, Brent.

Operator

We will take our next question from Scott Berg with Needham & Co. Please go ahead.

Ryan MacDonald -- Needham & Company -- Analyst

Hi. This is Ryan MacDonald on for Scott. First off, Rowan, you've made some impressive senior level technology hires over the last couple of months. These people in place, how should we think about the timing of some of the new AI-based products that you're -- you've discussed building.

Rowan Trollope -- Chief Executive Officer

Thanks, Ryan. No change to what I have talked about earlier that you shouldn't anticipate any meaningful contribution to revenue from AI anytime soon. We are in the stages with Jonathan joining and Dave Pickering on-board heading up our technology organization; we've got two incredible talents there as you mentioned, they've hit the ground running. So really, really solid and impressive start for both of them. Jonathan, is off to the races from a hiring perspective. He's already brought on board his first data scientist and starting to build out that team. He is engaged with customers already and been out on the road, talking about back to the previous question on AI and where we see the interest there, I think it was from Meta. We really see the strong interest from customers, so Jonathan is planning to continue to move forward with those POCs (ph) pretty aggressively and starting to getting feedback from customers. But I wouldn't say anything accelerated beyond what I've said before. 2019 is going to be a year engaging with customers, building out our team, looking to leverage the data, and then, we'll see where we go from there.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. And just a quick follow up. Obviously, with this strong top-line growth and the continued acceleration there, we're seeing some nice moves in ASPs. How much -- if you can talk about and from a balance perspective or mix perspective, is that coming from selling simply more seats initially versus customers purchasing more modules upfront? Thanks.

Dan Burkland -- President

Yes. Hi, this is Dan, I'll take that one. We had originally given out an average deal size as an indicator to show our move up market. We certainly did that and we're continuing to see more and more million dollar plus customers. So, what you're seeing is larger and larger deals that are happening. That's not at the expense of that mid-market that 50 to 500 seat market that's just coming toward us with great momentum, and we continue to execute very, very well there. There's more deals in that mid-market and in the large end of the market. So, what we'd like to emphasize is the number of larger and larger customers that are coming, and that includes initial deal size and includes add-on business, and to your point, it's also a combination of them having more seats and buying more SKUs (ph) and more capabilities as we move further and further up market with those large customers.

Ryan MacDonald -- Needham & Company -- Analyst

Thanks. Thank you very much.

Operator

(Operator Instructions) We will take our next question from Sterling Auty with JPMorgan. Please go ahead.

Ugam Kamat -- JPMorgan -- Analyst

Hi guys, this is actually Ugam Kamat on for Sterling. So, you mentioned about increasing investments in 2019. But just to get more color on how much we're investing in S&M (ph)? What capacity expansion in sales hiring, are you planning in 2019 as compared to what we saw in 2018? And I will follow up.

Rowan Trollope -- Chief Executive Officer

Yes, so in terms of the rate of hiring, we will hire at the rate that will allow us to continue this multi-year growth rate of enterprise subscription revenue in the 30s. We have grown in price realization rate on a consistent 605 basis at 38% year-over-year plus or minus one percentage point for the last almost two years. The rate of hiring will depend on a number of factors, including, sure Dan can further elaborate if necessary, things like the productivity, things like in the last question about deal sizes and so on.

Ugam Kamat -- JPMorgan -- Analyst

And as a follow-up, what percentage of leads are coming from partners and any change in source, example like Salesforce.com or other that you have seen in the quarter?

Dan Burkland -- President

Yes, no real dramatic changes. This is Dan speaking. Your can find lots of leads and opportunities coming from us from throughout, not only our ecosystem, which includes the CRMs and all the other ISV partners as well as our channel partners and resellers, but also from our marketing efforts, whether those be events, whether they be our digital marketing activities or other things that we're doing to increase our brand awareness. So we're getting leads from all different sources and we tightly measure and monitor the performance of those leads.

Ugam Kamat -- JPMorgan -- Analyst

Got it. Thank you so much.

Operator

We will take our next question from David Hynes with Canaccord. Please go ahead.

David Hynes -- Canaccord Genuity -- Analyst

Hey, thanks guys. So I want to follow-up maybe on the last question a little bit, which was tied to partners. And I guess if you think about kind of the SI and VAR relationships that maybe a little bit newer to Five9, have those folks expressed interest in kind of offloading some of the professional services work that you guys are managing and as you think about funneling money back into the business to fund growth initiatives, is there any more interest on your end to pushing some of that lower margin services work off? I know it's been a competitive edge in the past, what are the puts and takes as you think about that evolution?

Dan Burkland -- President

Yes. so, DJ (ph). This is Dan. Great question. And yes there very much interest on our part to leverage partners, especially to perform some of the systems integration work or PS work if you will for our customers. It's not that we were reluctant to do in the past, we wanted to make sure that if we were going to extend that out to partners that it was done so without sacrificing quality. It's so important to make sure that these customers take on a really a solution that's -- can be very custom, but it's also very mission-critical to them, delivering the experience and the up-time and the reliability that they need to operate their business very efficiently. So, we kept a very close eye on that. As we do more and more business with our SIs especially some of the global SIs, like Deloitte and Accenture and others, we absolutely are interested in moving some of that professional services work to them and they're very interested in taking that on. So the answer is yes, stay tuned as we continue to move up market into those accounts that they control.

David Hynes -- Canaccord Genuity -- Analyst

Yes. It makes sense. And then maybe a follow-up for Rowan, if I can. Rowan, you've talked about this huge kind of data edge that you guys have, right, 5 billion of minutes of calls on the platform each year, and one of the things that's enabling you to get at that is the decline in costs and speech to text translations. So, I'm curious how much of that volume are you kind of turning into analyzable data today? How far off are we from a cost perspective, enabling you to get out more, and as you get out of the whole dataset, kind of, what does that enable you to do? It's a bit of a far-reaching question but if you can run (ph) context around it.

Rowan Trollope -- Chief Executive Officer

Yes. No, that's a terrific turn of a question. We can talk for a long time about it, but let me summarize. The speech to text at a human level of access, speech to text obviously is there and is affordable today. The latest advances really that have come out of Google and some of the open-source work that's happened gets that now up to human level of accuracy or better and that is really what's the key from my perspective is that, once you saw, cross that threshold that we will really be able to make use of the stuff and how to be that much more interesting. So from that perspective that technology is still a little bit out of the reach, you know, it's about $0.01 per minute. And so if we wanted to do that for all 5 billion minutes, obviously, you can do the math would be somewhat expensive and we would need to monetize that pretty significantly through AI based offers.

I don't think this is going to be a problem for us though. So that's what the price is today. We're already having -- that's by the way for the best-in-class technology. Open source, of course, can be done much at the cost of compute and so that can be done at a much lower cost. And so, I don't believe that we see that as an inhibitor in any way, shape or form for us to be able to translate what is today analog voice into digital data. And that's something that we're racing forward essentially on, let's go build out the use cases assuming we can do this in a cost effective way and we think that's imminent.

And so early days still. We're still evaluating the open source technology to see where that lands and if not just Google who is out there in front of everyone else. I think the others have caught (ph) up pretty quickly, so this is kind of one of those commodity-based services that, especially with the rise of conversational interfaces on computers in general. It's driving that cost down to near zero or free. So, I think we'll we're not seeing that as an inhibitor anytime soon. And in terms of how much have we translated or actually leveraged, what we do actually do stuff today, but we haven't yet started to implement the new technology to translate into text and take advantage of that. So, that's something that's coming as we scope out which technology to use.

David Hynes -- Canaccord Genuity -- Analyst

Yes, perfect. Thanks for the color.

Dan Burkland -- President

Thanks.

Operator

We will take our next question from Terry Tillman from SunTrust. Please go ahead.

Courtnei Sanders -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hi, this is Courtnee Sanders on for Terry. Thanks for taking my question. The first question is a follow-up to the earlier question on sales capacity. In the prepared remarks, you touched on increased leverage from your ecosystem. So, as it relates to your thinking about sales capacity growth into 2019, I think historically, you've talked about growing capacity in enterprise in line with top line growth, does that change any as you get incremental leverage from the ecosystem, are you still going to be growing that enterprise capacity on along that same guideline?

Rowan Trollope -- Chief Executive Officer

So, the two interplay with one another. The more strong the ecosystem is, it can lead to higher quality and more numerous leads and there's a need for expanding the sales capacity and that's why we reiterate saying that our focus is in taking advantage of the growth in the enterprise market, we've consistently growing in the '30s and we'll expand our capacity in such a way that we can maintain those types of growth rates.

Courtnei Sanders -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you. And then the second question would be on the commercial business is seeing growth above 10% now for a third consecutive quarter. Just if you could give any thoughts with regard to whether it maybe -- that could be sustainable now and if that's a trend that could continue into 2019? That will be helpful.

Dan Burkland -- President

Yes. This is Dan. We're cautious on that one. Certainly, we've exceeded the 10%, gotten into double digits for last several quarters. But again it was against an easy compare last year. So we want to make sure, we continue to monitor that and stay tuned for whether that becomes a trend that we can sustain long term. But, remember it's only 23% of our business as well. So, we're placing our investments in the enterprise business and really going after that market wholeheartedly. And we obviously bring along a lot of the commercial business or SMB business with that.

Courtnei Sanders -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you.

Dan Burkland -- President

Yeah.

Operator

We will take our next question from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee -- Craig Hallum -- Analyst

Great, thanks, and congrats guys. Just looks outstanding here. First, on Dan, just along the lines of the sales side, I know you've been really keen on not only meeting the numbers, but having the right people in the seats and have been very particular about how you do that. Can you just talk about how in obviously getting bigger, bigger scale here, just the challenges and how you're coping with respect to finding the right people and where you're finding them?

Dan Burkland -- President

Yes. Very well, said Jeff. I appreciate the question and it's something that we pride ourselves on your -- in your out quarter-in quarter out and that's being very selective at attracting the right quality of people not only that bring the right business acumen and experience, but really what we did was we hired ahead of the curve, hired a lot of enterprise sales folks that have been used to selling market partly that comes from high background of having sold up market as well.

But a lot of folks over and said, be patient, it's more transactional than you might like today, but it get there from an enterprise standpoint, low and bold, here we are, and the ones that hung on and really went through the years of the evangelistic stage as Rowan had alluded to earlier, an evangelized cloud, they're now reaping the benefits of more and more larger enterprises, which is who they're used to selling. So long-winded answer to your question is, we're not only attracting enterprise folks and we have done so for years, but now more than ever.

We're getting more people coming at us because of our success, because of our growth, because we recognized is truly an enterprise brand. We're getting those people in droves and we could be even more selective.

Jeff Van Rhee -- Craig Hallum -- Analyst

Got it. And then the dollar-based net retention, if I look back at least for last say two and a half years or so up until Q2, you pretty fairly consistently in the 98 to 100 -- 100 range and then you jump from 99 to 101 in Q3 and then Q3, if I have it right from 101 to 103. So last two quarters, really kind of break out and I heard you guys touched on it a little earlier, but maybe just circle back to that and in particular just a little deeper dive on what's changed your because that's some real nice upticks over the last few quarters?

Dan Burkland -- President

Yeah. We're very, very pleased with that because it's a manifestation of, not just the customers wanted to expand, but the customers trusting us because obviously a pre-requisite for that expansion is that they like our up-time in our service and in our product and support. Jeff, it's in both areas, Enterprise and commercial. We don't give out the spot rates, but I will tell you that the recent quarter has been among the highest we've had in both areas and it's, and it's really just something that reflects the way we go about treating these customers both Enterprise and Commercial.

Jeff Van Rhee -- Craig Hallum -- Analyst

Great. If I could sneak one last quick one. On the, on the CapEx number, how do you think about it longer term, in terms of the ability to offload maybe some of your CapEx on to say cloud infrastructure providers versus spending on your own. Are there opportunities to put more of this on a cloud infrastructure provider? And as you kind of -- what are the puts and takes when you talk about that internally?

Rowan Trollope -- Chief Executive Officer

This is Rowan. There absolutely is that opportunity. In fact, that's currently in our plan that the team is working through. And so we do see opportunity there. The main driver though of moving into public cloud, GCP, Amazon, et cetera is not cost savings so much as it is flexibility and speed, the ability to deploy in new regions. We had the question earlier about about international. Given that these companies have already built out those data centers, you get a running start when you jump on to their infrastructure on that side. So that's the primary driver. There -- clearly, we've seen other companies that have moved, other public SaaS companies that have moved from their own data centers to public cloud, and there has been noted improvements in gross margins. And so we've looked carefully at that, although I would point out that every business is different. We run a real time SaaS business which is unlike most SaaS businesses that don't actually to deal with live voice and -- live voice, which has a different impact in terms of the cost model. So we're looking at the primary driver is speed, flexibility and our ability to expand internationally.

Jeff Van Rhee -- Craig Hallum -- Analyst

Got it. Great.

Rowan Trollope -- Chief Executive Officer

Big opportunity for us.

Jeff Van Rhee -- Craig Hallum -- Analyst

Yes. Thank you.

Operator

We will take our next question from Matt VanVliet with Stifel. Please go ahead.

Matt VanVliet -- Stifel -- Analyst

Yes. Hi. Thanks for taking my question. I guess, first off, just sort of dovetails on one of the last questions here, but just curious where you guys stand as you take a look at maybe total more wallet share that your existing customers are currently spending with you and what sort of upside opportunity do you feel like there is to cross-sell both total seats but then also additional modules at the moment?

Rowan Trollope -- Chief Executive Officer

Okay. Yes, let me take that one. We do see that opportunity and you actually are seeing some of that in our numbers already because we've been pretty aggressively extending the number of offers that we have to our customers, including WFO, WFM, quality management, dash-boarding, extended reporting offers, et cetera.

So, we really have a strong portfolio now built up, and you saw over 2018 start to sell more and more of that into our base and you can see that reflected in the DBRR in part, as we are able to sell more higher total share of wallet -- as we're able to sell more dollars per seat and you see that seat ASP continuing to sort of drift up, which is now -- Barry, would you add in that (inaudible).

Barry Zwarenstein -- Chief Financial Officer

We still somewhat of $200 per seat --

Rowan Trollope -- Chief Executive Officer

Just over $200.

Barry Zwarenstein -- Chief Financial Officer

Yes.

Rowan Trollope -- Chief Executive Officer

So the question that we do get asked sometimes is around some of the technology, be OEM, some of that we build ourselves, is there opportunities from an M&A perspective or anything like that. And I would say we're happy with the arrangement that we have now. We're able to have best-in-class offers that are delivered on our paper, that are delivered through our data center as a service to our customers and our customers love that. In fact it's one of our differentiating points that we have, for example, multiple different WFO offers in our portfolio. And that really helps us cover not only different segments of the market, but also customer buying preferences.

In some cases the WFO buyer will swing a deal because they've got a history and a preference for one or the other vendors. So, we end up being in a stronger position because of that strategy. But at the end of the day, it all comes from Five9, right. The whole technology stack, everything that we deliver, it's backed by us, it's hosted by us and delivered by us and that's what our customers like the most.

Matt VanVliet -- Stifel -- Analyst

And then just as a quick follow-up, maybe a little more granularity there -- a good cross sell win in the quarter. Just curious as you get more penetration of customers and you become a more trusted partner. Are there elements that they're more willing to rip out existing vendors, whether that's on WFO and saying, look, we want it all on a single platform now and that migration has come to Five9 and we're at a point in that lifecycle that it makes sense to do it now. Are you seeing that sale, potentially more often or is it really just the focus on customer engagement and their satisfaction with Five9 as a vendor that they're choosing to do that, not necessarily in the overall strategic outlook that they may had a couple of years ago?

Dan Burkland -- President

Yes, well, this is Dan. We're certainly seeing it more and that's one of the reasons, Rowan mentioned that we continue to expand our portfolio and bring offerings to our customers, maybe historically or immediate adjacencies, they've now become part of what the customer wants from one vendor and in particular Five9.

They have a great deal of trust in us and they are buying our brand and our support and our execution to do that successfully for them. That becomes especially true as we move up market into larger and larger enterprises. So when you see the large enterprises, they really look to figure out how they can have a complete offering and a bundling in effect, if you will.

And again, regardless of whether that's something that we build and that we skew from our own technology and IP or whether it's something that we choose very carefully to OEM and bring into our offerings. And so, yes, it runs the gamut and we're seeing more and more of that as we move upmarket.

Matt VanVliet -- Stifel -- Analyst

All right. Great, thank you.

Operator

We will take our next question from Catharine Trebnick with Dougherty. Please go ahead.

Catharine Trebnick -- Dougherty & Company -- Analyst

Hello?

Dan Burkland -- President

Hi.

Rowan Trollope -- Chief Executive Officer

Hi.

Catharine Trebnick -- Dougherty & Company -- Analyst

Okay. I didn't know If I was next. Catharine Trebnick. Yeah. Quick question, you have said that this quarter, you had new products entering into driving sales, but also a broad ecosystem of partners, any particular verticals that you see fire or contribute more in Q4 than in other quarters? Thanks.

Dan Burkland -- President

Yes. Thanks, Catherine. This is Dan. Nothing in particular in Q4. It's the same typical verticals. If you look across contact centers, very horizontal application when it comes to who needs contact centers to service their customers, and so typically it's the financial services, the healthcare, education, technology, retail, you name it. And we just continue to see more and more from those folks. It does give us an ability to really make sure that we're tailoring the products that will fit into those industries and we've done so. And some of our partners have some vertical specialization that they can help take us into and present us as an example, a healthcare expert or an application that fits very well within healthcare.

Catharine Trebnick -- Dougherty & Company -- Analyst

Thanks. And then a follow on is, last quarter, you cited the channel contributed 30% of the revenue. Since that's becoming more and more important to getting closer relationships with several of the resellers, any -- are you providing that number for us this quarter?

Dan Burkland -- President

Yes. It continues to grow. We don't give out the particular number, but it continues to increase as we continue to leverage more and more channels and that includes both master agents, as well as resellers and VARs and that's separate from the rest of the ecosystem where we get lots of referrals and lots of endorsements from the CRMs, an ISV partners.

Catharine Trebnick -- Dougherty & Company -- Analyst

All right, thank you. Very nice quarter.

Dan Burkland -- President

Thanks, Catherine.

Rowan Trollope -- Chief Executive Officer

Thanks, Catherine.

Operator

We will take our next question from Dmitry Netis with Stephens. Please go ahead.

Dmitry Netis -- Stephens Inc. -- Analyst

Hi, guys. This is Dmitry. I couldn't tell whether I was live or not, but can you hear me OK?

Rowan Trollope -- Chief Executive Officer

Yes, yes, we can, Dmitry.

Dmitry Netis -- Stephens Inc. -- Analyst

Okay, awesome. Thank you. So couple of questions, one for -- maybe one or two for Barry and then for Rowan as well. Just want to make sure I see -- I want to make sure I'm not missing anything. I see you've nicely sort of accelerated revenue from 25% to 28% to 30%, 31%, those sort of the progression that we saw in 2018, which is a nice momentum, and obviously sales motion there. So I look at the guide and I see kind of 20% growth. And if I heard you Barry correctly, you were guiding for pretty much flat growth in Q2 and then reacceleration in the second half of the year, which will put you right in line with what you're guiding for for the full year, call it, maybe upper end of that guidance at $301 million --$302 million, which will end up at a 17% give or take year-over-year growth rate from '18 level. Is it just conservatism, just kind of starting out the year and seeing how it progresses or is this something else you seeing that sort of gives you a little bit of -- let's not get ahead of our skis here yet? And I'm only asking this question because your growth rates are spectacular in '18 and why aren't we seeing a little bit of a better momentum there on -- on the growth on the topline in 2019?

Barry Zwarenstein -- Chief Financial Officer

Dmitry, thank you very much indeed for that question. So over the last many years -- four years or so, we've adopted a prudent guidance philosophy and that philosophy is unchanged. So each of the last four years, we've guided to 16% year upon year growth and we've ended up somewhere in the mid '20s and a bit higher this past year, which was complemented by a resurgence in the commercial side. And so we're very happy, as you alluded to -- to raise that guidance as the year unfolds. We do have a degree of seasonality, H1, H2 split consistently has been (inaudible), but we don't know that it's going to be that this year, again we have extremely high marginal profitabilities on any incremental revenue, so we tend to take the the prudent approach. There is no hidden thing here about the strength of our business that -- we have -- the business is strong. We have a leading competitive position. We have positive market signs across the board, from enterprises, from our ecosystem partners, from the field sales and if anything the market demand is accelerating and it's just same old Five9 story.

Operator

We will take our final question from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore -- Northland Capital Markets -- Analyst

Hey, thanks. Yeah, I guess on the, the AI based services, I assume those have sort of above corporate gross margins as they kind of get layered in here?

Barry Zwarenstein -- Chief Financial Officer

So, Mike , Rowan and the rest of the team has been at pains to say that don't expect revenue from this any time soon, certainly not in 2019. But, and so it's a little bit premature for us to get confident about the gross margin rates, Mike, but given the value add to our enterprise customers it likely would have above average margins when they do start generating revenue. Mike, are you there?

Operator

Sorry, no. That's all the time we have for questions, I'd like to turn the conference back to the presenters for additional or closing remarks.

Rowan Trollope -- Chief Executive Officer

Thank you, operator. So I'm closing, I'm pleased with the record quarter and year and our continued momentum. We're making great progress against our strategic priorities, led by our focus on product innovation and go-to-market. There's tremendous opportunity for Five9 and we believe we're well positioned to take advantage of the growing strategic importance of the contact center. Thank you.

Operator

This concludes today's call. You may now disconnect. Thank you.

Duration: 62 minutes

Call participants:

Lisa Laukkanen -- The Blueshirt Group, Managing Director

Rowan Trollope -- Chief Executive Officer

Dan Burkland -- President

Barry Zwarenstein -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Ryan MacDonald -- Needham & Company -- Analyst

Ugam Kamat -- JPMorgan -- Analyst

David Hynes -- Canaccord Genuity -- Analyst

Courtnei Sanders -- SunTrust Robinson Humphrey, Inc. -- Analyst

Jeff Van Rhee -- Craig Hallum -- Analyst

Matt VanVliet -- Stifel -- Analyst

Catharine Trebnick -- Dougherty & Company -- Analyst

Dmitry Netis -- Stephens Inc. -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

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