Five9 outlines $175M free cash flow target for 2026 while advancing AI-driven platform and launching $150M share repurchase program

Earnings Call Insights: Five9 (FIVN) Q3 2025

MANAGEMENT VIEW

* CEO Michael Burkland opened the call highlighting continued momentum in bookings, noting "enterprise AI bookings growing more than 80% year-over-year, contributing to healthy improvements in backlog." He reported that "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."
* Burkland emphasized Five9's unique position in the market: "We believe Five9 is uniquely positioned to be the platform for orchestrating end-to-end customer experience across both AI agents and human agents."
* He detailed the launch of Five9 Fusion for ServiceNow, stating it is "a turnkey AI-powered integration that unifies voice and digital interactions through real-time transcription and intelligent routing."
* The company achieved recognition as a leader in Gartner's Magic Quadrant for CCaaS for the eighth year and in IDC's inaugural MarketScape for European CCaaS.
* Burkland updated on the CEO search, saying, "the search is progressing well with our ongoing goal of announcing a successor by year-end."
* President Andy Dignan shared, "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."
* CFO Bryan Lee announced, "our inaugural $150 million share repurchase program, which is an important milestone that reflects a deep conviction in our long-term growth opportunity."

OUTLOOK

* CFO Bryan Lee guided Q4 revenue to a midpoint of $297.7 million, representing sequential growth of 4%, and maintained full year 2025 revenue guidance at $1.1465 billion. "For Q4 non-GAAP EPS, we're guiding to a midpoint of $0.78 per diluted share. For full year 2025 non-GAAP EPS, we're raising the midpoint by $0.06 to $2.94 per diluted share."
* Lee raised full year 2025 adjusted EBITDA margin expectations to "approximately 23% compared to our prior outlook of 22%."
* Lee added, "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."

FINANCIAL RESULTS

* Q3 revenue came in at $286 million, representing 8% growth year-over-year.
* Subscription revenue grew 10% year-over-year, now making up 81% of total revenue, driven by enterprise AI revenue growing 41% year-over-year.
* Q3 adjusted gross margin was 63%, up approximately 100 basis points year-over-year, while adjusted EBITDA margin reached a record 25%, up approximately 530 basis points year-over-year.
* Q3 GAAP EPS was $0.21 per diluted share, while non-GAAP EPS came in at $0.78 per diluted share.
* Operating and free cash flow reached record highs, with $59 million in operating cash flow and $38 million in free cash flow.

Q&A

* David Hynes, Canaccord: Asked about guidance performance. Bryan Lee responded that "in the current growth environment that we're transitioning through, we do not expect big beats," and attributed a tough comparison to lower subscription revenue growth and unexpected commercial revenue decline.
* Sitikantha Panigrahi, Mizuho: Inquired about installed base bookings conversion to revenue. Lee explained, "these kind of bookings... have a ramp converting from bookings to revenue, very similar to new logos," highlighting a lag effect.
* Ryan MacWilliams, Wells Fargo: Questioned bookings environment and seasonality. Burkland highlighted "AI bookings up 80% year-over-year," while Lee noted "minimal seasonality as they had anticipated" among top customers.
* Andrew King, Rosenblatt: Asked about international differentiation and BT relationship. Dignan stated, "international has a lot of upside for us, and we continue to lean heavily on the partner go-to-market."
* Elizabeth Elliott, Morgan Stanley: Probed on competitive environment. Dignan said, "our win rates continue to be strong, and we feel really good about where we're at in the core CCaaS platform."
* Multiple analysts asked about the lag in revenue conversion, competition from AI point solutions, and the commercial segment's performance. Management cited proactive adjustments and a shift toward high-value enterprise segments.

SENTIMENT ANALYSIS

* Analysts pressed on issues of revenue lag, conversion, seasonality, and competitive threats, reflecting a slightly negative to neutral tone as they sought clarification on shifting growth dynamics and timelines.
* Management maintained a confident and optimistic tone during prepared remarks, with statements like "we're really pleased with the bookings momentum" and "we remain laser-focused on achieving the Rule of 40 in 2027." During Q&A, management was more explanatory, addressing concerns with detailed breakdowns and acknowledging areas for improvement, such as the commercial segment.
* Compared to the previous quarter, management's tone was similarly optimistic, but analysts appeared somewhat more cautious, seeking greater clarity on revenue timing and growth sustainability.

QUARTER-OVER-QUARTER COMPARISON

* Q3 bookings momentum stayed strong, with continued acceleration in AI-driven deals, though overall revenue growth slowed compared to Q2.
* The shift toward high-margin subscription revenue and enterprise focus continued, with commercial revenue declining more than anticipated this quarter, compared to single-digit declines in Q2.
* Management raised full-year EPS and margin guidance again, but commentary on revenue growth was more measured, citing longer conversion cycles for AI product deployments.
* Analysts focused less on leadership transitions this quarter and more on competitive positioning, revenue conversion, and lag effects.
* Management confidence in AI-driven growth and operational leverage remained strong, but explicit references to recalibration and operational adjustments increased.

RISKS AND CONCERNS

* Management cited "tough compares" from their largest customer completing its multiyear ramp and minimal seasonality as headwinds to revenue growth.
* The commercial business segment was described as experiencing a "more pronounced" year-over-year decline than anticipated, attributed to underallocation of demand generation spend and sales capacity gaps.
* Installed base bookings' conversion to revenue is lagging, with implementation cycles taking longer, particularly for AI products.
* Management is making adjustments to demand generation allocation and sales capacity, expecting commercial trends to normalize in coming quarters.
* Competitive pressures from AI point solutions and emerging digital-first entrants were acknowledged, but management emphasized the strength of Five9's end-to-end platform.

FINAL TAKEAWAY

Five9 management emphasized robust enterprise AI momentum and record profitability, underpinned by a strategic shift to high-margin subscription revenue and a growing AI platform. The company announced a $150 million share repurchase program and reaffirmed confidence in future growth, targeting approximately $175 million in free cash flow for 2026 while continuing to recalibrate the commercial segment and invest in innovation and partnerships. Management remains focused on executing its strategy to capture the expanding AI-powered CX market and drive durable long-term shareholder value.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/fivn/earnings/transcripts]

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