Five9, Inc. 2022 Q1 Form 10-Q Summary
Business context and reporting period
Five9 provides cloud contact-center software and related usage services through a SaaS model. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Five9 reported more than 2,500 clients and approximately 9 billion annual call minutes. Subscription and related usage fees represented 91% of revenue, compared with 92% in the prior-year quarter.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $182.8 million | $137.9 million | Up 33% |
| Gross profit | $93.9 million | $78.1 million | Up 20% |
| Gross margin | 51% | 57% | Down 6 percentage points |
| Loss from operations | $30.8 million | $11.1 million | Higher loss |
| Net loss | $34.1 million | $12.3 million | Higher loss |
| Net loss per share | $0.49 | $0.18 | Higher loss per share |
| Adjusted EBITDA | $24.5 million | $22.2 million | Up 10% |
| Operating cash flow | $28.7 million | $13.8 million | Up $15.0 million |
Revenue growth was driven primarily by larger clients, increased sales and marketing activity, and improved brand awareness. Operating expenses increased to $124.7 million from $89.2 million, including research and development of $35.8 million, sales and marketing of $64.6 million, and general and administrative expense of $24.3 million.
Cash and cash equivalents were $100.2 million at March 31, 2022. Short- and long-term marketable investments totaled $496.2 million, for combined cash and marketable securities of approximately $596.4 million. Working capital was $440.8 million. Management stated that existing cash and cash equivalents were sufficient for working capital and capital expenditure needs for at least the next 12 months.
Cash flow from investing activities was positive $11.2 million, reflecting investment maturities exceeding purchases, partially offset by $12.4 million of capital expenditures and a $2.0 million equity investment. Financing activities used $30.6 million, primarily for settlement of 2023 convertible senior notes.
Debt and contractual obligations
- 2025 convertible senior notes had $747.5 million of principal outstanding, mature June 1, 2025, and carry a fixed 0.50% interest rate. Their net carrying amount was $735.6 million.
- Approximately $2.3 million of 2023 convertible senior notes remained outstanding at March 31, 2022 and mature May 1, 2023. The notes carry a fixed 0.125% interest rate.
- Total convertible-note principal outstanding was approximately $749.8 million. The 2023 notes were convertible during the second quarter of 2022; the 2025 notes were not convertible during that quarter based on the stated stock-price conditions.
- Operating lease liabilities totaled $55.0 million, with future minimum lease payments of $61.6 million before imputed interest.
- Cloud-service commitments totaled $55.4 million, and hosting and telecommunications commitments totaled $19.5 million as of March 31, 2022.
Material changes versus the prior comparable period
- Revenue increased 33%, but cost of revenue increased 49%, reducing gross margin from 57% to 51%.
- Research and development expense increased 62%, and sales and marketing expense increased 44%, primarily from higher headcount, salaries, stock-based compensation, commissions, and growth investments.
- Stock-based compensation increased to $39.4 million from $20.9 million and represented a significant non-cash expense across operating functions.
- Net loss widened to $34.1 million from $12.3 million, despite adjusted EBITDA increasing to $24.5 million from $22.2 million.
- Operating cash flow more than doubled, while ending cash and cash equivalents increased to $100.2 million from $90.9 million at December 31, 2021.
- During the quarter, Five9 paid $31.9 million in cash and issued 540,130 shares to settle 2023 note conversions. Approximately $2.1 million of additional conversion elections remained unsettled at quarter-end.
- Annual dollar-based retention was 120%, down from 121%, primarily reflecting the lapping of an earlier COVID-19-related benefit.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical revenue or earnings outlook. Management expects continued investment in research and development, sales and marketing, infrastructure, professional services, public cloud, and cloud operations. It expects gross margin to decline slightly in the near term because of these investments, with potential long-term improvement from scale.
Five9 decided in March 2022 to close its Russia office in June 2022 and establish a European development center in Porto, Portugal. The company incurred approximately $2.7 million of related costs in the quarter, including $2.6 million in research and development, $0.4 million in cost of revenue, $0.3 million in general and administrative expense, and a $0.6 million benefit in interest income and other. Management did not believe the decision would have a material effect on the business, but identified potential transition costs, employee-retention challenges, and operational disruption.
COVID-19 had a moderately positive impact on results through increased adoption of virtual operations, although the future duration and economic effects remain uncertain. Key risks include competition, client retention and expansion, service outages, reliance on telecommunications and cloud providers, cybersecurity incidents, international expansion, Russia-Ukraine-related sanctions and disruption, continued operating losses, potential financing needs, and the ability to service or repay convertible notes.
The company recorded a $0.3 million increase in contingent consideration expense related to the Inference acquisition and paid the resulting $24.0 million earn-out in April 2022. Management stated that existing legal and regulatory matters were not expected to have a material impact, although an unfavorable resolution could affect a future reporting period.
Important facts for investors to verify
- Whether revenue growth from larger clients can continue while sales and marketing and infrastructure spending remain elevated.
- Whether gross margin stabilizes or declines further as cloud, carrier, data-center, professional-services, and personnel costs increase.
- The magnitude and duration of operating losses and the extent to which positive operating cash flow depends on non-cash stock compensation and working-capital timing.
- Cash requirements for the $749.8 million of convertible-note principal, particularly the remaining 2023 notes and the 2025 maturity.
- The final cost, employee-retention impact, and operational effectiveness of closing the Russia office and establishing the Porto development center.
- Potential dilution from convertible notes, stock awards, and unsettled conversion elections.
- Exposure to cybersecurity, service availability, third-party provider, international, foreign-exchange, sanctions, and macroeconomic risks.