Five9, Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud software for contact centers, including voice, chat, email, web, social media and mobile capabilities. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Five9 reported more than 2,000 clients and over three billion annual customer interactions.
Financial Performance and Liquidity
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $47.7 million | $38.9 million | $94.7 million | $76.9 million |
| Gross profit | $27.5 million | $22.1 million | $54.5 million | $43.5 million |
| Gross margin | 58% | 57% | 58% | 57% |
| Loss from operations | $(3.2) million | $(2.2) million | $(7.6) million | $(5.8) million |
| Net loss | $(4.0) million | $(3.5) million | $(9.3) million | $(8.4) million |
| Net loss per share | $(0.07) | $(0.07) | $(0.17) | $(0.16) |
| Adjusted EBITDA | $3.0 million | $2.3 million | $5.6 million | $2.7 million |
- Subscription and related usage revenue represented 94% of revenue in both Q2 and the first six months of 2017. No client represented more than 10% of total revenue.
- Operating expenses were $30.6 million in Q2 and $62.1 million for the six-month period, including sales and marketing expense of $16.9 million and $32.7 million, respectively.
- Cash provided by operating activities was $0.2 million for the six months ended June 30, 2017, down from $2.3 million in the prior-year period. Investing cash outflow was $1.2 million, primarily for property and equipment; financing cash outflow was $38 thousand.
- Cash and cash equivalents were $57.1 million at June 30, 2017, compared with $58.1 million at December 31, 2016.
- Total debt at net carrying value was approximately $33.3 million, consisting primarily of $32.6 million drawn under a revolving credit facility and a $0.6 million FCC civil penalty payable. The revolving facility has $17.4 million of additional availability and matures in August 2019.
- The credit facility is secured by substantially all assets, requires at least $25.0 million of unrestricted cash with the lenders, includes liquidity and borrowing-base covenants, and prohibits dividends. Five9 was in compliance with its covenants at June 30, 2017.
- Capital lease liabilities totaled approximately $12.5 million, including current and long-term portions. Additional capital lease commitments incurred during the first six months totaled approximately $4.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 23% in both Q2 and the first six months, primarily from larger clients and increased sales and marketing activity.
- Gross margin increased by approximately one percentage point to 58%, reflecting improved usage efficiencies and subscription-related economies of scale.
- Sales and marketing expense increased 34% in Q2 and 29% for the six-month period, driven by headcount, commissions, stock-based compensation, marketing and travel investments.
- Research and development expense increased 18% in both comparative periods, principally because of higher personnel and stock-based compensation costs.
- Net losses widened to $4.0 million in Q2 and $9.3 million for the first six months, despite higher revenue and improved adjusted EBITDA, as the company continued investing in growth.
- Interest expense declined 26% in both comparative periods because the 2016 revolving facility carries lower interest costs than the facilities it replaced.
- Annual dollar-based retention declined to 98% from 100%, primarily because the prior-year period benefited from the ramp of one large customer.
- Stock-based compensation increased to $3.9 million in Q2 and $7.0 million for the first six months, compared with $2.4 million and $4.4 million, respectively, in 2016.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance in the filing. It expects revenue, cost of revenue and operating expenses to grow in absolute dollars as it expands sales, research and development, infrastructure and headcount, while seeking longer-term operating leverage.
- Management stated that existing cash and borrowing availability should fund working capital and capital expenditures at least through June 30, 2018, but noted that additional financing may be required depending on growth, client retention, capital spending, litigation and other factors.
- Five9 settled the Melcher litigation for a one-time payment of $1.7 million and recorded $1.8 million of settlement, legal and indemnification costs in the first quarter. The company believes it has indemnification rights against former Face It stockholders. A former Face It officer separately filed an advancement lawsuit after receiving $62 thousand in advances as of June 30, 2017.
- The company recorded a $3.1 million reversal to cost of revenue after an FCC ruling supported credits for prior wholesale-carrier USF payments. USAC had not completed the administrative approval as of the filing date. Remaining disputed USF assessments totaled $2.8 million, and unfavorable resolution could require additional payments.
- A $2.0 million FCC civil penalty is being paid in quarterly installments; approximately $0.6 million of principal remained outstanding at June 30, 2017. Compliance reporting under the consent decree continues through June 2018.
- In April 2017, Five9 identified suspected unauthorized acquisition of some client information, attributed to a remediated vulnerability. The company notified potentially affected clients and stated that expenses incurred to date were not material.
- The company faces ongoing risks from competition, short client termination periods, longer enterprise sales cycles, service outages, cybersecurity incidents, reliance on third-party telecommunications and data-center providers, international operations, regulatory and tax obligations, litigation and continued losses.
- Five9 expects to adopt the new revenue recognition standard, Topic 606, on January 1, 2018. It had not selected a transition method and expected potential material effects primarily on commission expense rather than revenue timing.
- The company continued to report an accumulated deficit of $175.7 million and stated that losses are expected to continue for the foreseeable future.
Most Important Facts for Investors to Verify
- Whether 23% revenue growth and 98% dollar-based retention can be sustained as the company expands into larger enterprise accounts.
- Whether operating expense growth, particularly sales and marketing spending, converts into durable revenue growth and eventual GAAP profitability.
- The company’s ability to generate consistent operating cash flow while funding capital expenditures, capital leases and debt service.
- Compliance with the revolving credit facility’s cash, liquidity and borrowing-base covenants, including the $25.0 million unrestricted-cash requirement.
- The final resolution and cash impact of disputed USF assessments, related interest and penalties, and the FCC civil penalty.
- Potential additional costs or liability from the NobelBiz patent litigation, the former officer’s advancement claim and other indemnification matters.
- The scope and consequences of the reported cybersecurity incident, including possible client, regulatory or litigation exposure.
- The financial statement impact of Topic 606 adoption and the increase in stock-based compensation and unrecognized equity compensation expense.