Five9, Inc. 2014 Form 10-K Summary
Business Context and Reporting Period
Five9 provides cloud-based contact center software and related telephony services through its Virtual Contact Center platform. The company serves more than 2,000 clients and operates as a single reportable segment. This Form 10-K covers the fiscal year ended December 31, 2014; quarterly figures below include the quarter ended December 31, 2014.
Subscription and related usage fees represented 97% of annual revenue. The United States generated 92% of 2014 revenue, and no individual client represented more than 10% of revenue.
Key Financial Metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $103.1 million | $84.1 million | 23% increase |
| Gross profit | $48.4 million | $35.3 million | 37% increase |
| Gross margin | 47% | 42% | 5 percentage-point increase |
| Loss from operations | $(35.5) million | $(28.3) million | Loss increased |
| Net loss | $(37.8) million | $(31.3) million | Loss increased |
| Adjusted EBITDA | $(22.7) million | $(22.0) million | Loss increased modestly |
| Operating cash flow | $(24.3) million | $(21.0) million | Cash use increased |
| Cash and short-term investments | $78.3 million | $17.7 million | Increased substantially |
Sales and marketing expense increased 33% to $37.4 million, research and development increased 26% to $22.1 million, and general and administrative expense increased 35% to $24.4 million. Stock-based compensation increased to $6.8 million from $1.9 million. The dollar-based retention rate declined to 96% from 100% in 2013 and 107% in 2012.
For the fourth quarter of 2014, revenue was $28.3 million, gross profit was $13.7 million, operating loss was $8.3 million, and net loss was $9.4 million, or $0.19 per share.
Liquidity, Debt, and Cash Flow
- Year-end cash and cash equivalents were $58.3 million, supplemented by $20.0 million of short-term U.S. Treasury investments.
- Net cash used in operating activities was $24.3 million. Investing cash use was $21.0 million, primarily reflecting purchases of short-term investments, while financing activities provided $85.9 million.
- The April 2014 initial public offering generated $74.9 million of proceeds after underwriting discounts and commissions and before offering expenses; net cash proceeds after offering costs were approximately $71.5 million.
- Total debt was $39.6 million before debt discounts, consisting primarily of a $20.0 million term loan, a $12.5 million revolving credit balance, a $4.5 million term loan, and a $2.6 million USAC promissory note. Capital lease obligations were an additional $9.3 million in present value.
- The revolving facility was increased to $20.0 million, with $7.5 million available at year-end, subject to borrowing-base and covenant limitations. The company was in compliance with its debt covenants and stated that available liquidity was expected to fund working capital and capital expenditures through at least December 31, 2015.
- Total contractual obligations were $65.2 million, including debt, leases, telecommunications usage, and hosting commitments.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed to 23% from 32% in 2013, although the company added approximately 17% more clients year over year. New clients contributed approximately $12.2 million of the revenue increase, while existing clients contributed approximately $6.8 million.
- Gross margin improved from 42% to 47%, primarily due to usage efficiencies and scale benefits.
- Operating losses widened because investments in sales, marketing, research and development, infrastructure, and public-company administration grew faster than revenue.
- Interest expense increased to $4.2 million from $1.1 million due to higher debt balances.
- The IPO converted all outstanding preferred stock to common stock and reclassified warrant liabilities to additional paid-in capital, eliminating subsequent fair-value remeasurement of those warrant liabilities.
- Headcount increased from 533 employees at December 31, 2013 to 630 at December 31, 2014.
- The company introduced its Summer Release 2014, adding native social, mobile, chat, and email capabilities through Five9 Connect.
Outlook, Risks, Contingencies, and Unusual Items
Management expected continued investment in sales and marketing, research and development, infrastructure, international expansion, and general administration. It expected expenses to increase in absolute dollars, while declining as a percentage of revenue over time, but also stated that losses were expected to continue for the foreseeable future. No formal quantitative revenue or earnings guidance was provided in the filing.
- Five9 recorded a $2.0 million charge for a tentatively agreed FCC civil penalty related to historical Universal Service Fund and international carrier compliance. At year-end, accrued federal fees totaled $5.2 million, and the company had a $2.6 million USAC promissory note outstanding.
- The company accrued $2.6 million for potential state and local sales taxes and surcharges. A favorable state ruling generated a $2.8 million credit, partially offsetting related expense.
- Fourth-quarter out-of-period adjustments added approximately $0.4 million to cost of revenue and $0.3 million to general and administrative expense for historical USF and state tax obligations.
- A March 2014 service interruption caused by third-party equipment affected the Santa Clara data center. Service reliability, cybersecurity, third-party telecommunications providers, and dependence on third-party data centers remain material risks.
- NobelBiz patent litigation remained unresolved; the company asserted non-infringement and invalidity and had not accrued a loss. A separate lawsuit filed in January 2015 sought approximately $2.5 million from alleged preferential or fraudulent transfers involving a bankrupt customer; no loss was accrued.
- The company had a history of losses and an accumulated deficit of $128.6 million at year-end. Federal and state net operating loss carryforwards were $106.4 million and $68.8 million, respectively, but were fully offset by a valuation allowance.
- The company had no off-balance-sheet arrangements and did not pay cash dividends.
Important Facts for Investors to Verify
- Whether revenue growth, retention, usage trends, and expansion within existing clients can offset continued operating losses and negative operating cash flow.
- The final amount and terms of the FCC consent decree, USF assessments, and related state and local tax liabilities.
- Debt maturities, variable-rate exposure, collateral requirements, and compliance with restrictive loan covenants.
- The financial impact of the NobelBiz patent case and the approximately $2.5 million UHC trustee claim.
- Whether infrastructure investments, international expansion, and new multichannel products produce sufficient incremental revenue and margin improvement.
- The effect of substantial stock-based compensation, outstanding options, RSUs, warrants, and future equity-plan issuances on dilution.