Five9, Inc. 2015 Q1 Form 10-Q Summary
Business context and reporting period
Five9 provides cloud contact center software and related telecommunications usage services through a SaaS model. This report covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The company reported more than 2,000 clients and approximately 635 employees at March 31, 2015. Subscription and related usage fees represented 97% of revenue.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $30.3 million | $24.3 million | Up 25% |
| Gross profit | $15.5 million | $11.1 million | Up 39% |
| Gross margin | 51% | 46% | Up 5 percentage points |
| Operating loss | $7.7 million | $9.3 million | Improved $1.5 million |
| Net loss | $8.9 million | $8.3 million | Loss increased $0.6 million |
| Adjusted EBITDA | $(3.2) million | $(6.5) million | Improved $3.3 million |
| Net loss per share | $(0.18) | $(1.48) | Prior period affected by substantially fewer shares |
| Cash used in operations | $(5.8) million | $(6.2) million | Improved $0.4 million |
Revenue growth was primarily attributed to new clients, with average pricing generally stable. Gross margin benefited from improved telecommunications usage efficiency and economies of scale. Operating expenses increased to $23.2 million from $20.4 million, including research and development of $6.0 million, sales and marketing of $9.9 million, and general and administrative expense of $7.3 million.
Cash and short-term investments totaled approximately $70.6 million at March 31, 2015, comprising $50.6 million of cash and $20.0 million of U.S. Treasury bills. Cash declined by $7.6 million during the quarter. Investing cash flow was positive $0.5 million, primarily reflecting the maturity and reinvestment of $20.0 million of short-term investments and the release of $0.7 million of restricted cash. Financing cash flow was negative $2.4 million, primarily due to debt and capital-lease repayments.
Total debt was $38.9 million before debt discounts, or $37.7 million on a net carrying-value basis. This included a $12.5 million revolving credit balance, a $20.0 million term loan, approximately $4.0 million under another term loan, and a $2.4 million USAC promissory note. The revolving facility had $7.5 million available, and an additional $10.0 million remained available under the term loan facility. Management stated that existing liquidity and borrowing availability should fund working capital and capital expenditures at least through March 31, 2016.
Material changes versus the prior comparable period
- Revenue increased 25%, while gross profit increased 39% and gross margin improved from 46% to 51%.
- Operating loss narrowed despite continued investment in personnel, infrastructure, product development, and sales and marketing.
- Net loss increased because Q1 2014 included a $1.7 million favorable change in the fair value of warrant liabilities; those warrants became equity-classified following the 2014 IPO. Interest expense also increased 46% to $1.1 million.
- Dollar-based retention declined to 95% from 100%, primarily due to lower usage revenue from one client affected by international calling price competition and the failure of a business process outsourcing customer.
- Stock-based compensation increased to $2.2 million from $1.2 million.
- General and administrative expense included a $0.6 million out-of-period adjustment for estimated sales taxes relating to prior periods and four additional states.
- The company settled the UHC bankruptcy-related claim for a $99,000 cash payment, compared with the approximately $2.5 million initially sought.
Outlook, commentary, risks, and unusual items
Management expects to continue increasing spending in research and development, sales and marketing, headcount, network infrastructure, and client support. Expenses are expected to increase in absolute dollars, although management expects some expense ratios to decline as revenue grows and infrastructure economies of scale develop. The filing does not provide formal quarterly or annual revenue or earnings guidance. Management expects losses and operating cash uses to continue for the foreseeable future and states that profitability may not be achieved or sustained.
The company has significant regulatory and tax contingencies. At March 31, 2015, it had $5.5 million accrued for unpaid Universal Service Fund contributions, interest, and penalties, a $2.4 million USAC promissory note, and a tentatively negotiated $2.0 million FCC civil penalty. Potential additional USF assessments for 2003 through 2007 remain unresolved, and the company is seeking credit or recovery for up to $3.1 million of prior indirect payments to telecommunications providers. It also had $3.3 million of accrued contingent state and local sales taxes and surcharges.
Material business risks include continued losses and negative operating cash flow; customer churn and the 30-day adjustment or termination provisions applicable to many contracts; competitive pricing pressure; dependence on third-party telecommunications providers and data centers; service outages, cybersecurity incidents, and data loss; longer sales cycles for larger customers; international operations and foreign-exchange exposure; regulatory compliance; additional financing needs; and the NobelBiz patent litigation. The NobelBiz case remained pending, with trial scheduled for June 20, 2016, and no loss accrued because management did not consider an adverse outcome probable.
The company reported no off-balance-sheet arrangements, no defaults under senior securities, and effective disclosure controls as of March 31, 2015. Newly issued accounting guidance discussed in the filing was not expected to have a material effect, although the company was still evaluating the future revenue-recognition standard effective beginning in 2017.
Important facts for investors to verify
- Whether 25% revenue growth and the 51% gross margin are sustainable, particularly given the 95% dollar-based retention rate.
- The pace at which the company can reduce its $3.2 million quarterly Adjusted EBITDA loss and $5.8 million quarterly operating cash burn.
- Debt maturities, variable interest-rate exposure, collateral requirements, and compliance with loan covenants.
- The ultimate amount and timing of USF assessments, the FCC consent decree and civil penalty, and potential recovery of prior indirect USF payments.
- The accuracy and sufficiency of accrued state and local sales-tax liabilities, including the $0.6 million prior-period adjustment.
- Developments in the NobelBiz patent litigation and any effect on the company’s technology or service offerings.
- Customer concentration and retention trends, including the causes of declining usage revenue and client churn.
- The company’s ability to fund operations beyond management’s stated March 31, 2016 liquidity horizon without additional debt or equity financing.