In this episode of Making Markets, host Daniel Newman is joined by Five9 CEO Rowan Trollope to discuss the company’s recent earnings results, the strong secular tailwinds that position the company to perform uniquely well even in an economic downturn, AND a dive into Trollope’s takes on Crypto and whether the recent capitulation of Terra has created a dark moment for the future of cryptocurrency.
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Transcript:
Daniel Newman: Is it just inflation or a plethora of macroeconomic forces driving the tech rack. What about top performing companies that are growing beating earnings and adding customers? Do these companies deserve to have their valuations fall by 25, 50 or even 90%? I talked to Five9 CEO Rowan Trollope about what is dragging on tech. Why is the solution going to be tech to so many problems? And why are good companies still good companies, even in a down market. And as a bonus, we talk about the crypto fall and is crypto going to make a comeback all this and more on this week’s Making Markets.
Announcer: This is the Making Markets podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies bridging the gap between strategy, markets, innovation, and the company’s featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host Principal Analyst and founding partner of Futurum Research, Daniel Newman.
Daniel Newman: Rowan Trollope CEO, Five9, welcome back to Making Markets.
Rowan Trollope: Hey Dan, good to have you here, God, good to be back. Thank you.
Daniel Newman: Good to have me, man. What a crazy time it is in tech and you’ve been on the show before and when I started this show, what I love to do is bring this. You bring you folks like yourself, CEOs on right after earning say, “Hey, let’s talk about when let’s talk about all the news, the excitement let’s talk about what maybe the market isn’t seeing and paying attention to”. But frankly, I started this thing like in early ’21 when tech was on fire and it was just so many smiles and cheers and happies, and then November came and since November, it hasn’t been so happy and cheery. And since maybe March, April the rest of the tech world, it wasn’t part of that first wave of, growth annihilation is starting to catch up and then the indices fell and here we go.
So, but at the same time, this quarter tech still was pretty good Rowan. And so you guys just reported and had really good numbers. So before I go in on my bandwagon, in my soapbox about kind of how tech is not being properly valued right now, tell me how, tell me about the last quarter, because despite all the negativity Five9, doing really good.
Rowan Trollope: Well, we could debate about properly valued I guess, but we had a great quarter. We signed the largest deal in the history of the company, $44,000,000 one deal worth $44,000,000 ARR annually, acquiring revenue. And we beat on the top and bottom line, we’re a company, we’re growing in the thirties and our EBIT does in the teens. We’ve been a company that’s consistently not only consistently delivered beats on the top and bottom line, but also we’ve always had a focus on bottom line performance. And I think what’s shifted in the last, certainly in the last quarter has been Wall Street. Now looking much more towards your bottom line than your top line and seeing what’s going to be your, what are your returns going to be? And when are we going to see profitability and so on.
And so it’s nice to be in a profitable company. And, and that’s kind of where we are and investors are rewarding at us for it although of course, like everyone, we’ve taken a major whack to our stock price, right? Like 50% off in the, last, whatever, it’s been six months or more than 50% for, for some companies. But that’s a different matter. That’s, that’s just how Wall Street values companies. I mean, at the end of the day, my job is to keep growing the company and keep delivering for customers and shareholders, which is what we keep doing consistently. So…
Daniel Newman: I mean, you got top line growth, you’ve got bottom line growth, you’ve got revenue expansion, you’ve got deal size growth. You’ve got retention rates sitting up high. I mean, from afar, I look at this and say Five9s on sale. You know, if I was an outsider looking in at this thing, Five9 seeing the price fall, it’s a bigger company than it was a quarter ago and it was trading higher. It’s got more revenue, more customers, more success.
And by the way, everything we’re seeing in terms of discounting, whether it’s Amazon and Microsoft, or it’s Five9 or Zoom, or it’s any, has a lot more to do with the macros. So I just want to be really clear. It’s the macros, it’s the inflation data it’s interest rate hikes, it’s discounting, future growth, it’s supply chain, woes it’s war issue concerns about the war. It’s political it’s what’s going to happen in the midterm election. I mean, these are the things I think that are really driving it because you, and so many of your fellow tech companies had robust earnings and even the ones that were bad were like that would’ve been okay in any other period besides coming out of the last two years.
Rowan Trollope: Well, it’s certainly been a blood bath in the markets, but I mean, I don’t think it’s all of those factors. I think it’s one really important factor, which is interest rates. And we’ve been in this historic strange position for a long time of essentially zero or even negative interest rates. And in that kind of an environment where you have, you money got forced into equities, basically, you, there was a saying on Wall Street, like there is no choice like there is only one thing to do, and that is to invest equities because you couldn’t get returns anywhere else. And so that is unwinding and frankly, that’s a good thing in a bunch of ways, because when you have these like long bull run expansions, what ends up happening is what the market is washed with capital.
We printed record amounts of money. That money is getting put to work in companies that fundamentally either shouldn’t have been companies, right. Or it got misallocated essentially that all, there’s so much money being given to so many companies and a lot of waste and companies that ultimately now are going to get stressed and go away and they probably should go away, but it leaves the durable, real businesses in a better state at the end of it. So it’s actually a good thing for a company like Five9 and for real companies and real entrepreneurs and you know, real business leaders to thrive, frankly, in a market where a lot of this sort of the nonsense gets washed out.
Daniel Newman: Well I think there’s importance to decouple. I mean, you said it wasn’t all the factors I would somewhat disagree, but I understand what you’re saying. The thing that moved the market the most in November, Fall almost came instantaneously when the commitment to raise rates came out, I just mean the longer sort of tail. And then the continued headwinds of things like supply chain, political environment, gridlock in Washington, no infrastructure, no more stim… I’m saying kind of is they’re all little parts and pieces, but discounting growth, especially like you said early on companies with no profits, those companies got smashed first. And then you had companies that basically in the wrong sectors that clearly when discretionary dollars dry up, you’re like, oh, that company’s going to be in big trouble. And you made a point that I’ve tried to make.
And I think you said it very eloquently, but effectively a whole bunch of features became publicly traded companies instead of actual solid robust companies with potential and growth and earnings. And by the way, some companies just got mixed up in that because you know, like SPACS, we talked about that offline, everything that’s a SPAC was negative and not all SPACS are bad, but the point is that just the general perception of it has become so negative that basically every company in that particular space has probably seen anywhere from 50 to 80% washout. But talk a little bit your growth though. Cause I think what you said is really the key thing as a CEO, continue to grow the company, focus on customer, focus on net revenue, expansion, product development, do those things do them consistently and over a long tail, which is what investors, not traders, but investors really think about is if you just kind of don’t look at the port, your portfolio, you’re going to come back and be rewarded. If you do those things consistently over various market conditions, what are the macro? What are the secular trends that you think are your tailwinds at Five9
Rowan Trollope: Well, clearly the cloud transition is one of them. That’s probably the biggest one is all these companies. If you ever call into a business and you get terrible service, the odds are they’re using a dusty phone system in a closet somewhere that hasn’t been upgraded and the agents are probably typing on like green screens on like DOS prompts and stuff like that still exists. It’s more common than you would think actually, in fact, most companies are still in that state. So we’re at the beginning of a transition off of those legacy phone systems onto modern cloud CCaaS platforms. So contact center as a service platforms like ours and where most of the industry, really this is the tail end, I would say of the B2B SAS transition or in some ways like maybe I don’t know if that’s the right way to say it, but like you had a huge first wave, which was the CRM platforms like think about Salesforce went first, right?
They created the SAS category in a way and certainly popularized it. And those systems went first, the real time systems like contact center, which is a real time platform. We deal with real time voice and it’s all through the web browser and similar to the rest of the realtime cloud space. Those technologies needed more robustness and reliability in the internet than we had 10 years ago. This experience we’re having right now, we’re probably both on wifi and we’re sitting on our home internet connections and you’re getting crystal clear audio and video. Hopefully that was not possible 10 years ago…
Daniel Newman: Hopefully.
Rowan Trollope: Yeah, hopefully. That wasn’t possible 10 years ago. But it is today. And that shift is really enabled people to take their on-premises contact center systems and go, well, we don’t have to maintain this big iron rack and stack hardware to do this, we could actually use a cloud service.
So that’s the big trend driving it. The second big trend driving our business there’s actually three. The second one is a generational shift away from sort of like old guys like me and you who are kind of, we grew up being used to, “yeah, you want to get support, you pick up the phone”. Okay. That’s what you do now. We didn’t like it, but it was what you were used to. Right. And you tolerate the IVR and all that nonsense. My kids, I don’t know if you have kids Dan, but like our, that generation of kids and younger millennials coming into the market, like they grew up with like the expectation of texting and online web and everything else. So the idea of calling into a call center it’s, that’s not something that my daughter is probably ever going to do in her life period.
And so that’s driving the big shift as well is that you cannot get away with doing what you did for so many years. You have to modernize that platform and give your customers a better way to engage, which is usually like online and self-service and digital channels first.
And then the third really big trend driving our business is the labor problem, which is to the degree that most of the contact volume is still be handled by human beings. Those human beings are becoming more expensive, harder to find. And so AI and automation people are, customers are coming to us saying, how can you help us automate even more than we’ve automated before? And we have invested early in this trend. So we’re a market leader in AI and automation, we got, acquired a company called Inference and it’s basically helping customers get more efficient with their labor, which essentially means taking some of that high volume, but low value contact center traffic off of the plate of the human beings and letting the computer handle it so that the human being either you need fewer human beings or you put the existing people that you have onto doing things that are more interesting. So those are the three, the three trends driving our business.
Daniel Newman: It’s actually quite a secular tailwind. You actually have. I’ve written on, published publicly, said a million times. I believe enterprise tech will hold up extremely well, despite a lot of the external factors because companies are going to make investments in cloud, 5G, SAS, automation, things that are going to make their businesses more efficient, more effective things. That’ll maybe move some CapEx to OPEX, spending, streamline business performance, monitoring analytics, AI, all those things. And by the way, you’re in almost all of them, which works out really well for you.
Rowan Trollope: It doesn’t matter what happens with the economy. Businesses are not going to undigitize. That is not the way of the future. It’s not going to be, well things got tough. Let’s go get an old phone system from some telco or something. And maybe we can, that’s not how it works. It’s the opposite.
Daniel Newman: Well, in a recent sit down I had with Arvin Krishna, the IBM CEO, he actually said one growth number you can count on is the tech growth will always be higher than GDP. And it’s more or less I don’t, I’m paraphrasing him. So I want to be clear about that. But the point he kind of made is that if you want to the biggest proof of the deflationary aspects of tech, it’s the fact that it just almost has to grow faster than the economy, because the only way the economy grows is on the back of tech. And so to wrap up our conversation, the question I’d love to ask you is I keep saying that we’ve got to tech our way out of this. Okay. So meaning that you mentioned a tight labor force, you’ve mentioned the supply chain you’ve mentioned and we haven’t specifically talked about, but even things like abuse and misinformation, spread of abuse and misinformation on social media.
If you look at companies being able to execute their ESG commitments to the world, I don’t see any other investment that enterprises can make that will provide a higher ROI to meeting these objectives or to fixing these problems in the world than the investments in tech, other than maybe the people required to deploy them. What other options do companies have? Which by the way, and I just want to get this out, but is exactly why I say no matter what the craziness of the market and the day traders do, and the gyrations and volatility being in tech over the long run is going to be a winner, especially in the right. I mean, you got to pick the right companies, but the right ones that are doing what you said, performing, growing, delivering great customer experiences, hitting margins, where else would you want to be?
Rowan Trollope: Yeah, I think it’s important that people don’t get distracted by what happened in, I don’t want to call it a bubble, but like over the last 10 years where money became cheaper and cheaper and it funded a lot of nonsense, you can’t throw the baby out with the bath water. You can’t look at that and go, well, there was some crazy dumb things that got funded. Therefore all the funding is bad. There’s actually tons of amazing. And it’s pretty obvious, right? But there’s tons of amazing companies that have been created over the last 10 years that are real companies in the tech space. And it’s what’ll happen over the next period of time. However long this sort of downturn lasts one or two years, something like that. Is a lot of that nonsense will get washed away and you’ll see the real durable.
What are these real companies that are actually like awesome assets to own? And maybe they’re, look over the fullness of time. Those companies that are going to survive. This are incredible buys right now. Right? And like, depending on how long out you look like what’s your horizon for returns, but like, as long as you’re thinking about the long enough horizon of returns here, all these are probably some of these are, are good buys at this point. I certainly I’m a holder in our own company. I think again, over the fullness of time, when you have a company that’s growing 30% in the 30s year over year consistently and profitable that’s going to be a great investment and whatever the starting line is, okay.
So the starting line is lower now, but ultimately it’s still it’s better when you’re not looking at this market from my perspective and saying, when’s the air going to come out of the balloon. Now the air has come out of the balloon. I don’t know. Maybe it’ll go out even more that’s possible. But I want to be operating from a place of like a sensible investment environment where people are making investments on real companies on real future returns and not a bunch of nonsense. That’s clouding the air and that’s a better starting place. So in a way it’s like, whew, thank God that’s over. Now we can get back to people just making sensible investment decisions in real companies.
Daniel Newman: Until we do it again, because every decade we…
Rowan Trollope: It’ll happen again…
Daniel Newman: Really stupid, we blow up the balloon and then we pop it and then we all go crazy. The psychology of this is real. It’s hard. I mean, like I said, the reason most of us don’t do it as well as we should is because when it actually gets really bad, the whole buffet buy when there’s blood on the street or that whole kind of thing. Like we all get a little paralyzed, like instead of actually going most people, not all, but most people actually, they contract, they pull their money out, they take their chips down and that’s for instance, and I’m going to ask you this, I’m going to we’re end on this Rowan, but I’ve seen, you’ve had laser eyes. I’ve seen it on your Twitter profile. So you’re clearly a crypto guy. It’s easy after seeing the Terra, Luna story, Bitcoin falling.
I mean, I’m a big investor in Solana. I’m a believer in XRP. I’m in Bitcoin and Ethereum because those are the core holdings of any portfolio. But my point is like the last week I saw more anti crypto people come out, every expert on the planet, every 75 year old or older Wall Streeter all came out to tell us, say, crypto is no value. There’s no store it’s going to, and my point is that it’s kind of an interesting moment to see what happens to the psychology. But question for you is, you still a believer?
Rowan Trollope: Absolutely. I mean when the Bitcoin white paper came out I read it and I just thought, this is unbelievable. And I’ve been promoting Bitcoin. So for a decade and thinking about it and I did not get caught up in the frothiness of the, well only a little bit, but not too much in the frothiness of the crypto craze, but I’m invested in Bitcoin and Ethereum. I truly, Bitcoin initially, which I thought was just an awesome long term play. And frankly, I didn’t invest in it to make money, to be honest, I invested in it because I thought it was a really important technology that needed to exist. And so I’ve never sold any crypto asset and I don’t intend to sell anything anytime soon. And I invested in Ethereum because it felt to me like that was another awesome idea of built, built on a blockchain that we could build applications.
And it is an awesome idea. And whether or not Ethereum is the one that will ultimately win or Solana or whatever. It’s that idea that is worth investing in. So my perspective is maybe these things will make tons of money in the future. Obviously they have done very well. Those particular two assets in the last few years. I mean there’s a lot of high speed hand ringing about BTC 30K whatever, like go back three years. Okay. It was much lower. And so it was a so like get over it, think about it over a long period of time. This is a fundamental enabling technology for the internet and for the future of society, it ain’t going anywhere and it’s worth investing in it because we need it.
Daniel Newman: And I’m going to end on that. I could go back and do a whole crypto show with you, but I remembered the laser eyes on Twitter. I love talking about it and by the way, you probably can talk a little more freely about crypto than, than about Five9.
Rowan Trollope: That’s just a hobby.
Daniel Newman: But great having you row and on the show. Thanks for joining me once again on Making Markets. Can’t wait to have you back soon. Thanks Dan.
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Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
