Business Context and Reporting Period
Five9, Inc. provides cloud-based contact-center software, telephony, automation and artificial-intelligence capabilities through a SaaS model. The company serves more than 3,000 clients and operates as one reportable segment. This Form 10-K covers the fiscal year ended December 31, 2023; fourth-quarter figures are included in the unaudited quarterly data.
Financial Highlights
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $910.5 million | $778.8 million | 17% increase |
| Gross profit | $477.8 million | $411.3 million | 16% increase |
| Gross margin | 52% | 53% | Down 1 percentage point |
| Loss from operations | $98.6 million | $87.6 million | Loss increased |
| Net loss | $81.8 million | $94.7 million | Loss narrowed |
| Net loss per share | $1.13 | $1.35 | Loss per share improved |
| Adjusted EBITDA | $166.3 million | $140.4 million | 18% increase |
| Cash flow from operations | $128.8 million | $88.9 million | 45% increase |
Subscription and related usage revenue represented 92% of total revenue in 2023. Fourth-quarter revenue was $239.1 million, with gross profit of $126.6 million and a net loss of $12.4 million, compared with fourth-quarter 2022 revenue of $208.3 million and net loss of $13.7 million.
Annual Dollar-Based Retention Rate declined to 110% from 115%, primarily due to macroeconomic pressure on the installed customer base. Approximately 89% of 2023 revenue was generated from customers with U.S. billing addresses.
Cash, Liquidity and Debt
- Cash and cash equivalents were $143.2 million at December 31, 2023, compared with $180.5 million at December 31, 2022.
- Marketable investments totaled $587.1 million, resulting in cash, cash equivalents and marketable investments of approximately $730.3 million.
- Working capital was $756.8 million.
- Net cash used in investing activities was $259.6 million, including $80.6 million for the Aceyus acquisition, $31.2 million of capital expenditures and $9.5 million of capitalized software development costs.
- Cash provided by financing activities was $94.6 million, including $74.5 million received from settlement of capped calls associated with the 2023 convertible notes.
- The company had $747.5 million principal amount of 0.500% convertible senior notes outstanding, maturing June 1, 2025. The notes had a carrying value of $742.1 million and estimated fair value of $718.3 million at year-end.
- Management stated that existing cash and cash equivalents should fund working-capital and capital-expenditure needs for at least the next 12 months, but repayment or refinancing of the 2025 notes remains a significant liquidity consideration.
Material Changes Versus the Prior Comparable Period
- Revenue increased $131.6 million, driven primarily by larger clients, increased sales and marketing activity and improved brand awareness.
- Cost of revenue rose 18%, faster than revenue, reducing gross margin to 52% from 53%. Key increases included data-center and public-cloud costs, personnel costs, hosted software costs and Universal Service Fund and telecommunications fees.
- Research and development expense increased 10% to $156.6 million, while sales and marketing expense increased 13% to $296.7 million.
- General and administrative expense increased 29% to $123.1 million, partly because of Aceyus acquisition and other strategic-activity costs.
- Interest income and other increased to $26.8 million from $4.8 million, primarily because of higher interest income on marketable investments.
- Stock-based compensation increased to $206.3 million from $172.5 million, equal to approximately 23% of revenue and a significant adjustment to reported earnings.
- Five9 acquired Aceyus in August 2023 for approximately $82.0 million in cash. The preliminary purchase accounting included $62.0 million of goodwill and $22.1 million of acquired intangible assets.
- Costs associated with closing and relocating Russian operations declined to approximately $2.8 million from $7.9 million. Management does not expect additional material costs related to this transition.
- The 2023 convertible senior notes matured in May 2023 and were settled using cash and common stock; no such notes remained outstanding at year-end.
Outlook, Commentary, Risks and Unusual Items
Management expects to continue investing in sales and marketing, research and development, cloud infrastructure, international operations and AI-enabled products. The filing does not provide a specific 2024 revenue, margin, earnings or cash-flow guidance figure.
- Management expects adverse economic conditions, including inflation, higher interest rates and reduced economic output, to continue affecting revenue, particularly the installed customer base.
- AI and generative-AI products are central growth initiatives, but the company identifies risks relating to accuracy, bias, intellectual-property ownership, privacy, cybersecurity, regulation, specialized personnel and customer adoption.
- The company faces intense competition from cloud and legacy contact-center vendors, CRM providers, unified-communications providers and developer-oriented platforms.
- Service outages, cybersecurity incidents, telecommunications-provider failures and public-cloud disruptions could result in customer loss, credits, damages, regulatory actions and reputational harm. The company reported no known cybersecurity incident that had materially affected or was reasonably likely to materially affect the business as of the filing.
- Regulatory exposure includes telecommunications rules, TCPA and robocall requirements, STIR/SHAKEN, FCC and USF obligations, privacy laws including GDPR and U.S. state laws, and evolving AI regulation.
- The company accrued $1.7 million for potentially unpaid state and local taxes, fees and surcharges. It also had $0.1 million of accrued interest related to a disputed historical USF assessment for 2003–2007.
- Material commitments included $104.4 million of cloud-services, software and maintenance commitments, $52.0 million of operating-lease obligations, $5.0 million of finance-lease obligations and $14.9 million of hosting and telecommunications obligations.
- Professional-services offerings currently have negative margins, and increased reliance on professional services or usage revenue could pressure consolidated margins.
Investor Verification Checklist
- Verify the company’s ability to refinance or repay the $747.5 million convertible notes due June 1, 2025, including the potential cash requirement upon conversion or a fundamental change.
- Assess whether the decline in Annual Dollar-Based Retention Rate to 110% stabilizes or continues, particularly among existing customers affected by macroeconomic conditions.
- Evaluate whether revenue growth can offset rising public-cloud, data-center, telecommunications, personnel and professional-services costs.
- Separate GAAP performance from adjusted EBITDA by reviewing the substantial $206.3 million stock-based compensation adjustment and other excluded items.
- Monitor Aceyus integration, final purchase accounting, goodwill and intangible-asset impairment risk.
- Review the company’s ability to commercialize AI products while managing accuracy, privacy, intellectual-property, cybersecurity and regulatory risks.
- Confirm the ultimate amount and timing of state, local and federal telecommunications tax, fee and USF liabilities.
- Review future dilution from outstanding RSUs, PRSUs, options, employee purchase-plan shares and potential convertible-note settlement.