Five9, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Five9 provides cloud-based contact-center software and related telecommunications services through a SaaS model. The filing covers the fiscal year ended December 31, 2015, with comparative results for 2014 and 2013. For the fourth quarter of 2015, revenue was $36.0 million and net loss was $3.5 million. Five9 served more than 2,000 clients and facilitated approximately three billion annual customer interactions.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $128.9 million | $103.1 million | +25% |
| Gross profit | $69.4 million | $48.4 million | +43% |
| Gross margin | 54% | 47% | +7 percentage points |
| Operating loss | $21.2 million | $35.5 million | Improved |
| Net loss | $25.8 million | $37.8 million | Improved by $11.9 million |
| Adjusted EBITDA | $(5.3) million | $(22.7) million | Improved |
| Operating cash flow | $(12.9) million | $(24.3) million | Improved by $11.3 million |
Subscription and related usage revenue represented 96% of total revenue. U.S. customers generated 93% of revenue. Annual dollar-based retention was 96%, unchanged from 2014. No customer represented more than 10% of revenue.
Cash and cash equivalents were $58.5 million at year-end, including $7.5 million required to remain deposited with a lender. Working capital was $22.7 million, compared with $56.2 million in 2014, primarily reflecting the classification of the $12.5 million revolving credit balance as current and the absence of $20.0 million of short-term investments.
Total debt and capital lease obligations were $46.6 million. Debt included $12.5 million drawn on a $20.0 million revolving facility, $20.0 million under a term loan, $2.5 million under another term loan, $1.5 million owed to USAC, and a $1.7 million FCC civil penalty payable. Contractual obligations totaled $58.4 million, including $31.1 million due within one year.
Material changes versus prior comparable period
- Revenue growth accelerated to 25% from 23% in 2014, driven primarily by larger clients, increased sales activity, and improved brand awareness.
- Gross margin expanded to 54% from 47%, mainly due to improved telecommunications usage efficiencies and scale benefits.
- Operating expenses increased 8% to $90.5 million, but declined to 70% of revenue from 81%. Sales and marketing increased 12%, research and development increased 2%, and general and administrative expense increased 6%.
- Net loss narrowed substantially, although the company remained unprofitable. Loss per share improved to $(0.52) from $(1.00).
- Cash used in operations decreased to $12.9 million from $24.3 million. Investing cash flow was positive $19.7 million, primarily from maturity of short-term investments, while financing cash flow was negative $6.6 million due mainly to debt and capital lease repayments.
- Stock-based compensation increased to $7.7 million from $6.8 million and represented a significant non-cash expense.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative revenue, margin, profitability, or cash-flow guidance. Management expects to continue investing in sales and marketing, research and development, infrastructure, international expansion, and headcount. It expects costs to increase in absolute dollars but generally decline as a percentage of revenue if growth and scale continue. Management stated that existing cash and available revolving capacity were expected to fund working capital and capital expenditures through at least December 31, 2016, subject to operating performance and other conditions.
- Five9 expects losses to continue for the foreseeable future and may be unable to achieve profitability or positive adjusted EBITDA.
- Client agreements generally allow changes in agent seats or termination on approximately 30 days’ notice, creating retention and revenue volatility risk.
- The company relies on third-party telecommunications providers and co-location data centers; outages, security breaches, cyberattacks, or capacity issues could result in credits, damages, lost customers, and reputational harm.
- Competition is intense, including from large legacy vendors expanding into cloud offerings and other cloud contact-center providers.
- Debt is secured by substantially all assets and includes restrictive covenants. The revolving facility matured on December 1, 2016, so refinancing or renewal was important to continued liquidity.
- Five9 had a disputed USF liability of approximately $4.9 million, including estimated interest and penalties. FCC proceedings could require additional back assessments for 2003–2007.
- A $2.0 million FCC civil penalty was payable in twelve quarterly installments beginning in July 2015; compliance reporting continues through June 2018.
- State and local tax contingencies totaled approximately $2.7 million at year-end. Actual liabilities could exceed recorded accruals.
- NobelBiz patent litigation remained unresolved. Five9 had not accrued a loss because management did not consider an adverse loss probable, but stated that the potential high end of the loss range could be material.
- The company early adopted the new deferred-tax classification guidance and had not yet determined the effect or transition method for the new revenue-recognition standard effective in 2018.
Most important facts for investors to verify
- Whether revenue growth, 96% dollar-based retention, and gross-margin expansion continued after 2015.
- The renewal or refinancing status of the revolving credit facility and the company’s ability to meet 2016 debt maturities.
- Actual operating cash burn and progress toward positive adjusted EBITDA or GAAP profitability.
- Resolution of the disputed USF assessments, tax contingencies, and related regulatory obligations.
- Developments and potential exposure in the NobelBiz patent litigation.
- Impact of competition, pricing pressure, customer churn, telecommunications costs, cybersecurity incidents, and service outages.
- Dilution from outstanding options, restricted stock units, warrants, and employee equity plans; approximately 14.1 million shares were reserved for future issuance at year-end.