Five9, Inc. Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud software and related telephony services for contact centers, serving more than 2,000 clients. This Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The filing was signed May 4, 2020.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $95.1 million | $74.5 million | Up 28% |
| Gross profit | $55.1 million | $43.7 million | Up 26% |
| Gross margin | 58% | 59% | Down 1 percentage point |
| Operating loss | $5.0 million | $0.3 million | Greater loss |
| Net loss | $7.4 million | $1.9 million | Greater loss |
| Net loss per share | $0.12 | $0.03 | Greater loss per share |
| Adjusted EBITDA | $14.1 million | $11.8 million | Up 19% |
| Cash flow from operations | $10.4 million | $11.2 million | Down 7% |
Subscription and related usage fees represented 91% of revenue, compared with 93% in the prior-year quarter. Revenue growth was primarily attributed to larger clients, increased sales and marketing activity, and improved brand awareness. U.S. revenue was $87.4 million and international revenue was $7.7 million.
Operating expenses increased 36% to $60.0 million. Research and development rose 44% to $15.2 million, sales and marketing rose 39% to $30.2 million, and general and administrative expense rose 25% to $14.7 million. Stock-based compensation increased to $13.8 million from $8.7 million.
At March 31, 2020, cash and cash equivalents were $155.9 million and marketable investments were $170.4 million, for total cash and marketable securities of $326.3 million. Working capital was $322.9 million. Management stated that existing cash and cash equivalents were expected to fund working capital and capital expenditure needs for at least the next 12 months.
Net cash provided by investing activities was $66.1 million, primarily reflecting $134.6 million of marketable-investment maturities, partly offset by $62.3 million of investment purchases and $6.0 million of capital expenditures. Cash increased by $77.9 million during the quarter to $155.9 million.
Convertible senior notes had a principal amount of $258.7 million and a carrying value of $212.9 million at March 31, 2020. The notes bear interest at 0.125% and mature May 1, 2023. Total liabilities were $297.2 million and stockholders’ equity was $206.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 28%, while gross profit increased 26%; gross margin declined from 59% to 58%.
- Operating loss widened to $5.0 million from $0.3 million as the company continued investing in personnel, sales and marketing, research and development, infrastructure, and growth initiatives.
- Net loss increased to $7.4 million from $1.9 million, partly reflecting higher operating expenses and lower interest income.
- Adjusted EBITDA increased to $14.1 million from $11.8 million, but this non-GAAP improvement was accompanied by substantially higher stock-based compensation.
- Operating cash flow declined modestly despite higher revenue, reflecting the larger net loss and increased investment in deferred contract acquisition costs and other operating assets.
- The annual dollar-based retention rate declined to 103% from 107%, primarily due to timing and ramping differences among larger clients.
- Amortization expense increased by approximately $1.0 million because of intangible assets acquired from Whendu LLC in November 2019.
- The company adopted the expected-credit-loss standard on January 1, 2020. The adoption had no material overall financial statement impact but increased the doubtful-account allowance by $233,000 during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance figure. Management expected to continue investing in infrastructure, research and development, sales and marketing, and headcount, but at a tempered rate in the near term because of COVID-19 and the related macroeconomic environment. Management also expected cost of revenue and operating expenses to increase in absolute dollars, with percentage-of-revenue trends fluctuating in the near term.
COVID-19 had no material impact on first-quarter financial results because the initial economic effects occurred mainly near the end of the quarter. All employees transitioned to working remotely and business travel was canceled. Management believed the longer-term need for work-from-home agents and business-continuity solutions could benefit portions of the business, while warning that smaller or financially stressed clients, including clients in travel, leisure, and consumer-discretionary industries, could reduce seats, delay purchases, or fail to pay.
Key COVID-19 risks include lower renewals, seat reductions, price concessions, increased credit losses, delayed sales decisions, longer sales cycles, slower implementations, pressure on professional services, infrastructure and cybersecurity risks, and difficulty forecasting results. The company stated that the pandemic materially limited its ability to predict revenue and expense levels.
During the quarter, the convertible notes became convertible at the holders’ option for April 1 through June 30, 2020 because the stock-price conversion condition was met. A limited number of conversion elections were received; one was settled in cash during the quarter and the company expected to settle the remaining elections in cash during the second quarter.
On April 1, 2020, after the reporting period, Five9 acquired Virtual Observer, formerly Coordinated Systems, for $32 million in cash, subject to adjustment. The acquisition is expected to expand the company’s cloud-based workforce-optimization offering and is expected to be accounted for as a business combination.
Hosting and telecommunications commitments totaled $8.1 million for terms of up to 36 months. Management stated that ordinary-course legal matters were not expected to materially affect results, cash flows, or financial position, although unfavorable outcomes could be material in a particular period. No off-balance-sheet arrangements were reported.
Most Important Facts for Investors to Verify
- Whether COVID-19 caused subsequent changes in client seat counts, renewals, collections, payment terms, or sales-cycle duration.
- Whether revenue growth and the 103% dollar-based retention rate were sustained after the first quarter.
- The effect of continued sales, marketing, research and development, infrastructure, and stock-based compensation spending on operating losses and cash generation.
- The cash, equity, and potential dilution consequences of conversions of the 2023 convertible notes, including the effectiveness of the capped-call transactions.
- The purchase accounting, integration costs, and operating contribution of the April 2020 Virtual Observer acquisition.
- Whether the company maintained sufficient liquidity as the $258.7 million convertible-note maturity approaches in 2023.
- The effect of increased expected credit losses and any deterioration in accounts receivable or client payment behavior.