Five9, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Five9 provides cloud contact-center software and related usage services to more than 3,000 clients. The filing covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Subscription and related usage fees represented 93% of revenue, compared with 92% in the prior-year period.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $247.0 million | $218.4 million | 13% increase |
| Gross profit | $132.5 million | $113.7 million | 17% increase |
| Gross margin | 53.6% | 52.0% | Approximately 160 bps increase |
| Loss from operations | $(20.7) million | $(29.0) million | Improved by $8.3 million |
| Net loss | $(7.1) million | $(27.2) million | Improved by $20.2 million |
| Net loss per share | $(0.10) | $(0.38) | Improved |
| Adjusted EBITDA | $37.6 million | $35.1 million | 7% increase |
| Cash flow from operations | $32.4 million | $33.4 million | 3% decrease |
Operating expenses were $153.2 million, or 62% of revenue, versus $142.7 million, or 65%, in Q1 2023. Research and development was $41.5 million, sales and marketing was $81.1 million, and general and administrative expense was $30.5 million. Stock-based compensation was $44.7 million, compared with $50.7 million in the prior-year period.
At March 31, 2024, cash and cash equivalents were $240.2 million and marketable investments were $843.2 million. Management reported working capital of $1.1 billion and stated that existing cash and cash equivalents should fund working capital and capital expenditure needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue increased $28.6 million, primarily due to growth from larger clients, increased sales and marketing activity, and improved brand awareness.
- Annual dollar-based retention declined to 109% from 114%, primarily reflecting macroeconomic pressure on the installed base.
- Gross margin improved as revenue growth exceeded the increase in cost of revenue. Cost of revenue increased 9%, driven mainly by higher depreciation, data-center and public-cloud costs, personnel costs, third-party costs, and amortization of capitalized software.
- Interest income and other increased to $10.6 million from $4.1 million, primarily because of higher investable balances and interest rates, as well as foreign-currency transaction gains.
- The company recorded a $6.6 million gain on the early extinguishment of debt following the repurchase of approximately $313.1 million principal amount of its 2025 convertible notes.
- Net cash increased by $96.9 million, compared with a $39.1 million decrease in Q1 2023, largely because of the new convertible-note financing.
Debt, liquidity, and capital commitments
- In March 2024, Five9 issued $747.5 million principal amount of 1.00% convertible senior notes due 2029, generating approximately $728.9 million of net proceeds.
- After the repurchase, approximately $434.4 million principal amount of 0.50% convertible notes due June 2025 remained outstanding. Total principal outstanding under the 2025 and 2029 notes was approximately $1.18 billion.
- The 2029 notes have an initial conversion price of approximately $79.42 per share. Capped-call transactions covering approximately 9.4 million shares are intended to partially offset potential dilution, subject to their cap price.
- The 2025 notes were not convertible during the quarter and were not eligible for conversion during the quarter ending June 30, 2024 based on the applicable stock-price conditions.
- Five9 was discussing a potential revolving credit facility of up to $200 million, potentially secured or unsecured, with expected availability in the second half of 2024. There was no assurance that the facility would be obtained on acceptable terms or at all.
- Outstanding commitments included $89.2 million for cloud services and software or maintenance, $13.6 million for co-location and telecommunications services, $48.5 million of operating lease obligations, and $4.5 million of finance lease obligations.
Guidance, outlook, commentary, and risks
The filing does not provide quantitative revenue, profitability, or cash-flow guidance. Management expects to continue investing in sales and marketing, research and development, professional services, public cloud, operations, client support, and network infrastructure. Management expects gross margin to increase over the long term as revenue growth more than offsets infrastructure and service investments.
Management expects adverse economic conditions to continue affecting revenue, particularly the installed base, which historically contributes approximately half of annual revenue growth. Other significant risks include client cancellations or reduced usage, competition, longer enterprise sales and implementation cycles, service outages, reliance on telecommunications and other third-party providers, cybersecurity incidents, international operations and foreign exchange exposure, difficulty developing and commercializing AI solutions, employee retention, and the company’s history of losses.
The company continued to identify debt-service and refinancing risk. It may need substantial cash to repay or settle conversions of the 2025 and 2029 notes, including upon maturity, conversion, or a qualifying fundamental change. Convertible-note conversions could dilute existing stockholders or require cash settlement.
Russia-office closure and relocation costs were approximately $0.1 million in Q1 2024 versus $0.7 million in Q1 2023; management does not expect additional material costs related to that activity. The August 2023 Aceyus acquisition remained subject to preliminary purchase-accounting estimates and generated a $0.1 million measurement-period adjustment in Q1 2024.
Management concluded that disclosure controls and procedures were effective as of March 31, 2024, and reported no material change in internal control over financial reporting during the quarter. Legal matters arising in the ordinary course were not expected to materially affect financial position, results, or cash flows, although unfavorable outcomes could have a material effect in a particular period.
Important facts for investors to verify
- Reconcile the company’s recurring revenue growth and 109% annual dollar-based retention rate with trends in client usage, seat expansion, cancellations, and macroeconomic pressure.
- Assess whether improved gross margin is sustainable while data-center, public-cloud, infrastructure, and personnel costs continue to rise.
- Review the June 1, 2025 maturity of approximately $434.4 million of convertible notes and the company’s refinancing or repayment plan.
- Evaluate potential dilution and cash-settlement exposure from the $747.5 million of 2029 convertible notes, including the effectiveness and limits of the capped calls.
- Consider the significance of $44.7 million of quarterly stock-based compensation and its effect on adjusted EBITDA versus GAAP results.
- Monitor retention, enterprise-client concentration and growth, AI product execution, cybersecurity, third-party service reliability, and international operating risks.
- Confirm the status, terms, and availability of the proposed revolving credit facility, which had not been finalized as of the filing.