Five9, Inc. 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud software for contact centers through a subscription-based SaaS model, including voice, chat, email, web, social media and mobile capabilities. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company had more than 2,000 clients, and no single client represented more than 10% of revenue.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $74.5 million | $58.9 million | 27% increase |
| Gross profit | $43.7 million | $34.2 million | 28% increase |
| Gross margin | 58.6% | 58.1% | Approximately 50 bps increase |
| Loss from operations | $(0.3) million | $(0.2) million | Operating loss increased modestly |
| Net loss | $(1.9) million | $(0.6) million | Loss increased $1.3 million |
| Net loss per share | $(0.03) | $(0.01) | Higher loss per share |
| Adjusted EBITDA | $11.8 million | $7.5 million | 58% increase |
| Cash flow from operations | $11.2 million | $8.0 million | 40% increase |
Subscription and related usage revenue represented 93% of total revenue, compared with 92% in the prior-year quarter. Annual dollar-based retention increased to 107% from 98%, primarily because larger clients increased their agent-seat usage.
Revenue growth was primarily attributed to larger clients, increased sales and marketing activity and improved brand awareness. Gross-margin improvement reflected usage efficiencies, subscription economies of scale and improved professional-services efficiency.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $93.5 million at March 31, 2019, compared with $81.9 million at December 31, 2018.
- Marketable investments were $205.5 million, producing cash and marketable investments of approximately $298.9 million.
- Working capital was $288.3 million.
- Operating cash flow was $11.2 million; capital expenditures were approximately $4.0 million.
- The company had $258.8 million principal amount of 0.125% convertible senior notes due May 1, 2023. The carrying value was $199.8 million after discounts and issuance costs.
- The notes were not convertible during the quarter because the applicable stock-price conditions were not met. The company expects to settle the principal amount in cash if conversion occurs.
- Finance lease liabilities totaled $9.5 million, and operating lease liabilities recognized under ASC 842 totaled $7.3 million.
- Management stated that existing cash and cash equivalents should be sufficient for working-capital and capital-expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27%, while gross profit increased 28%.
- Research and development expense increased 36% to $10.5 million, sales and marketing increased 24% to $21.7 million, and general and administrative expense increased 29% to $11.8 million.
- Stock-based compensation increased to $8.7 million from $5.3 million, contributing to higher operating expenses.
- Interest expense increased to $3.4 million from $0.8 million, primarily because of the convertible notes issued in May 2018.
- Operating cash flow increased despite the higher GAAP net loss, supported by noncash stock-based compensation, depreciation and amortization, and amortization of note discounts and issuance costs.
- The company adopted ASC 842 on January 1, 2019, recognizing $8.4 million of operating lease right-of-use assets and liabilities at adoption. The adoption did not affect operating results or cash flows.
- Remaining performance obligations under contracts with original durations exceeding one year totaled $105.6 million; approximately three-fourths was expected to be recognized over the following 24 months.
Outlook, Commentary, Risks and Unusual Items
Management expects continued investment in sales and marketing, research and development, infrastructure and headcount. It expects cost of revenue and operating expenses to increase in absolute dollars, while generally benefiting from economies of scale over time. Research and development expense was expected to increase faster than historical rates and as a percentage of revenue during 2019.
Key risks include client churn or reduced usage, competition, extended sales and implementation cycles for larger customers, service outages, dependence on third-party telecommunications and internet providers, cybersecurity incidents, rapid technological change, difficulty managing rapid growth, continuing losses, financing needs and the ability to service or repay the convertible notes.
The company had approximately $1.0 million of legal and indemnification fees advanced through March 31, 2019 in connection with the Melcher litigation. Management did not expect existing legal matters to have a material impact, but acknowledged that an unfavorable resolution could materially affect a future reporting period. Hosting and telecommunications commitments totaled $7.9 million for terms of 12 to 36 months. No material changes were reported to the previously disclosed risk factors.
Investor Verification Checklist
- Verify whether revenue growth and the 107% dollar-based retention rate continued, particularly among larger clients.
- Assess whether rising research and development, sales and marketing, stock-based compensation and interest costs support or outpace revenue growth.
- Monitor cash generation against approximately $258.8 million of convertible-note principal due in 2023 and lease obligations.
- Review the potential dilution and cash-settlement implications of the convertible notes, including the capped-call transactions.
- Track client concentration, churn, agent-seat expansion and exposure to short-notice reductions or termination of subscriptions.
- Follow developments in the Melcher litigation and related indemnification recovery claims.
- Confirm the effect of ASC 842 and future operating-lease commitments, including $4.1 million of leases not yet commenced as of March 31, 2019.