Five9, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed August 4, 2014. Five9 provides cloud contact center software and related telecommunications usage services to more than 2,000 clients. The company completed its initial public offering in April 2014.
Financial Highlights
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $24.7 million | $20.3 million | $49.0 million | $39.4 million |
| Gross profit | $11.2 million | $8.1 million | $22.3 million | $15.5 million |
| Gross margin | 45% | 40% | 46% | 39% |
| Loss from operations | $(7.5) million | $(7.3) million | $(16.8) million | $(14.0) million |
| Net loss | $(8.7) million | $(8.3) million | $(17.0) million | $(14.9) million |
| Adjusted EBITDA | $(6.9) million | $(6.1) million | $(13.4) million | $(11.6) million |
| Net loss per share | $(0.18) | $(2.25) | $(0.64) | $(4.14) |
- Revenue increased 22% year over year in the quarter and 24% for the six-month period. New clients accounted for approximately $4.5 million of quarterly growth and $7.6 million of six-month growth.
- Subscription and related usage fees represented 97% of revenue in both the quarter and six-month period.
- Operating expenses were $18.7 million in the quarter and $39.2 million for the six months. Sales and marketing increased 34% and 40%, respectively, while research and development increased 35% and 30%.
- Quarterly general and administrative expense declined 13% because of a $2.8 million release of a contingent state sales-tax liability. Excluding that credit, G&A expense increased.
- Cash used in operating activities was $14.4 million for the six months, compared with $9.8 million in the prior-year period. Capital expenditures were $0.3 million.
- Cash and cash equivalents were $61.6 million at June 30, 2014, and short-term investments were $30.0 million, for total cash and short-term investments of $91.6 million.
- Total debt at carrying value was $39.3 million, including the $12.5 million revolving line of credit, $26.8 million of notes payable and capital lease obligations. The revolving line matures in March 2015.
- Stockholders’ equity was $57.5 million at June 30, 2014, compared with a deficit of $3.0 million at December 31, 2013, primarily reflecting the IPO and conversion of preferred stock.
Material Changes Versus the Prior Comparable Period
- The IPO generated $74.9 million of gross proceeds after underwriting discounts and commissions and before approximately $4.2 million of offering expenses. Net IPO proceeds reported in financing cash flow were $71.5 million.
- Revenue growth was driven primarily by new clients, while revenue from existing clients declined slightly in the quarter but increased for the six-month period.
- Gross margin improved by five percentage points for the quarter and seven percentage points for the six months, mainly from usage efficiencies, scale benefits and elimination of duplicate data centers.
- Interest expense increased substantially to $1.1 million for the quarter and $1.9 million for the six months because of higher debt balances.
- Dollar-based retention declined to 98% from 103% for the trailing twelve months, primarily because two large clients terminated after experiencing financial difficulties and because of lower international usage from another client.
- Liability-classified warrant balances were reclassified to additional paid-in capital upon the IPO; future fair-value charges for those warrants are not expected.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued investment in sales and marketing, research and development, infrastructure, client support and public-company administration. These investments are expected to increase expenses and losses in the foreseeable future.
- Management stated that existing cash, short-term investments and available borrowing capacity were expected to fund working-capital and capital-expenditure needs at least through June 30, 2015; the filing does not provide formal revenue or earnings guidance.
- The company introduced its Summer Release 2014, adding native social, mobile, chat and email capabilities and enhancements for mobility, monitoring and reporting.
- A March 2014 outage at a third-party colocation facility caused an extended interruption for some clients. Service credits were issued, but the company reported no material revenue impact.
- Five9 remains subject to uncertainty regarding Universal Service Fund assessments, interest and potential penalties. At June 30, accrued federal fees were $4.4 million and the USAC promissory note balance was approximately $3.2 million. Additional assessments for periods as early as 2003 remain possible.
- State and local tax liabilities remain subject to regulatory interpretation. A favorable state ruling resulted in the $2.8 million liability release, but the company continued to accrue other usage-based tax liabilities.
- NobelBiz has asserted patent infringement claims. A claim construction hearing was scheduled for August 22, 2014; no loss was accrued because management did not believe an unfavorable outcome was probable.
- Key risks include continued operating losses, negative operating cash flow, debt maturities and covenants, competition, short client termination periods, service outages, reliance on third-party telecommunications and data-center providers, privacy and security obligations, regulatory assessments, litigation and the need for additional financing.
- The company adopted new tax-benefit presentation guidance without material impact and was evaluating the impact and transition method for the new revenue-recognition standard effective January 1, 2017.
Investor Verification Items
- Verify the sustainability of revenue growth and the decline in dollar-based retention, particularly among larger clients and international usage customers.
- Reconcile reported gross-margin improvement with continued infrastructure, telecommunications, support and federal-fee costs.
- Assess the company’s path to profitability and cash-flow breakeven given the $17.0 million six-month net loss and $14.4 million operating cash outflow.
- Review the March 2015 revolving-credit maturity, debt covenants, secured collateral and the interest-rate exposure of variable-rate borrowings.
- Monitor unresolved USF assessments, potential FCC penalties, state and local tax obligations and any potential recovery of previously paid telecommunications taxes.
- Track the NobelBiz patent litigation and any effects on the company’s caller-ID technology or required licensing and modification costs.
- Evaluate dilution and potential selling pressure from outstanding options, restricted stock units, warrants and shares subject to IPO lock-up expiration.