Five9, Inc. 2021 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud software for contact centers through its Virtual Contact Center platform and related applications. The company serves more than 2,000 clients and generates revenue primarily from recurring subscriptions and related telephony usage. This filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Subscription and related usage revenue represented 92% of total revenue in the first quarter of 2021, compared with 91% in the prior-year period. Management stated that COVID-19 had a moderately positive effect on results because of the shift from brick-and-mortar operations to virtual environments.
Financial Performance and Liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $137.9 million | $95.1 million | 45% increase |
| Gross profit | $78.1 million | $55.1 million | 42% increase |
| Gross margin | 56.6% | 57.9% | Decreased approximately 1.3 percentage points |
| Operating loss | $11.1 million | $5.0 million | Loss increased |
| Operating margin | (8.0%) | (5.2%) | Declined |
| Net loss | $12.3 million | $7.4 million | Loss increased |
| Net loss per share | $0.18 | $0.12 | Loss per share increased |
| Adjusted EBITDA | $22.2 million | $14.1 million | 57% increase |
| Net cash from operating activities | $13.8 million | $10.4 million | 32% increase |
Cost of revenue increased 49% to $59.8 million, causing gross margin to decline to approximately 57%. Management attributed the margin pressure primarily to higher personnel and stock-based compensation costs, depreciation, data-center and public-cloud costs, federal telecommunications fees, third-party hosted software costs, and amortization of acquisition-related intangible assets.
Operating expenses increased 49% to $89.2 million. Research and development increased 46% to $22.1 million, sales and marketing increased 49% to $44.8 million, and general and administrative expense increased 52% to $22.2 million. Stock-based compensation was $20.9 million, compared with $13.8 million in the prior-year quarter.
Cash and cash equivalents were $176.3 million at March 31, 2021, compared with $220.4 million at December 31, 2020. Short-term marketable investments were $467.1 million, resulting in cash, cash equivalents and marketable investments of approximately $643.5 million. Working capital was $624.7 million.
Net cash used in investing activities was $51.7 million, primarily reflecting $163.7 million of marketable investment purchases and $8.2 million of capital expenditures, partially offset by $120.2 million of investment maturities. Net cash used in financing activities was $6.1 million, including $7.8 million for 2023 convertible note settlements.
Management stated that existing cash and cash equivalents are expected to be sufficient for working capital and capital expenditure needs for at least the next 12 months. The filing does not provide formal quantitative revenue or earnings guidance.
Debt, Commitments and Other Key Items
- Aggregate principal of convertible senior notes outstanding was $798.5 million at March 31, 2021: $747.5 million due June 1, 2025, and approximately $51.0 million due May 1, 2023.
- The notes are senior unsecured obligations with fixed annual interest rates of 0.500% for the 2025 notes and 0.125% for the 2023 notes.
- During the quarter, Five9 paid $7.8 million in cash and issued 143,015 shares to settle approximately $7.8 million of 2023 convertible notes. An additional $9.8 million of conversion elections remained unsettled at quarter-end and were expected to be settled during the first half of 2021.
- Five9 early adopted ASU 2020-06 effective January 1, 2021. The adoption combined the debt and equity components of the convertible notes, increased reported debt, reduced additional paid-in capital by $168.4 million, and reduced opening accumulated deficit by $22.7 million. It also reduced future noncash interest expense.
- The Inference acquisition generated $2.5 million of contingent consideration expense in the quarter. Contingent consideration was valued at $20.6 million at March 31, 2021, with potential earn-out payments of up to $24.0 million.
- A new Bishop Ranch office lease commenced February 1, 2021, adding approximately $46.4 million of total lease commitments over 10 years. Operating lease liabilities increased to $50.6 million from $9.3 million at year-end.
- Remaining performance obligations under contracts with original terms exceeding one year were $369.8 million, of which approximately three-fourths was expected to be recognized over the next 24 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by larger clients, increased sales and marketing activity, improved brand awareness, and increased agent seats among existing clients.
- Annual dollar-based retention based on net revenue improved to 121% from 111%, principally because larger clients increased their agent seats.
- Revenue growth did not translate into improved GAAP profitability: the net loss widened by $4.9 million, and operating margin declined.
- Adjusted EBITDA improved despite higher operating expenses, reflecting the company’s non-GAAP adjustments for stock-based compensation, depreciation and amortization, acquisition-related costs, contingent consideration, and other items.
- Interest expense declined 44% to $1.9 million, primarily because ASU 2020-06 eliminated amortization of prior debt discounts and because the outstanding 2023 note balance declined.
- Cash from operations increased, but total cash declined because of investment purchases, capital expenditures, and convertible note settlements.
Outlook, Risks and Unusual Items
Management expects continued investment in infrastructure, research and development, sales and marketing, and client support. Cost of revenue and operating expenses are expected to increase in absolute dollars over the long term, while near-term margins may fluctuate due to cloud infrastructure spending, COVID-19 effects, and macroeconomic conditions.
- COVID-19 continues to create uncertainty regarding client demand, economic conditions, operations, and future financial performance, although management expects a continuing longer-term net benefit from increased virtual activity.
- Key risks include customer retention and expansion, competition, rapid technological change, service outages, reliance on telecommunications and internet providers, cybersecurity incidents, longer sales cycles for larger clients, and the ability to manage rapid growth.
- The company has a history of losses and may not achieve or sustain profitability. Domestic deferred tax assets remain subject to a full valuation allowance.
- Convertible note conversion, settlement, refinancing, or repayment could require significant cash or result in share dilution. The 2023 notes were convertible during the quarter and through June 30, 2021 based on the applicable stock-price trigger.
- Legal matters were described as arising in the ordinary course, with no currently known matter expected by management to have a material impact; however, an unfavorable resolution could materially affect a future period.
- The filing reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2021.
Investor Verification Checklist
- Verify whether revenue growth and the 121% dollar-based retention rate remain supported by larger-client expansion and additional agent seats.
- Monitor whether gross-margin pressure from public-cloud costs, telecommunications fees, amortization, and stock-based compensation persists.
- Reconcile adjusted EBITDA with GAAP operating results and assess the magnitude and recurring nature of excluded costs.
- Track settlements, conversions, potential dilution, and cash requirements related to the 2023 convertible senior notes.
- Assess liquidity after investment purchases, capital expenditures, lease commitments, acquisitions, and future contingent consideration payments.
- Evaluate the effect of COVID-19, cybersecurity, service availability, competition, and macroeconomic conditions on customer demand and retention.