Five9, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud contact-center software and related usage services through a SaaS model. The filing covers the quarter and six months ended June 30, 2023. The company reported more than 2,500 clients, with subscription and related usage fees representing 91% of quarterly revenue and 92% of year-to-date revenue.
Financial Performance and Liquidity
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $222.9 million | $189.4 million | 18% |
| Gross profit | $118.5 million | $101.2 million | 17% |
| Gross margin | 53% | 53% | Flat |
| Loss from operations | $(25.2) million | $(21.8) million | Loss increased |
| Net loss | $(21.7) million | $(23.7) million | Loss narrowed |
| Net loss per share | $(0.30) | $(0.34) | Improved |
| Adjusted EBITDA | $41.5 million | $33.1 million | 25% |
| Six Months Ended June 30 | 2023 | 2022 |
|---|---|---|
| Revenue | $441.3 million | $372.2 million |
| Gross profit | $232.2 million | $195.1 million |
| Gross margin | 53% | 52% |
| Loss from operations | $(54.2) million | $(52.6) million |
| Net loss | $(49.0) million | $(57.8) million |
| Adjusted EBITDA | $76.7 million | $57.6 million |
| Net cash from operating activities | $55.3 million | $25.6 million |
As of June 30, 2023, cash and cash equivalents were $195.6 million, short-term marketable investments were $464.2 million, and long-term marketable investments were $85.1 million. Working capital was $683.0 million, excluding long-term marketable investments. Total cash, cash equivalents and marketable investments were approximately $744.9 million.
Outstanding debt consisted primarily of $747.5 million principal amount of 0.5% convertible senior notes due June 1, 2025, carried at $740.2 million net of unamortized issuance costs. The 2023 convertible notes matured on May 1, 2023; settlement included cash and shares, and related capped calls produced $74.5 million of cash and 370,877 shares.
Operating cash flow was $55.3 million for the first six months. Investing cash flow was $(129.7) million, primarily reflecting purchases of marketable investments, capital expenditures of $16.6 million, and capitalized software development costs of $3.6 million. Financing cash flow was $90.7 million, primarily from capped-call settlement proceeds and employee equity issuances.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18% in Q2 and 19% for the first six months, driven primarily by larger clients, increased sales and marketing activity, and improved brand awareness.
- Annual dollar-based retention declined to 112% from 118%, reflecting macroeconomic pressure on the installed base, including particular weakness in the consumer vertical during Q2.
- Gross margin was stable at 53% in Q2 and improved to 53% from 52% for the first six months.
- Operating expenses increased 17% in Q2 and 16% for the first six months. Year-to-date sales and marketing expense rose 17%, research and development rose 9%, and general and administrative expense rose 22%.
- Net loss narrowed despite higher operating expenses, primarily because interest income increased substantially as a result of higher yields on marketable investments.
- Stock-based compensation increased to $53.4 million in Q2 and $104.1 million for the first six months, compared with $44.8 million and $84.2 million, respectively.
- Costs associated with closing and relocating Russian operations were approximately $1.1 million in Q2 and $1.8 million year to date, compared with $1.1 million and $3.9 million in the prior-year periods.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance figure. Management expects continued investment in research and development, sales and marketing, infrastructure, professional services, public cloud, client support, and network capacity. Management expects long-term gross-margin improvement as revenue growth outpaces infrastructure and service costs.
Management believes existing cash and cash equivalents will satisfy working-capital and capital-expenditure needs for at least the next 12 months. Future capital requirements may be affected by growth, client retention, macroeconomic conditions, sales and marketing expansion, product development, litigation, the Russia-to-Portugal operational transition, and acquisitions. The company may seek additional equity or debt financing, but availability and terms are not assured.
- Macroeconomic deterioration, inflation, interest rates, reduced economic output, foreign-exchange movements, and geopolitical events may reduce demand, usage, retention, and growth.
- Competition is intense, and the company must continue developing cloud contact-center and AI capabilities.
- AI products and employee use of AI create potential accuracy, bias, intellectual-property, privacy, cybersecurity, regulatory, and reputational risks.
- Service outages, cybersecurity incidents, telecommunications-provider failures, or implementation delays could result in customer losses, claims, or credits.
- The company has a history of losses and may not achieve or sustain GAAP profitability.
- The $747.5 million convertible notes mature in 2025, creating a substantial refinancing, repayment, or conversion obligation.
After quarter-end, on August 3, 2023, Five9 agreed to acquire Aceyus, Inc. for approximately $82 million at closing, subject to customary adjustments and closing conditions. The company expected the transaction to close by the end of the third quarter and stated that it would support enterprise cloud migration and contextual-data and AI opportunities.
Management reported effective disclosure controls as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter. The board adopted amended and restated bylaws on August 2, 2023, principally addressing universal proxy procedures and enhanced stockholder proposal and nomination requirements.
Important Facts for Investors to Verify
- Whether annual dollar-based retention stabilizes or continues declining under macroeconomic pressure.
- The company’s ability to convert revenue growth and adjusted EBITDA into sustained positive GAAP operating income and net income.
- The magnitude and timing of repayment, refinancing, or potential equity dilution related to the 2025 convertible notes.
- The cash impact, purchase accounting, and integration performance of the proposed Aceyus acquisition.
- Whether AI investments generate commercially successful products while avoiding accuracy, intellectual-property, privacy, cybersecurity, and regulatory issues.
- The effect of elevated stock-based compensation on shareholder dilution and underlying earnings quality.
- The company’s ability to maintain liquidity while funding growth, capital expenditures, software development, contractual commitments, and potential acquisitions.