Five9, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud contact-center software and related telecommunications usage services through a SaaS model. The filing covers the three months ended March 31, 2016, with comparison to the three months ended March 31, 2015. Five9 served more than 2,000 clients and facilitated approximately three billion annual interactions. Subscription and related usage fees represented 95% of revenue.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $38.0 million | $30.3 million | Up 26% |
| Gross profit | $21.4 million | $15.5 million | Up 38% |
| Gross margin | 56% | 51% | Up approximately 5 percentage points |
| Loss from operations | $(3.6) million | $(7.7) million | Improved $4.1 million |
| Net loss | $(4.9) million | $(8.9) million | Improved $4.0 million |
| Net loss per share | $(0.10) | $(0.18) | Improved |
| Adjusted EBITDA | $0.5 million | $(3.2) million | Improved $3.6 million |
| Cash flow from operations | $0.1 million | $(5.8) million | Improved $5.8 million |
Operating expenses were $25.0 million, or 66% of revenue, compared with $23.2 million, or 77% of revenue, in the prior-year period. Sales and marketing increased 28% to $12.7 million, while research and development declined 4% to $5.8 million and general and administrative expense declined 10% to $6.5 million. Stock-based compensation was $2.0 million.
Cash and cash equivalents were $57.8 million at March 31, 2016, compared with $58.5 million at December 31, 2015. The company generated $52 thousand of operating cash flow, used $252 thousand in investing activities and used $517 thousand in financing activities, resulting in a $717 thousand decrease in cash during the quarter.
Total debt at net carrying value was $35.5 million, including $12.5 million drawn under a $20.0 million revolving facility and $23.0 million of notes payable. Capital lease liabilities totaled $9.7 million. Approximately $19.9 million of debt was classified as current. The revolving facility matures December 1, 2016; management intended to refinance it before expiration. The company was in compliance with its debt covenants and had $7.5 million available under the revolving facility.
Material Changes Versus the Prior Comparable Period
- Revenue increased $7.7 million, primarily from larger clients, increased sales and marketing activity, improved brand awareness and higher average recurring revenue per agent seat.
- Gross margin improved from 51% to 56%, driven by usage efficiencies, improved professional-services performance and economies of scale.
- Sales and marketing investment increased $2.8 million to support new-client acquisition, expansion within existing clients and brand development.
- Research and development expense decreased $236 thousand, primarily due to lower cash-based personnel costs.
- General and administrative expense decreased $739 thousand, principally because Q1 2015 included a $0.6 million out-of-period adjustment for sales taxes.
- Annual dollar-based retention increased to 98% from 95%, primarily because larger clients increased agent seats and revenue per seat.
- Adjusted EBITDA turned positive, and operating cash flow improved to approximately breakeven, although GAAP net losses continued.
Guidance, Outlook, Commentary and Risks
Management expected revenue growth to continue, particularly through larger-client opportunities, expansion of existing client relationships, product development and international growth. The company expected cost of revenue and operating expenses to increase in absolute dollars as it expanded headcount, infrastructure and sales and marketing, while declining as a percentage of revenue over time. Management expected losses to continue for the foreseeable future and did not provide specific quarterly or annual revenue guidance in the filing.
Management stated that available cash and borrowing capacity, or refinancing of the revolving facility, were expected to fund working-capital and capital-expenditure needs at least through March 31, 2017. This assessment depended on operating performance, successful refinancing and continued access to capital.
- Liquidity risk includes the December 2016 maturity of the revolving facility, substantial current debt maturities and the company’s history of losses.
- The company had an accumulated deficit of $159.3 million and could be unable to achieve or sustain GAAP profitability or positive adjusted EBITDA.
- The company accrued $4.9 million for disputed USF contributions, estimated interest and penalties. Administrative proceedings could result in additional assessments, including for periods from 2003 through 2007.
- A $2.0 million FCC civil penalty was payable in quarterly installments through the consent decree; compliance reporting continues through June 2018.
- Contingent state and local sales-tax liabilities totaled $2.5 million, and actual liabilities could exceed recorded amounts.
- The NobelBiz patent litigation was stayed in March 2016 pending an appeal in related cases. Five9 believed it had good defenses, had accrued no loss, and stated that the high end of potential loss could not be reasonably estimated and could be material.
- Key operating risks include intense competition, short client termination periods, service outages, cybersecurity incidents, dependence on third-party telecommunications and data-center providers, longer sales cycles for larger clients, regulatory compliance and international operations.
- Management reported effective disclosure controls and procedures as of March 31, 2016, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Progress and terms of refinancing the $12.5 million revolving facility before its December 2016 maturity.
- Whether positive adjusted EBITDA and near-breakeven operating cash flow are sustained without relying on favorable working-capital changes.
- Revenue growth, dollar-based retention, client expansion and gross-margin trends as larger clients become a greater portion of the business.
- Resolution of the USF administrative proceedings and adequacy of accrued federal-fee and sales-tax liabilities.
- Developments in the NobelBiz litigation and any potential effect on the company’s caller-ID technology.
- Future capital requirements, debt service, capital-lease obligations and the company’s ability to reach GAAP profitability.
- Effects of the forthcoming revenue-recognition standard, for which the company had not selected a transition method or determined the impact.