Five9, the cloud contact center maestro, just delivered a strong Q1 performance, topping revenue expectations and hinting at a potential second-half surge. But amidst the flurry of analyst questions about AI, FedRAMP, and the elusive megadeal pipeline, a hidden narrative might have been missed. Could Five9 be poised for a windfall driven not just by new deals, but by a dramatic shift in the financial behavior of its existing customer base?

While the spotlight shone on Five9's recent record deal with a Fortune 50 financial services company, a subtle comment from Barry Zwarenstein, Five9's CFO, hinted at an intriguing phenomenon: the impending inflection in the company's dollar-based retention rate (DBRR). This metric, a critical gauge of customer loyalty and expansion, has remained stagnant at 110% for several quarters, burdened by the "soggy" macro conditions impacting customer spending. However, Zwarenstein repeatedly emphasized an anticipated "positive inflection" in the second half of 2024, suggesting a potential DBRR surge beyond the modest uptick implied by the current guidance.

What's driving this confidence? The answer lies in the intriguing convergence of three factors: a robust backlog of new logo deployments, the mechanical effect of DBRR calculation dynamics, and a potential "tail breeze" from professional services revenue. Let's dissect each element:

The Backlog Bonanza:

Five9 boasts a substantial backlog of new logo deployments, largely secured through a record-breaking Q4 enterprise bookings performance. These deployments are on track, as evidenced by record-setting seat turn-ups in Q1, adding fuel to the expected second-half acceleration.

The DBRR Calculation Quirk:

Five9's LTM DBRR calculation is susceptible to a phenomenon known as the "base effect." Essentially, the metric compares the current period's revenue from an existing customer cohort to the revenue generated by the same cohort in the same period last year. As weaker quarters from last year roll off the calculation and are replaced by stronger periods, the DBRR automatically experiences an uplift.

The Professional Services Boost:

The massive Fortune 50 financial services deal, while not expected to contribute significantly to 2024 subscription revenue, will generate a "moderate amount" of professional services revenue. This revenue stream, often overlooked in discussions of long-term growth, could provide an unexpected boost to the overall revenue trajectory.

Taken together, these factors paint a compelling picture: Five9's existing customer base, once constrained by macroeconomic headwinds, might be on the cusp of a spending rebound. This potential "pent-up demand" phenomenon, coupled with a favorable DBRR calculation dynamic and a professional services bump, could propel Five9 to a revenue performance significantly exceeding the initial 16% growth guidance.

While analysts are busy dissecting Five9's AI prowess and megadeal pipeline, they might be overlooking the potential for a silent windfall brewing within the existing customer base. The stage is set for a DBRR resurgence, potentially fueled by pent-up demand, unleashing a wave of revenue growth that could surprise even the most seasoned Wall Street observers.

Hypothesis and Numbers:

To quantify this hypothesis, let's consider a scenario where Five9's LTM DBRR jumps to 115% in the second half of 2024. This represents a 5 percentage point increase from the current 110% rate. Applying this increased rate to the existing $909.53 million of 2023 revenue yields an additional $45.48 million in revenue from the existing customer base. This figure, combined with the $52 million in expected new logo deployments and a "moderate" professional services contribution (estimated conservatively at $10 million), pushes the total 2024 revenue to $1.017 billion, exceeding the midpoint of the current guidance by $62 million. This scenario translates to a year-over-year growth rate of approximately 17.5%, significantly outpacing the initial 16% guidance.

While this hypothesis relies on several assumptions, including the magnitude of the DBRR inflection and professional services contribution, it highlights the potential for a substantial revenue outperformance driven by an overlooked factor: the financial resurgence of Five9's existing customers.

Revenue Growth Projections

"Fun Fact: Did you know that Five9's name comes from the five nines of availability (99.999%) that is the gold standard for cloud-based services? This reflects their commitment to delivering reliable and uninterrupted service to their customers, a key factor in their success in winning mega deals and fostering customer loyalty."