Five9, Inc. annual report, FY2021

Five9, Inc. 2021 Form 10-K Summary

Business context and reporting period

Five9 provides cloud-based contact-center software, including voice, digital engagement, artificial intelligence, automation, workforce optimization and related telephony services. The company operates as a single reportable segment and serves more than 2,500 clients. This filing covers the fiscal year ended December 31, 2021, with quarterly data provided for the fourth quarter ended December 31, 2021.

Revenue is primarily recurring subscription and usage revenue, supplemented by professional services. Subscription and related usage represented 92% of revenue in each of 2021, 2020 and 2019. Approximately 91% of 2021 revenue was generated from clients with U.S. billing addresses.

Financial performance and key metrics

Metric	2021	2020	Change
Revenue	$609.6 million	$434.9 million	Up 40%
Gross profit	$338.5 million	$254.6 million	Up 33%
Gross margin	56%	59%	Down 3 percentage points
Operating loss	$56.3 million	$12.3 million	Loss increased
Net loss	$53.0 million	$42.1 million	Loss increased
Net loss per share	$0.79	$0.66	Loss per share increased
Adjusted EBITDA	$110.5 million	$85.7 million	Up 29%
Operating cash flow	$28.5 million	$67.3 million	Down $38.8 million

Fourth-quarter 2021 revenue was $173.6 million, up from $127.9 million in the fourth quarter of 2020. Fourth-quarter net loss was $3.6 million, compared with $7.2 million in the prior-year quarter.
Annual Dollar-Based Retention Rate improved to 122% from 117%, primarily because larger clients increased agent seats.
Research and development expense increased 55% to $106.9 million; sales and marketing increased 46% to $193.9 million; and general and administrative expense increased 43% to $93.9 million.
Stock-based compensation increased to $108.8 million from $64.7 million and represented a significant non-cash expense across operating categories.
Capital expenditures were $42.2 million. Net cash used in investing activities was $150.5 million, primarily reflecting purchases of marketable investments and capital expenditures.
Cash and cash equivalents were $90.9 million at year-end, compared with $220.4 million at year-end 2020. Short- and long-term marketable investments totaled $526.4 million, producing total cash, cash equivalents and marketable investments of approximately $617.2 million.
Working capital was $459.7 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.

Balance sheet, debt and liquidity

Total assets were $1.193 billion, compared with $1.064 billion at December 31, 2020. Total liabilities were $981.8 million and stockholders’ equity was $211.1 million.
Convertible senior notes had aggregate principal outstanding of approximately $781.7 million: $34.2 million due May 1, 2023 and $747.5 million due June 1, 2025.
The 2023 notes were convertible during the first quarter of 2022, and the company had received elections to convert approximately $34.0 million of principal that remained unsettled at year-end. Five9 expected to settle those conversions in cash or a combination of cash and shares during the first quarter of 2022.
Operating lease obligations totaled $64.0 million. Cloud service commitments totaled $61.1 million, including $21.8 million expected to be paid in 2022. Hosting and telecommunications commitments totaled $18.6 million.
Cash flow from operations declined despite higher revenue, primarily because of the net loss and increased use of cash for accounts receivable, deferred contract acquisition costs, prepaid expenses and other operating assets and liabilities.

Material changes versus the prior comparable period

Revenue growth accelerated to 40%, driven primarily by larger clients, increased sales and marketing activity and improved brand awareness.
Gross margin declined from 59% to 56%, principally because of higher personnel costs, public-cloud and data-center costs, hosted software costs, Universal Service Fund contributions, amortization from prior acquisitions and facility costs.
Operating losses widened as Five9 continued investing heavily in research and development, sales and marketing, infrastructure and personnel.
Interest expense fell to $8.0 million from $28.3 million, primarily because of the adoption of ASU 2020-06 and the reduction in 2023 convertible-note balances. The company recorded no early extinguishment loss in 2021 versus $7.0 million in 2020.
Five9 early adopted ASU 2020-06 effective January 1, 2021. The adoption recombined the liability and equity components of its convertible notes, increased reported debt by $145.7 million and reduced opening accumulated deficit by $22.7 million.
The proposed merger with Zoom was terminated on September 30, 2021 after stockholders failed to approve it. Five9 incurred approximately $7.6 million of related transaction costs, recorded in general and administrative expense.
Revenue from remaining performance obligations under contracts with original terms longer than one year was $544.3 million at year-end; approximately three-fourths was expected to be recognized over the following 24 months.

Guidance, outlook, management commentary and risks

The filing does not provide a clear quantitative revenue or earnings outlook for 2022. Management expects to continue investing in sales and marketing, research and development, infrastructure, international expansion and general administration. It expects gross margin to decline slightly in the near term because of investments in public cloud, cloud operations and professional services, with potential improvement over the longer term through scale.

Management stated that COVID-19 had a moderately positive effect on 2020 and 2021 results because of the shift from brick-and-mortar contact centers to virtual operations, and that there could be a continuing longer-term net benefit. However, the duration and economic effects of the pandemic remained uncertain.

Five9 has incurred annual losses since inception and expects losses to continue for the foreseeable future. The accumulated deficit was $228.4 million at December 31, 2021.
Key operating risks include intense competition, client attrition or reduced seat usage, long enterprise sales cycles, pressure on pricing and margins, and the need to expand and retain sales, professional services and technical personnel.
The company relies on third-party telecommunications providers, internet providers, data centers, public-cloud infrastructure and technology partners. Service outages, capacity constraints or provider failures could result in customer credits, lost clients, litigation or higher costs.
Cybersecurity, privacy and data-protection risks are significant because the platform processes client and customer information. Regulatory exposure includes GDPR, CCPA, CPRA, telecommunications rules, TCPA, STIR/SHAKEN and Universal Service Fund obligations.
Five9 remains in dispute with the FCC regarding potential Universal Service Fund contributions for 2003–2007 and had accrued $0.1 million of related interest at year-end.
The company accrued approximately $1.0 million for potential state and local taxes, fees and surcharges that may be imposed on prior activities; actual liabilities could differ.
Contingent consideration related to the Inference acquisition was valued at $23.7 million at year-end, with $5.6 million of expense recognized in 2021.
International operations, including operations in Russia, expose the company to sanctions, trade controls, political, regulatory, currency and operational risks.

Important facts for investors to verify

Whether revenue growth and the 122% dollar-based retention rate remain sustainable as comparisons become more difficult.
Whether gross margin stabilizes or continues to decline as public-cloud, telecommunications, personnel and professional-services costs increase.
The timing and cash-versus-share settlement of the approximately $34.0 million of 2023 note conversions outstanding after year-end.
Five9’s ability to fund continuing operating losses, capital expenditures, cloud commitments and the 2023 and 2025 convertible-note maturities without raising additional capital.
The magnitude and timing of potential FCC, Universal Service Fund, state and local tax, privacy or other regulatory liabilities.
Whether the terminated Zoom merger, elevated stock-based compensation and ongoing hiring needs affect employee retention, dilution and operating expenses.
The company’s exposure to cybersecurity incidents, service outages, third-party infrastructure failures and changing data-protection requirements.
Whether the company converts its remaining performance obligations and deferred contract acquisition costs into revenue and cash as expected.