Five9, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Five9 provides cloud contact-center software and related usage services to more than 2,500 clients.
Financial Performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $230.1 million | $198.3 million | $671.4 million | $570.5 million |
| Revenue growth | 16% | 18% | ||
| Gross profit | $119.0 million | $104.2 million | $351.2 million | $299.3 million |
| Gross margin | 52% | 53% | 52% | 52% |
| Loss from operations | $(25.7) million | $(21.7) million | $(80.0) million | $(74.3) million |
| Net loss | $(20.4) million | $(23.2) million | $(69.4) million | $(81.0) million |
| Net loss per share | $(0.28) | $(0.33) | $(0.97) | $(1.16) |
| Adjusted EBITDA | $41.3 million | $36.7 million | $118.0 million | $94.3 million |
Subscription and related usage revenue represented 92% of revenue in both the quarter and nine-month period, compared with 90% and 91%, respectively, in the prior-year periods. Revenue growth was primarily attributed to larger clients, increased sales and marketing activity, and improved brand awareness.
Q3 gross margin was approximately 52%, down from 53%, as cost of revenue grew faster than revenue. Operating expenses were $144.8 million in Q3 and $431.2 million for the nine-month period. Stock-based compensation was $52.6 million in Q3 and $156.7 million for nine months, up from $44.5 million and $128.7 million, respectively.
Adjusted EBITDA increased to $41.3 million in Q3 and $118.0 million for nine months. The filing presents adjusted EBITDA as a non-GAAP measure that excludes, among other items, stock-based compensation, depreciation and amortization, interest, taxes, Russia exit costs, and acquisition-related costs.
Cash Flow, Liquidity, and Debt
- Cash provided by operating activities was $92.3 million for the first nine months of 2023, compared with $56.1 million in the prior-year period.
- Investing activities used $235.0 million, primarily reflecting purchases of marketable investments, the $80.6 million net cash payment for Aceyus, $19.9 million of capital expenditures, and $5.8 million of capitalized software development costs.
- Financing activities provided $91.0 million, including $74.5 million received from settlement of capped calls associated with the 2023 convertible notes, $9.4 million from the employee stock purchase plan, and $8.3 million from stock-option exercises.
- Cash, cash equivalents, and restricted cash declined by $51.6 million to $129.4 million at September 30, 2023. Cash and cash equivalents were $127.8 million, and marketable investments were $572.5 million.
- Working capital was $718.7 million. Management stated that existing cash and cash equivalents should satisfy working-capital and capital-expenditure needs for at least the next 12 months.
- The outstanding 2025 convertible senior notes had principal of $747.5 million, a 0.50% fixed interest rate, and mature June 1, 2025. Their net carrying amount was $741.2 million.
- The 2023 convertible senior notes matured May 1, 2023 and were settled in cash and common stock. No 2023 notes remained outstanding at quarter-end.
- Outstanding commitments included $72.0 million for cloud services, software, and maintenance; $17.0 million for co-location and telecommunications services; $55.1 million of operating lease payments; and $5.0 million of finance lease payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16% in Q3 and 18% for the first nine months, while net losses narrowed 12% and 14%, respectively.
- Operating loss widened in Q3 and for nine months because operating expenses continued to increase, although the net loss benefited from substantially higher interest income on marketable investments.
- Interest income and other increased to $8.2 million in Q3 and $18.5 million for nine months, compared with $1.0 million and $2.1 million, respectively, in 2022.
- Annual dollar-based retention declined to 110% from 118%, primarily due to continuing macroeconomic headwinds.
- Five9 acquired Aceyus on August 14, 2023, for approximately $82.0 million in cash. The preliminary purchase accounting included $62.0 million of goodwill and $22.2 million of acquired intangible assets. Aceyus results were not material to consolidated results for the period.
- Goodwill increased to $227.4 million from $165.4 million at December 31, 2022, primarily due to the Aceyus acquisition.
- Russia office closure and relocation costs were approximately $0.9 million in Q3 and $2.7 million for nine months, compared with $0.7 million and $4.6 million in the prior-year periods.
Outlook, Commentary, Risks, and Unusual Items
Management expects adverse economic conditions to continue affecting revenue, particularly the installed-base business, which historically contributes approximately half of annual revenue growth. The company expects continued investment in research and development, sales and marketing, professional services, cloud operations, infrastructure, and client support. It expects long-term gross margin improvement from scale, but near-term margins may fluctuate.
The filing does not provide a clear quantitative revenue or earnings guidance range for future periods. Management states that future capital requirements will depend on growth, client retention, new-client acquisition, investment levels, litigation, international expansion, the Russia-to-Portugal transition, acquisitions, and macroeconomic conditions.
- AI-related risks include inaccurate or biased outputs, intellectual-property claims, evolving regulation, cybersecurity and confidentiality issues, reputational harm, technical failures, and difficulty recruiting specialized personnel.
- Other key risks include client attrition or reduced usage, competition, service outages, reliance on telecommunications and other third parties, cybersecurity incidents, international and foreign-currency exposure, macroeconomic deterioration, and the company’s history of losses.
- The company remains exposed to the June 2025 maturity of $747.5 million of convertible notes and cautions that it may not be able to obtain additional financing on acceptable terms if needed.
- Management reported that legal and regulatory matters arising in the ordinary course were not expected to have a material impact, although an unfavorable resolution could affect a future reporting period.
- Disclosure controls and procedures were assessed as effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of revenue growth and the decline in annual dollar-based retention from 118% to 110%.
- Assess whether gross-margin pressure from hosting, infrastructure, personnel, telecommunications, and usage costs improves as scale increases.
- Review adjusted EBITDA alongside GAAP operating loss and the significant recurring stock-based compensation expense.
- Evaluate liquidity relative to the $747.5 million convertible-note maturity in June 2025 and other contractual commitments.
- Monitor the integration and strategic contribution of Aceyus, including the preliminary goodwill and intangible-asset valuations.
- Track the commercial performance, legal compliance, data-security implications, and development costs of AI-powered products.
- Consider the effects of macroeconomic conditions, client spending reductions, international expansion, foreign-exchange movements, and the Russia-to-Portugal operational transition.