Five9, Inc. 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides intelligent cloud contact-center software and related telephony, serving more than 2,000 clients. This filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Subscription and related usage fees represented 92% of revenue in both 2021 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $154.3 million | $112.1 million | $436.0 million | $307.0 million |
| Revenue growth | 38% | — | 42% | — |
| Gross profit | $87.2 million | $65.6 million | $244.7 million | $178.0 million |
| Gross margin | 56% | 58% | 56% | 58% |
| Loss from operations | $(19.0) million | $(1.8) million | $(44.3) million | $(15.0) million |
| Net loss | $(20.5) million | $(11.4) million | $(49.4) million | $(34.9) million |
| Net loss per share | $(0.30) | $(0.17) | $(0.73) | $(0.55) |
| Adjusted EBITDA | $27.4 million | $24.1 million | $73.6 million | $56.5 million |
Cash flow from operating activities was $20.3 million for the first nine months of 2021, down from $48.0 million in the prior-year period. Capital expenditures were $28.5 million. Cash and cash equivalents declined to $82.5 million from $220.4 million at December 31, 2020, while marketable investments totaled $541.3 million. Management reported working capital of $388.1 million and stated that existing cash and cash equivalents should fund working capital and capital expenditures for at least the next 12 months.
Total convertible senior note principal outstanding was $787.5 million at September 30, 2021, consisting of approximately $40.0 million due in 2023 and $747.5 million due in 2025. The carrying value of the notes was $773.4 million. The company also had $53.9 million of operating lease liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue increased 38% in the quarter and 42% year to date, primarily from larger clients, increased sales and marketing activity, and improved brand awareness.
- Gross margin declined two percentage points to 56%, reflecting higher data-center, public-cloud, telecommunications, depreciation, amortization, and stock-based compensation costs.
- Research and development expense increased 68% in the quarter and 53% year to date; sales and marketing increased 51% and 47%, respectively; general and administrative expense increased 60% and 51%, respectively.
- Operating and net losses widened despite revenue growth, partly because of continued investment and higher personnel-related costs.
- Interest expense declined substantially following early adoption of ASU 2020-06, which eliminated amortization of certain convertible-debt discounts, and following reductions in the 2023 notes.
- Annual dollar-based retention based on net revenue improved to 123% from 114%, driven primarily by larger clients increasing agent seats.
- Stock-based compensation increased to $27.4 million in Q3 and $73.2 million year to date, compared with $17.3 million and $47.9 million, respectively.
- Operating cash generation decreased as deferred contract acquisition costs, accounts receivable, prepaid expenses, and other operating assets absorbed cash.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance forecast. Management expects continued investment in infrastructure, research and development, sales and marketing, and client support. It expects near-term cost of revenue, research and development, and sales and marketing expenses to increase in absolute dollars, with margins affected by cloud infrastructure, international expansion, and personnel costs.
- Five9 and Zoom mutually terminated their proposed merger on September 30, 2021 after stockholders failed to approve it. Five9 recorded approximately $7.5 million of merger-related transaction costs in general and administrative expense.
- The company recorded $5.3 million of contingent consideration expense year to date related to the Inference acquisition. The contingent earn-out had an estimated fair value of $23.4 million at September 30, 2021, with potential payments ranging from zero to $24.0 million through December 31, 2021.
- Five9 early adopted ASU 2020-06 on January 1, 2021. The adoption increased opening debt by approximately $145.7 million, reduced additional paid-in capital by $168.4 million, and reduced opening accumulated deficit by $22.7 million.
- The company entered into a September 2021 cloud-services agreement with a total commitment of $56.0 million through 2024, in addition to a $5.0 million agreement entered into in June 2021.
- COVID-19 had a moderately positive effect on the reported periods as customers shifted from physical to virtual operations, but management stated that the duration and future effects remain uncertain.
- Principal risks include client retention and seat reductions, competition, long sales and implementation cycles, service outages, telecommunications-provider dependence, cybersecurity and data-security incidents, rapid technological change, employee retention, COVID-19 impacts, stock-price volatility, and the company’s continuing history of losses.
- Management stated that no material legal matters were expected to affect financial results, although unfavorable resolutions could materially affect a future period. No off-balance-sheet arrangements were reported.
Most Important Facts for Investors to Verify
- Whether strong revenue growth and 123% dollar-based retention continue after the merger termination and amid changing economic and COVID-19 conditions.
- Whether gross margin can recover from 56% as cloud, telecommunications, infrastructure, amortization, and personnel costs rise.
- Cash burn, investment maturities, and the company’s ability to fund operations while addressing $787.5 million of convertible-note principal due in 2023 and 2025.
- The timing and amount of the Inference contingent earn-out and any additional merger-related or legal costs.
- The effect of substantial stock-based compensation and potential dilution from equity awards and convertible notes.
- Execution of the company’s growth investments, including larger-client expansion, artificial intelligence capabilities, international growth, and infrastructure commitments.