Five9, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Five9 provides cloud-based contact center software through a SaaS model, serving more than 2,000 clients and supporting voice, chat, email, web, social media and mobile interactions.
Financial Overview
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Revenue | $30.3 million | $24.7 million | $60.5 million | $49.0 million |
| Revenue growth | 23% | — | 24% | — |
| Gross profit | $16.0 million | $11.2 million | $31.5 million | $22.3 million |
| Gross margin | 53% | 45% | 52% | 46% |
| Operating loss | $(6.2) million | $(7.5) million | $(13.9) million | $(16.8) million |
| Net loss | $(7.4) million | $(8.7) million | $(16.3) million | $(17.0) million |
| Net loss per share | $(0.15) | $(0.18) | $(0.33) | $(0.64) |
| Adjusted EBITDA | $(2.3) million | $(6.9) million | $(5.4) million | $(13.4) million |
| Cash flow from operations | — | — | $(9.7) million | $(14.4) million |
- Subscription and related usage revenue represented 96% of quarterly revenue and 97% of six-month revenue.
- Operating loss margins improved to approximately 20% in the quarter and 23% for the six-month period, compared with 30% and 34%, respectively, in the prior-year periods.
- Adjusted EBITDA improved primarily because of higher revenue, better usage efficiencies and operating leverage, although it remained negative.
- Cash and cash equivalents were $65.3 million at June 30, 2015, compared with $58.3 million at December 31, 2014. Short-term investments declined from $20.0 million to zero as investments matured and funds were repositioned into cash and money market funds.
- Current assets were $77.8 million and current liabilities were $33.0 million. The filing reports no material off-balance-sheet arrangements.
- Net debt carrying value was $38.7 million, including a $12.5 million revolving line, $26.2 million of notes payable and approximately $9.0 million of capital lease liabilities. The revolving facility had $7.5 million available, and the company had $36.0 million outstanding under variable-rate debt or financing agreements.
Material Changes Versus the Prior Comparable Period
- Revenue increased $5.6 million, or 23%, in the quarter and $11.6 million, or 24%, for the six months, primarily from new clients and increased sales and marketing activity. Average pricing was relatively consistent.
- Gross margin expanded by 8 percentage points in both the quarter and six-month period, principally because of improved telecommunications usage efficiency and economies of scale.
- Research and development increased 8% for the six months, while sales and marketing increased 10%, reflecting higher headcount, commissions and stock-based compensation. Both categories declined as a percentage of revenue.
- General and administrative expense increased 71% in the quarter and 37% for the six months. The increase reflected contingent state and local taxes, stock-based compensation, personnel costs and public-company expenses. The comparison was also affected by a $2.8 million tax-liability release recorded in Q2 2014.
- Dollar-Based Retention Rate declined to 94% for the twelve months ended June 30, 2015, from 98% in the prior comparable period. Management attributed the decline primarily to lower growth from clients supporting Affordable Care Act enrollment.
- Operating cash use improved by $4.7 million year over year, but the company remained cash-flow negative. Investing cash flow was positive because of net maturities of short-term investments, while 2014 financing cash flow benefited substantially from the IPO and term-loan proceeds.
Outlook, Commentary, Risks and Unusual Items
- Outlook: No formal revenue or earnings guidance is provided in the filing. Management expects continued investment in sales and marketing, research and development, infrastructure and headcount. Expenses are expected to increase in absolute dollars, while declining as a percentage of revenue over time if growth continues.
- Management believes existing cash, cash equivalents and borrowing availability will satisfy working-capital and capital-expenditure needs at least through June 30, 2016, but notes that additional financing may be required if operating performance underperforms expectations or investment needs increase.
- The company remains unprofitable and expects losses to continue for the foreseeable future. It had an accumulated deficit of $144.9 million at June 30, 2015.
- In June 2015, Five9 entered into an FCC consent decree requiring a $2.0 million civil penalty, payable in twelve quarterly installments beginning July 2015, plus three years of regulatory compliance monitoring and training. The liability was discounted to a present value of approximately $1.7 million.
- Five9 recorded $0.6 million in Q1 2015 and $0.2 million in Q2 2015 of out-of-period adjustments for additional sales taxes. It had $2.7 million accrued for contingent state, local and Canadian sales taxes and surcharges at June 30, 2015.
- The company had $4.4 million accrued for disputed USF contributions, interest and penalties, in addition to a $2.1 million USAC promissory-note balance. FCC proceedings remain unresolved, and additional back assessments for 2003–2007 may be required.
- The NobelBiz patent litigation remains pending, with trial scheduled for June 20, 2016. Management believes it has good defenses and has not accrued a loss.
- Key operating risks include client churn and short termination periods, declining retention, intense competition, service outages and cybersecurity events, dependence on third-party telecommunications and data-center providers, regulatory and tax liabilities, continued operating losses, debt covenants and the potential need for additional capital.
Investor Verification Checklist
- Verify whether revenue growth and improved gross margins are sustained as the company continues investing in infrastructure, sales capacity and product development.
- Monitor Dollar-Based Retention Rate, client additions, agent-seat expansion and the effect of ACA-related customer normalization.
- Reconcile cash balances and operating cash burn with debt maturities, capital-lease obligations and the $7.5 million revolving-credit availability.
- Track resolution of disputed USF assessments, state and local sales-tax exposures, Canadian tax obligations and compliance with the FCC consent decree.
- Assess the potential financial and operational impact of the NobelBiz patent litigation and other intellectual-property claims.
- Review dilution risk from approximately 15.0 million shares reserved for options, restricted stock units, employee plans and warrants.