Five9, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022, with selected quarterly data including the fourth quarter ended December 31, 2022. Five9 provides cloud contact-center software and telephony services through a SaaS model, serving more than 2,500 clients. The company operates as one reportable segment.
Key Financial Metrics
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $778.8 million | $609.6 million | +28% |
| Gross profit | $411.3 million | $338.5 million | +22% |
| Gross margin | 53% | 56% | Down 3 percentage points |
| Loss from operations | $(87.6) million | $(56.3) million | Loss increased |
| Net loss | $(94.7) million | $(53.0) million | Loss increased |
| Net loss per share | $(1.35) | $(0.79) | Loss increased |
| Adjusted EBITDA | $140.4 million | $110.5 million | +27% |
| Net cash from operating activities | $88.9 million | $29.0 million | Improved |
Subscription and related usage revenue represented 91% of total revenue, compared with 92% in 2021. Annual Dollar-Based Retention Rate declined to 115% from 122%, reflecting the fading COVID-19 benefit and macroeconomic headwinds. Research and development expense increased 33% to $141.8 million, sales and marketing expense increased 35% to $262.0 million, and general and administrative expense increased 1% to $95.1 million.
Stock-based compensation was $172.5 million, up from $108.8 million, and represented a significant non-cash expense. Adjusted EBITDA excludes stock-based compensation and other items and is not a GAAP profitability measure.
Fourth Quarter 2022
| Metric | Q4 2022 | Q4 2021 |
|---|---|---|
| Revenue | $208.3 million | $173.6 million |
| Gross profit | $112.1 million | $93.8 million |
| Loss from operations | $(13.3) million | $(12.0) million |
| Net loss | $(13.7) million | $(3.6) million |
| Net loss per share | $(0.19) | $(0.05) |
Fourth-quarter revenue increased 20% year over year, while net loss widened. The filing identifies the fourth quarter as seasonally stronger because of activity in retail, healthcare and education, although macroeconomic pressure particularly affected the healthcare and consumer verticals.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $180.5 million at year-end, compared with $90.9 million in 2021.
- Short-term and long-term marketable investments totaled $434.6 million; cash, cash equivalents and marketable securities totaled approximately $615.1 million.
- Working capital was $627.9 million. Management stated that existing cash and cash equivalents should fund working capital and capital expenditure needs for at least the next 12 months.
- Investing cash flow was positive $31.0 million, after $52.3 million of capital expenditures, $3.9 million of capitalized software development costs and $435.8 million of marketable-investment purchases, offset by investment maturities and sales.
- Financing cash flow was negative $30.2 million, primarily reflecting $34.1 million of cash payments for 2023 convertible-note settlements and $24.0 million paid for Inference contingent consideration.
- Aggregate convertible-note principal outstanding was approximately $747.7 million: $747.5 million of 0.500% notes due June 1, 2025 and approximately $0.2 million of 0.125% notes due May 1, 2023.
- Operating lease obligations were $57.9 million, and cloud-service commitments were $41.1 million at year-end.
Material Changes and Unusual Items
- Revenue grew 28%, primarily from larger clients, expanded sales and marketing activity, and improved brand awareness.
- Cost of revenue grew 36%, faster than revenue, reducing gross margin from 56% to 53%. Drivers included personnel, public-cloud and data-center costs, hosted software, international expansion, and higher usage and carrier costs.
- Five9 incurred approximately $7.9 million related to closing and relocating its Russian operations and establishing a development center in Portugal. Approximately $7.2 million was excluded from adjusted EBITDA.
- Five9 paid the final $24.0 million contingent earn-out related to its 2020 Inference acquisition.
- The former chief executive officer resigned effective November 28, 2022, and Michael Burkland returned as chief executive officer on that date.
- The proposed merger with Zoom was terminated in September 2021 after stockholders failed to approve it. The company recorded approximately $7.6 million of related transaction costs in 2021.
- Five9 early adopted ASU 2020-06 for convertible-note accounting effective January 1, 2021, resulting in a $22.7 million reduction to opening accumulated deficit and a $168.4 million reduction to additional paid-in capital.
- Net loss increased despite higher adjusted EBITDA, and accumulated deficit reached $323.1 million. Five9 has incurred annual losses since inception and expects losses to continue for the foreseeable future.
Outlook, Management Commentary and Risks
Management expects continued investment in sales and marketing, research and development, public-cloud infrastructure, professional services, client support and international expansion. The filing does not provide a clear formal revenue or earnings guidance figure.
Management expects gross margin to improve over the long term through scale, but near-term margins remain exposed to cloud infrastructure, telecommunications, usage, professional services and client-mix costs. The company reported continuing macroeconomic headwinds affecting its installed base, which typically contributes approximately half of revenue growth, and the mid-market portion of new-client activity.
- Customer retention and expansion are central risks: clients can reduce agent seats or usage, generally with short notice, and dollar-based retention declined year over year.
- Competition is intensifying from cloud contact-center providers, legacy vendors, CRM companies, unified-communications providers and technology platforms.
- Service outages, cybersecurity incidents, data breaches, third-party telecommunications failures and public-cloud disruptions could lead to customer loss, credits, damages, regulatory actions and reputational harm.
- Regulatory exposure includes telecommunications rules, TCPA and robocall requirements, STIR/SHAKEN compliance, privacy laws, GDPR, state taxes and Universal Service Fund obligations.
- The company accrued $1.2 million for potential state and local sales taxes and surcharges and $0.1 million of interest related to a disputed 2003–2007 USF assessment. Actual liabilities could differ.
- The $747.5 million convertible-note maturity in 2025 creates a material refinancing, repayment, conversion and liquidity consideration. The filing states that Five9 may not generate sufficient cash to service or repay its notes under adverse conditions.
- International operations face execution, currency, political, regulatory and personnel risks following the closure of the Russia office and expansion in Portugal.
Most Important Facts for Investors to Verify
- Whether revenue growth and the 115% dollar-based retention rate stabilize as macroeconomic pressure persists.
- Whether cost of revenue moderates and gross margin recovers from 53%.
- The sustainability of positive operating cash flow after considering high stock-based compensation, capital expenditures and deferred contract-acquisition costs.
- Available liquidity and refinancing or settlement plans for the $747.5 million of convertible notes due in 2025.
- The effect of CEO turnover, international relocation costs and continued headcount investment on execution.
- Potential exposure from privacy, telecommunications, USF, state and local tax, cybersecurity and other regulatory matters.
- The extent to which adjusted EBITDA differs from GAAP operating performance, particularly because FY 2022 stock-based compensation was $172.5 million.