Five9, Inc. 2014 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud contact center software and related telecommunications usage services. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013. The company had more than 2,000 clients and 555 employees at March 31, 2014.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $24.3 million | $19.1 million | Up 27% |
| Gross profit | $11.1 million | $7.4 million | Up 50% |
| Gross margin | 46% | 39% | Up 7 percentage points |
| Loss from operations | $(9.3) million | $(6.7) million | Loss increased |
| Net loss | $(8.3) million | $(6.7) million | Loss increased 25% |
| Net loss per share | $(1.48) | $(1.88) | Improved; share count increased |
| Adjusted EBITDA | $(6.5) million | $(5.5) million | Loss increased |
| Cash used in operating activities | $(6.2) million | $(3.8) million | Use increased |
Subscription and related usage fees represented 98% of revenue in both periods. Revenue growth was driven primarily by new clients, which contributed approximately $4.4 million of the $5.2 million increase; existing clients contributed approximately $0.8 million. No individual client represented more than 10% of revenue.
Cost of revenue increased 13% to $13.1 million, slower than revenue growth, reflecting improved usage efficiencies, economies of scale and elimination of duplicate data centers. Operating expenses increased 45% to $20.4 million, led by sales and marketing growth of 47% and general and administrative growth of 61%. Sales and marketing, research and development, and general and administrative expenses were 37%, 22% and 25% of revenue, respectively.
Cash and cash equivalents were $29.2 million at March 31, 2014, compared with $17.7 million at December 31, 2013. Total assets were $69.2 million. Total liabilities were $78.2 million, resulting in stockholders’ deficit of $9.0 million. Net debt carrying value was $39.5 million, including the $12.5 million revolving line of credit and $27.0 million of notes payable. The company also had capital lease obligations.
Financing activities provided $17.8 million, primarily from $20.0 million borrowed under a new term loan facility. This more than offset operating and investing cash uses and drove the $11.5 million increase in cash during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27%, while gross profit increased 50% and gross margin improved from 39% to 46%.
- Operating losses widened as the company increased investments in sales, marketing, research and development, personnel, infrastructure and public-company preparation.
- Operating cash use increased from $3.8 million to $6.2 million.
- Interest expense increased from $0.2 million to $0.8 million because of higher debt balances.
- Stock-based compensation increased from $0.3 million to $1.2 million.
- The dollar-based retention rate declined to 100% from 103% for the trailing twelve months ended March 31.
- The company borrowed $20.0 million under a new term loan facility and had an additional $10.0 million available through February 2015, subject to the facility terms.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, infrastructure, client support and public-company compliance. These investments are expected to increase expenses and may prolong losses. Management stated that existing cash, IPO proceeds and available borrowing capacity were expected to fund working capital and capital expenditures at least through March 31, 2015.
- On March 20, 2014, a third-party equipment issue caused an extended service interruption at the Santa Clara colocation facility. Estimated service credits were not material to first-quarter revenue, but the event highlights dependence on infrastructure and third-party providers.
- The company had accrued $4.4 million for unpaid Universal Service Fund contributions, interest and penalties, in addition to a $3.4 million USAC promissory note. Potential assessments may cover periods as early as 2003, and potential FCC penalties remain unresolved.
- The company accrued $5.7 million for potential state and local taxes and surcharges on usage-based fees. Actual liabilities could exceed estimates.
- Five9 was defending a NobelBiz patent infringement lawsuit seeking damages and injunctive relief. The company believed it had valid defenses and had not accrued a loss, but an unfavorable outcome could require damages, licensing or technology changes.
- Debt is secured by substantially all company assets and includes covenants, including a $5.5 million cash deposit requirement under the existing credit facility. The $12.5 million revolver matures in March 2015.
- The company has a history of losses, including a $99.1 million accumulated deficit at March 31, 2014, and expects losses to continue as it scales.
Subsequent to quarter-end, Five9 completed its initial public offering. It sold 11.5 million shares at $7.00 per share, including the underwriters’ full 1.5 million-share option, and received approximately $72.7 million in net proceeds for working capital. Preferred stock converted to common stock and a four-for-one reverse stock split became effective on April 3, 2014. IPO proceeds are not included in the March 31 balance sheet.
Important Facts for Investors to Verify
- Assess whether 27% revenue growth and the 100% dollar-based retention rate can be sustained as the company targets larger clients and faces short contract terms.
- Reconcile the company’s non-GAAP Adjusted EBITDA with GAAP net loss and monitor whether operating cash use continues to increase.
- Review debt maturities, variable interest rates, collateral and covenant requirements, particularly the March 2015 revolver maturity.
- Evaluate the ultimate exposure from USF assessments, FCC penalties, state and local tax liabilities and possible recovery of prior indirect USF payments.
- Monitor service reliability, third-party telecommunications dependence and the financial impact of any future outages or service credits.
- Follow the NobelBiz patent litigation and any resulting damages, injunction, licensing or product modification requirements.
- Consider dilution from the IPO, stock options, warrants, equity plans and approximately $11.7 million of unrecognized stock-based compensation expense.