Five9, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud software and related telephony services for contact centers, serving more than 2,000 clients. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Subscription and related usage fees represented 92% of second-quarter revenue and 91% of first-half revenue. Management stated that first-half results were not materially impacted by COVID-19, although future effects remained highly uncertain.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $99.8 million | $77.4 million | $194.9 million | $152.0 million |
| Revenue growth | 29% | — | 28% | — |
| Gross profit | $57.3 million | $46.2 million | $112.4 million | $89.9 million |
| Gross margin | 57% | 60% | 58% | 59% |
| Loss from operations | $(8.2) million | $0.1 million | $(13.2) million | $(0.2) million |
| Net loss | $(16.1) million | $(1.9) million | $(23.5) million | $(3.8) million |
| Basic and diluted loss per share | $(0.25) | $(0.03) | $(0.38) | $(0.06) |
| Adjusted EBITDA | $18.3 million | $14.4 million | $32.4 million | $26.2 million |
- Operating expenses increased to $65.6 million in the second quarter and $125.6 million in the first half, representing approximately 65% of revenue in both periods. Research and development and sales and marketing grew faster than revenue.
- Stock-based compensation was $16.8 million in the quarter and $30.6 million year to date, compared with $10.4 million and $19.1 million, respectively, in the prior-year periods.
- Cash provided by operating activities was $25.2 million for the first half, compared with $18.0 million in 2019.
- Capital expenditures were $14.9 million, and cash paid for the Virtual Observer acquisition was $28.3 million. Investing activities used $336.4 million, primarily reflecting net purchases of marketable investments and acquisitions.
- Cash and cash equivalents were $233.2 million at June 30, 2020. Short-term and long-term marketable investments totaled $534.8 million, resulting in cash and investments of approximately $768.0 million.
- Working capital was $675.5 million. Total assets were $993.3 million and stockholders’ equity was $254.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 29% in the quarter and 28% year to date, primarily due to growth from larger clients, increased sales and marketing activity, and improved brand awareness.
- Gross margin declined from 60% to 57% in the quarter and from 59% to 58% year to date. Management attributed the decline primarily to increased amortization from the Whendu and Virtual Observer acquisitions and higher stock-based compensation.
- The company moved from near break-even operating results in 2019 to operating losses in 2020 as investments in personnel, research and development, sales and marketing, infrastructure, and client support increased.
- Net loss increased substantially, partly because interest expense rose and the company recorded a $5.8 million loss on the early extinguishment of 2023 convertible notes. Interest income also declined as investment yields decreased.
- Annual dollar-based retention declined to 105% from 107%, which management attributed primarily to timing differences in larger clients’ platform deployments and ramp rates.
- In April 2020, Five9 acquired Virtual Observer for approximately $32.2 million in cash, adding a cloud-based workforce optimization offering. The preliminary purchase accounting included $22.6 million of goodwill and $12.8 million of intangible assets.
Debt, Liquidity, Outlook, and Risks
- In May and June 2020, Five9 issued $747.5 million principal amount of 0.500% convertible senior notes due June 1, 2025, generating approximately $728.8 million of net proceeds. The company also paid $90.5 million for related capped calls.
- Five9 repurchased or otherwise retired approximately $181.0 million principal amount of its 0.125% convertible notes due 2023 for aggregate consideration of approximately $449.6 million, including $181.0 million of cash and 2.7 million common shares. Approximately $77.7 million principal amount remained outstanding at June 30, 2020.
- Aggregate principal amount of convertible notes outstanding was $825.2 million. The balance-sheet carrying amount was $642.2 million because of unamortized debt discounts and issuance costs.
- The 2023 notes were convertible during the third quarter of 2020 based on stock-price conversion triggers. As of the filing date, holders had submitted additional conversion elections with an aggregate principal amount of $13.7 million after June 30, 2020; the company expected to settle conversions in cash or a combination of cash and shares.
- Management believed existing cash and cash equivalents would fund working capital and capital expenditure needs for at least the next 12 months. However, debt conversions, fundamental-change repurchase obligations, continued operating losses, acquisitions, and lower-than-expected operating performance could pressure liquidity.
- Management expected cost of revenue and operating expenses to increase in absolute dollars as the company continued investing in infrastructure, product development, and growth. No quantitative revenue or earnings guidance was provided in the filing text.
- COVID-19 could reduce client agent seats, delay purchases, increase payment defaults, lengthen sales cycles, impair professional services delivery, and increase infrastructure and cybersecurity risks. Conversely, demand for work-from-home and business-continuity solutions could benefit the business over the longer term.
- The company disclosed no material off-balance-sheet arrangements. Management did not expect existing legal matters to have a material impact, although unfavorable outcomes could affect a future period.
- After quarter-end, Five9 entered into a 10-year lease for approximately 104,253 square feet of new headquarters space beginning February 1, 2021. Initial monthly base rent was approximately $0.4 million, with eight months of rent abatement, a security deposit of approximately $0.5 million, and a tenant-improvement allowance of approximately $4.2 million.
Important Facts for Investors to Verify
- Whether revenue growth and the 105% dollar-based retention rate remain durable as COVID-19 affects smaller clients and economically sensitive industries.
- Whether gross-margin pressure from infrastructure costs, acquisitions, amortization, telecommunications fees, and stock-based compensation improves or persists.
- The cash requirements and potential dilution associated with conversion or cash settlement of the 2023 and 2025 convertible notes.
- The final purchase accounting and operating contribution of Virtual Observer, including any subsequent goodwill or intangible-asset adjustments.
- The company’s ability to generate sustainable GAAP profitability and operating cash flow while maintaining elevated sales, marketing, research and development, and infrastructure spending.
- The financial impact of the new headquarters lease, future acquisitions, capital expenditures, and any additional financing needs.