Five9, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020, with selected quarterly data for the quarter ended December 31, 2020. Five9 provides cloud-based contact-center software and related telephony services through a SaaS model. The company served more than 2,000 clients and operated as one reportable segment.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $434.9 million | $328.0 million | +33% |
| Gross profit | $254.6 million | $193.5 million | +32% |
| Gross margin | 58.5% | 59.0% | Approximately flat |
| Operating income (loss) | $(12.3) million | $3.3 million | Declined |
| Operating margin | (2.8%) | 1.0% | Declined |
| Net income (loss) | $(42.1) million | $(4.6) million | Loss increased |
| Net loss per share | $(0.66) | $(0.08) | Declined |
| Adjusted EBITDA | $85.7 million | $60.8 million | +41% |
| Operating cash flow | $67.3 million | $51.2 million | +31% |
Subscription and related usage revenue represented 92% of total revenue. Revenue growth was primarily attributed to larger clients, increased sales and marketing activity, and improved brand awareness. Annual dollar-based retention was 117% under the company’s revised net-revenue methodology, compared with 112% in 2019; under the prior net-invoicing methodology, it was 110% versus 105%.
- Research and development expense increased 52% to $68.7 million, or 16% of revenue.
- Sales and marketing expense increased 39% to $132.4 million, or 30% of revenue.
- General and administrative expense increased 33% to $65.8 million, or 15% of revenue.
- Stock-based compensation increased to $64.7 million from $42.1 million.
- Interest expense rose to $28.3 million from $13.8 million, and the company recorded a $7.0 million loss on early extinguishment of debt.
At December 31, 2020, cash and cash equivalents were $220.4 million, short-term marketable investments were $383.2 million, and long-term marketable investments were $42.1 million, for total cash, cash equivalents, and marketable investments of $645.7 million. Working capital was $585.6 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 used in investing activities was $382.3 million, including $165.3 million for acquisitions, $30.4 million of capital expenditures, and net purchases of marketable investments. Cash provided by financing activities was $457.4 million, primarily from the issuance of 2025 convertible senior notes.
Debt, commitments, and balance-sheet changes
- The company issued $747.5 million of 0.500% convertible senior notes due June 2025 and received approximately $728.8 million of net proceeds.
- Outstanding convertible senior-note principal totaled approximately $806.4 million at year-end, consisting of $747.5 million due 2025 and $58.9 million due 2023.
- The company repurchased, exchanged, or retired approximately $181.0 million of 2023 notes during 2020, partly for cash and partly for common stock.
- Total assets increased to $1.064 billion from $482.4 million, while total liabilities increased to $784.6 million from $285.9 million.
- Goodwill increased to $165.4 million from $11.8 million, principally from the Virtual Observer and Inference acquisitions.
- The company entered into a 10-year Bishop Ranch headquarters lease beginning February 1, 2021, with total commitments of approximately $46.4 million.
Material changes and unusual items
- Five9 acquired Virtual Observer in April 2020 for approximately $32.2 million to expand its workforce-optimization offering.
- Five9 acquired Inference Solutions in November 2020 for approximately $156.7 million, including $18.1 million of estimated contingent consideration and potential earn-out payments of up to $24.0 million through December 31, 2021.
- COVID-19 had a moderately positive impact on 2020 results as organizations shifted from brick-and-mortar to virtual operations; management expected a continuing longer-term net benefit but noted substantial uncertainty.
- Fourth-quarter 2020 revenue was $127.9 million, up from $92.3 million in the fourth quarter of 2019. Fourth-quarter operating income was $2.7 million versus $3.0 million, and net loss was $7.2 million versus net income of $0.8 million.
- 2020 quarterly results included $1.8 million of COVID-19 employee relief bonuses, $6.3 million of acquisition-related transaction and integration costs, and the $7.0 million debt-extinguishment loss.
Outlook, risks, and contingencies
The filing does not provide a clear numerical revenue or earnings outlook. Management expects continued investment in sales and marketing, research and development, infrastructure, international expansion, and product enhancements, and expects losses to continue for the foreseeable future. Cost of revenue and operating expenses are expected to increase in absolute dollars, while margins may fluctuate in the near term.
- Key risks include intensified competition, client attrition or seat reductions, longer enterprise sales cycles, service outages, dependence on third-party telecommunications and cloud providers, cybersecurity incidents, and rapid technological change.
- COVID-19 could affect client renewals, seat counts, collections, sales cycles, infrastructure capacity, employee operations, and forecasting reliability.
- The company is subject to telecommunications, privacy, data-security, tax, and consumer-protection regulation, including FCC, USF, GDPR, CCPA, and TCPA requirements.
- Five9 had accrued approximately $0.9 million for disputed USF assessments for 2003–2007 and approximately $1.1 million for potential state and local sales taxes and surcharges. Actual liabilities could exceed recorded amounts.
- The company reported no material off-balance-sheet arrangements. Management stated that known legal and regulatory matters were not expected to materially affect results, but unfavorable outcomes could materially affect a future period.
- The independent auditor and management concluded that financial statements and internal control over financial reporting were effective as of December 31, 2020.
Investor verification points
- Reconcile GAAP net losses with adjusted EBITDA, particularly the substantial stock-based compensation, convertible-note accretion, acquisition costs, and other exclusions.
- Monitor conversion, settlement, and potential dilution from the 2023 and 2025 convertible notes, including cash requirements at maturity or upon conversion.
- Evaluate whether 117% net-revenue retention and larger-client growth remain sustainable as the company scales.
- Assess integration progress and earn-out exposure related to Virtual Observer and Inference, including the preliminary valuation of acquired technology and goodwill.
- Track gross-margin effects from usage revenue, telecommunications costs, USF obligations, public-cloud investments, and professional services.
- Review exposure to COVID-19-related demand changes, cybersecurity incidents, service interruptions, regulatory actions, and disputed tax or USF liabilities.