Five9, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. Five9 provides cloud contact-center software and related telephony services to more than 2,500 clients.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $189.4 million | $143.8 million | $372.2 million | $281.7 million |
| Gross profit | $101.2 million | $79.4 million | $195.1 million | $157.5 million |
| Gross margin | 53% | 55% | 52% | 56% |
| Loss from operations | $(21.8) million | $(14.2) million | $(52.6) million | $(25.3) million |
| Net loss | $(23.7) million | $(16.5) million | $(57.8) million | $(28.9) million |
| Net loss per share | $(0.34) | $(0.25) | $(0.83) | $(0.43) |
| Adjusted EBITDA | $33.1 million | $24.0 million | $57.6 million | $46.2 million |
| Cash flow from operations | Not separately provided | Not separately provided | $25.6 million | $25.2 million |
Revenue grew 32% year over year in both the quarter and six-month period, primarily from larger clients, increased sales and marketing activity, and improved brand awareness. Subscription and related usage revenue represented 91% of total revenue, compared with 92% in the prior-year periods.
Profitability weakened despite revenue growth. Gross margin declined to approximately 53% in Q2 and 52% for the first six months, primarily because cost of revenue increased faster than revenue. Research and development expense increased 42% in Q2 and 51% year to date; sales and marketing expense increased 39% and 42%, respectively. Stock-based compensation was $44.8 million in Q2 and $84.2 million year to date, compared with $24.9 million and $45.8 million in the comparable periods.
At June 30, 2022, Five9 had $101.3 million of cash and cash equivalents, $397.1 million of short-term marketable investments, and $60.4 million of long-term marketable investments. Reported working capital was $513.4 million. Management stated that existing cash and cash equivalents should fund working capital and capital expenditure needs for at least the next 12 months.
Net cash provided by operating activities was $25.6 million for the first six months. Investing activities provided $25.6 million, largely because investment maturities exceeded purchases, while capital expenditures were $34.5 million and capitalized software costs were $1.4 million. Financing activities used $40.8 million, including $34.0 million for 2023 convertible note settlements and $24.0 million of Inference contingent consideration payments.
Debt and contractual obligations
- Approximately $747.7 million of convertible senior note principal was outstanding at June 30, 2022.
- The 2025 convertible notes had $747.5 million principal outstanding, mature June 1, 2025, and bear interest at 0.50%.
- Approximately $0.2 million of 2023 convertible notes remained outstanding, maturing May 1, 2023. Five9 settled approximately $34.0 million of principal during the first six months using cash and 573,633 common shares.
- Operating lease obligations totaled $52.0 million on the balance sheet, with $58.2 million of undiscounted future payments.
- Outstanding cloud-service commitments totaled $50.5 million, and hosting and telecommunications commitments totaled $18.8 million.
Material changes versus the prior comparable period
- Revenue increased 32% year over year, but gross margin declined by approximately two to four percentage points depending on the period.
- Q2 net loss increased by $7.1 million, and the six-month net loss increased by $28.9 million, reflecting substantially higher operating investment and stock-based compensation.
- Annual dollar-based retention declined to 118% from 123%, primarily because the prior-year comparison included an initial COVID-19 benefit.
- Cash flow from operations was broadly stable year over year despite the larger GAAP loss, supported by non-cash stock compensation and depreciation and amortization.
- The company paid the $24.0 million final contingent consideration obligation related to the Inference acquisition and made a $2.0 million equity investment in a privately held company.
Outlook, commentary, risks, and unusual items
Five9 did not provide a clear formal revenue or earnings guidance figure in the filing. Management expects continued investment in research and development, sales and marketing, public cloud infrastructure, client support, and network capacity. It expects gross margin to improve over the long term, although near-term margins may fluctuate.
Five9 closed its Russia office and began establishing a European development center in Porto, Portugal. Russia-related closure and relocation costs were approximately $1.1 million in Q2 and $3.9 million year to date. Management stated that it does not currently expect the transition to have a material effect on the business, but disclosed risks of operational disruption, higher costs, recruiting challenges, and reduced efficiency.
Q2 adjusted EBITDA included a $3.5 million refund for prior-year overpayment of U.S. Federal Universal Service Fund fees. Adjusted EBITDA also excludes significant stock-based compensation, depreciation and amortization, acquisition-related costs, Russia exit costs, and other items; investors should not treat it as a substitute for GAAP earnings or cash flow.
Key risks include macroeconomic deterioration, inflation and higher interest rates, longer sales cycles, client reductions or cancellations, competition, cybersecurity and service outages, reliance on telecommunications and cloud providers, international expansion and foreign-exchange exposure, the Russia-Ukraine conflict, COVID-19 uncertainty, continuing operating losses, and the ability to refinance or repay convertible notes. The filing states that legal matters arising in the ordinary course are not expected to have a material impact, although an unfavorable resolution could materially affect a future period.
Important facts for investors to verify
- Whether revenue growth from larger clients and the 118% dollar-based retention rate can be sustained as macroeconomic conditions weaken.
- Whether gross margin recovers after increased infrastructure, carrier, personnel, cloud, and international-transition costs.
- The recurring impact of high stock-based compensation, which was $84.2 million in the first six months and materially exceeded GAAP net loss adjustments.
- Liquidity relative to the $747.5 million 2025 note maturity, the remaining 2023 note obligations, capital expenditures, and contractual commitments.
- The operational and financial effect of relocating Russian operations to Portugal, including any additional exit, recruiting, or disruption costs.
- Whether operating cash flow remains positive while the company continues to report GAAP losses and invests heavily in growth.