Five9, Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud-based contact-center software and related telephony services through a SaaS model. The unaudited filing covers the three and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods. Five9 reported more than 2,000 clients and approximately three billion annual customer interactions.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $41.0 million | $32.3 million | $117.9 million | $92.8 million |
| Gross profit | $23.2 million | $17.5 million | $66.7 million | $49.0 million |
| Gross margin | 57% | 54% | 57% | 53% |
| Loss from operations | $(1.9) million | $(4.9) million | $(7.8) million | $(18.8) million |
| Net loss | $(3.9) million | $(6.0) million | $(12.3) million | $(22.3) million |
| Net loss per share | $(0.07) | $(0.12) | $(0.24) | $(0.45) |
| Adjusted EBITDA | $2.7 million | $(1.1) million | $5.5 million | $(6.5) million |
Subscription and related usage fees represented 96% of third-quarter revenue and 95% of nine-month revenue. Annual dollar-based retention improved to 100% from 95% for the comparable twelve-month period. At September 30, 2016, cash and cash equivalents were $57.3 million, total assets were $102.7 million, and accumulated deficit was $166.7 million.
Net cash provided by operating activities was $4.0 million for the first nine months of 2016, compared with $12.9 million used in the prior-year period. Investing cash flow was $(1.0) million, primarily for property and equipment, and financing cash flow was $(4.1) million. Cash decreased by $1.2 million during the period.
Debt and Liquidity
- In August 2016, Five9 entered into a new $50.0 million revolving credit facility maturing August 1, 2019 and borrowed $32.6 million at closing.
- The new facility bears interest at prime plus 0.50%, with a 0.25% increase if adjusted EBITDA is negative at quarter-end. Amount available for additional borrowing at September 30 was $17.4 million.
- Total debt, net of discounts, was $34.1 million, including $32.6 million under the revolving facility. Capital lease liabilities totaled approximately $10.5 million.
- The facility is secured by substantially all company assets and requires, among other provisions, $25.0 million of unrestricted cash deposited with the lenders and a minimum liquidity ratio. Five9 reported compliance with the covenants at quarter-end.
- Management stated that existing cash and available borrowing capacity should be sufficient for working capital and capital expenditures through at least September 30, 2017, subject to operating performance and other factors.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27% in both the quarter and nine-month period, primarily driven by larger clients, increased sales and marketing activity, and improved brand awareness.
- Gross margin expanded by three percentage points in the quarter and four percentage points for the nine months, reflecting usage efficiencies, subscription scale benefits, and improved professional-services economics.
- Operating loss narrowed substantially as revenue growth outpaced operating-expense growth. Sales and marketing expenses continued to rise to support expansion, while research and development and general and administrative expenses declined as percentages of revenue.
- Adjusted EBITDA improved from a loss to positive results in both periods.
- Interest expense declined, but Q3 2016 included a $1.0 million loss on extinguishment of debt related to refinancing the prior credit facilities.
- The company issued additional equity through option exercises and its employee stock purchase plan; shares outstanding increased to approximately 53.0 million at September 30, 2016 from 51.2 million at December 31, 2015.
Outlook, Risks, Contingencies, and Unusual Items
Management expects continued investment in sales and marketing, research and development, infrastructure, international expansion, and headcount. It expects cost of revenue and operating expenses to increase in absolute dollars but generally decline as percentages of revenue as the business scales. The filing does not provide clear quantitative revenue or earnings guidance.
- Five9 continues to report GAAP losses and expects losses to continue for the foreseeable future; profitability is not assured.
- Client contracts generally permit changes in agent seats or effective termination with approximately 30 days' notice, creating retention and usage risk.
- Competition is intense, including from established on-premise vendors and cloud contact-center providers. Sales to larger clients involve longer cycles, significant implementation costs, and customization demands.
- Service outages, cybersecurity incidents, data-center disruptions, and failures by third-party telecommunications or hosting providers could result in credits, claims, client losses, or reputational damage.
- Five9 maintained accruals of $5.2 million for disputed Universal Service Fund obligations and estimated interest and penalties. Additional back assessments for earlier periods remain possible.
- A $1.2 million FCC civil penalty remained payable, with compliance reporting continuing through June 2018. Contingent state and local sales taxes and surcharges totaled approximately $2.2 million.
- The Melcher shareholder litigation and NobelBiz patent litigation remain unresolved. No losses were accrued because management did not believe losses were probable and could not reasonably estimate the high end of potential exposure, which could be material.
- Brexit, foreign-exchange movements, international data-privacy requirements, regulatory changes, and potential changes to U.S. telecommunications taxes and fees may affect demand, costs, and margins.
Important Facts for Investors to Verify
- Whether 100% annual dollar-based retention is sustained and whether larger clients continue increasing seats, usage, and add-on purchases.
- Whether positive adjusted EBITDA converts into consistently positive operating cash flow while GAAP losses continue.
- Compliance with the new revolving facility’s cash, liquidity, borrowing-base, and adjusted EBITDA-related requirements.
- The potential cash impact of disputed USF assessments, sales-tax liabilities, FCC obligations, litigation, and capital-lease commitments.
- The effect of continued sales and marketing, infrastructure, and headcount investment on gross margin, operating leverage, and future financing needs.
- The impact of competition, cybersecurity or service interruptions, client churn, telecommunications-provider dependence, and evolving privacy and communications regulations.