Five9, Inc. 10-Q Summary
Business context and reporting period
Five9 provides cloud software for contact centers, including virtual contact center applications supporting voice, chat, email, web, social media and mobile interactions. This Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company reported more than 2,000 clients and stated that no individual client represented more than 10% of revenue.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $112.1 million | $83.8 million | 34% |
| Gross profit | $65.6 million | $49.3 million | 33% |
| Gross margin | 58% | 59% | Down 1 point |
| Operating income (loss) | $(1.8) million | $0.5 million | Declined |
| Net loss | $(11.4) million | $(1.6) million | Loss increased |
| Adjusted EBITDA | $24.1 million | $15.0 million | Increased |
| Net loss per share | $(0.17) | $(0.03) | Loss increased |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Revenue | $307.0 million | $235.7 million | 30% |
| Gross profit | $178.0 million | $139.2 million | 28% |
| Gross margin | 58% | 59% | Down 1 point |
| Operating income (loss) | $(15.0) million | $0.2 million | Declined |
| Net loss | $(34.9) million | $(5.4) million | Loss increased |
| Adjusted EBITDA | $56.5 million | $41.3 million | Increased |
Subscription and related usage fees represented 93% of third-quarter revenue and 92% for the first nine months. Annual dollar-based retention was 107% for both periods measured at September 30, 2020 and September 30, 2019.
- Cash and cash equivalents were $301.8 million at September 30, 2020, versus $78.0 million at December 31, 2019.
- Marketable investments were $479.1 million, producing cash and marketable investments of approximately $780.9 million.
- Working capital was $765.3 million.
- Operating cash flow for the first nine months was $48.0 million, compared with $35.7 million in 2019.
- Capital expenditures were $20.4 million, and cash paid for the Virtual Observer acquisition was $28.3 million.
- Net cash provided by financing activities was $463.5 million, primarily reflecting the 2025 convertible notes issuance.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by larger clients, increased sales and marketing activity and improved brand awareness.
- Operating expenses increased materially: research and development rose 52% for both the quarter and nine months; sales and marketing rose 32% for the quarter and 36% for the nine months; general and administrative rose 38% and 32%, respectively.
- Gross margin declined from 59% to 58%, primarily because of higher amortization from acquisitions and increased stock-based compensation.
- Interest expense increased to $9.6 million in the quarter and $18.9 million for the nine months, primarily due to the 2025 convertible notes and non-cash amortization of debt discounts and issuance costs.
- Stock-based compensation increased to $17.3 million in the quarter and $47.9 million for the nine months, compared with $11.1 million and $30.2 million, respectively.
- Five9 issued $747.5 million of 0.500% convertible senior notes due 2025 and received approximately $728.8 million of net proceeds. It also paid $90.5 million for related capped calls and repurchased or retired approximately $181.0 million principal amount of 2023 notes.
- At September 30, 2020, approximately $820.2 million of convertible-note principal was outstanding: $72.7 million due in 2023 and $747.5 million due in 2025.
- Five9 acquired Virtual Observer for approximately $32.2 million in cash, recording preliminary goodwill of $22.6 million and intangible assets of $12.8 million.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative revenue or earnings guidance figure. Management expects continued long-term increases in cost of revenue and operating expenses as it invests in infrastructure, research and development, sales and marketing, and client support. Management stated that existing cash and cash equivalents were expected to fund working capital and capital expenditures for at least the next 12 months.
- COVID-19 had not materially affected the first nine months of 2020, but its duration and impact remained uncertain. Management identified potential benefits from work-from-home demand and increased e-commerce activity, while warning that smaller clients and travel, leisure and consumer discretionary customers could reduce seats, delay purchases or fail to pay.
- Key risks include client attrition or reduced usage, longer enterprise sales cycles, infrastructure outages, cybersecurity incidents, telecommunications-provider dependence, intense competition and the company’s continuing history of losses.
- The convertible notes may require cash settlement upon conversion or a fundamental change, creating liquidity and potential dilution risks. The 2023 notes were convertible during the fourth quarter of 2020, and the company had received additional conversion elections after quarter-end.
- Acquisition-related transaction and integration costs were $2.0 million in the third quarter and $4.0 million for the nine months. The company also recorded a $6.1 million loss on early extinguishment of debt for the nine months.
- On October 22, 2020, Five9 agreed to acquire Inference Solutions for approximately $148 million in cash at closing, plus up to $24 million of contingent consideration. Closing was expected by January 5, 2021, subject to conditions.
- The company entered into a new headquarters lease beginning February 1, 2021, with total commitments of $46.4 million over 120 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether revenue growth and 107% dollar-based retention persist as COVID-19 effects evolve.
- Whether gross-margin pressure from infrastructure, amortization, telecommunications costs and stock-based compensation moderates.
- The cash requirements and potential dilution associated with the 2023 and 2025 convertible notes, including conversion elections and future settlement choices.
- The financial impact, closing status and integration performance of the Inference acquisition.
- Whether the substantial sales, marketing and research-and-development investments translate into sustained adjusted EBITDA and eventual GAAP profitability.
- The collectability of receivables and client seat levels in industries adversely affected by the pandemic.