Five9, Inc. Fiscal 2016 Form 10-K Summary
Business context and reporting period
Five9 provides cloud-based contact-center software and telephony through a software-as-a-service model. Its platform supports voice, chat, email, web, social media and mobile interactions. The filing covers the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. Five9 reported more than 2,000 clients and more than three billion annual customer interactions. The company operates in one reportable segment.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $162.1 million | $128.9 million | 26% increase |
| Gross profit | $95.2 million | $69.4 million | 37% increase |
| Gross margin | 59% | 54% | Up 5 percentage points |
| Loss from operations | $(6.5) million | $(21.2) million | Loss narrowed |
| Net loss | $(11.9) million | $(25.8) million | Loss narrowed |
| Net loss per share | $(0.23) | $(0.52) | Improved |
| Adjusted EBITDA | $8.4 million | $(5.3) million | Improved |
| Operating cash flow | $6.8 million | $(12.9) million | Improved |
- Subscription and related usage revenue represented 95% of total revenue in 2016; professional services comprised the remainder.
- Annual Dollar-Based Retention Rate increased to 100% from 96%, primarily because larger clients expanded agent-seat deployments.
- Sales and marketing expense increased 25% to $52.7 million, while research and development expense increased 5% to $23.9 million. General and administrative expense declined 3% to $25.1 million.
- Stock-based compensation was $9.6 million, compared with $7.7 million in 2015.
- Cash, cash equivalents and short-term investments totaled $58.1 million at year-end. Working capital was $40.9 million and total assets were $105.2 million.
- Total debt and capital leases were $45.8 million on the selected balance-sheet measure. The balance sheet included $32.6 million outstanding under the new revolving credit facility, $1.0 million of FCC civil-penalty obligations and approximately $0.1 million under the USAC promissory note.
Material changes versus the prior comparable period
- Revenue growth accelerated modestly to 26% from 25% in 2015, driven primarily by larger clients, increased sales and marketing activity and improved brand awareness.
- Gross margin improved from 54% to 59%, reflecting subscription scale benefits, better usage efficiency and improved professional-services economics. The result also benefited from a $3.1 million reversal of accrued USF charges following a favorable FCC Wireline Bureau ruling.
- Operating loss narrowed substantially as revenue growth exceeded the increase in operating expenses.
- Operating cash flow turned positive, improving by $19.8 million from 2015, while year-end cash declined only $0.4 million to $58.1 million.
- On August 1, 2016, Five9 replaced prior debt arrangements with a $50.0 million revolving credit facility, drew $32.6 million and repaid prior borrowings. The facility matures August 1, 2019.
- Headcount increased from 692 to 780 employees, supporting continued investment in sales, operations, research and development and international expansion.
- The fourth quarter of 2016 was the first profitable quarter reported in the quarterly table, with net income of $0.4 million and operating income of $1.2 million. The filing does not provide a clear full-year profitability outlook.
Guidance, outlook, commentary and risks
Management expects revenue growth to continue as Five9 targets larger contact centers, expands existing client deployments, adds applications, invests in its platform, develops its partner ecosystem and expands internationally. The company expects cost of revenue and operating expenses to increase in absolute dollars in future periods, although it expects these costs to decline as a percentage of revenue as scale improves. Management also stated that losses were expected to continue for the foreseeable future in the risk disclosures, notwithstanding the 2016 improvement and fourth-quarter profit.
- Management believed cash, cash equivalents and available borrowing capacity would fund working capital and capital expenditures at least through December 31, 2017. This assessment depends on operating performance and access to financing.
- The credit facility requires $25.0 million of unrestricted cash to be maintained with lenders, imposes liquidity and other covenants, is secured by substantially all company assets and prohibits dividends.
- Material contingencies include disputed USF assessments, accrued state and local taxes and surcharges, the Melcher arbitration, and the NobelBiz patent litigation. The company had not accrued losses for the two legal proceedings because loss was not considered probable or reasonably estimable; management stated that potential losses could be material.
- As of year-end, accrued liabilities included $2.5 million for disputed USF contributions and estimated interest and penalties and $2.1 million for contingent sales taxes and surcharges.
- Key operating risks include client retention and expansion, intense competition, longer enterprise sales cycles, service outages, cybersecurity incidents, reliance on third-party telecommunications providers and data centers, international expansion, regulatory compliance and continued operating losses.
- Future adoption of the revenue-recognition standard in Topic 606 was planned for January 1, 2018. Management had not selected a transition method and stated that its assessment had not identified a likely material impact, although evaluation was continuing.
Most important facts for investors to verify
- Whether the fourth-quarter profit and positive operating cash flow are sustainable or were materially aided by the $3.1 million USF reversal and other unusual items.
- The company’s path from recurring net losses to sustained GAAP profitability, including the effect of continued sales, marketing, infrastructure and research-and-development investment.
- Compliance with the revolving facility’s $25.0 million cash covenant, liquidity requirements and borrowing-base limitation.
- The ultimate resolution and financial exposure from USF disputes, state and local tax contingencies, the Melcher arbitration and NobelBiz patent litigation.
- Whether the 100% retention rate and larger-client expansion continue, given that customers generally may reduce seats or terminate with approximately 30 days’ notice.
- The impact of regulatory, privacy and data-transfer developments, including international requirements and the forthcoming GDPR referenced in the filing.