Five9, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Five9 provides cloud contact-center software and related telecommunications usage through a SaaS model. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company served more than 2,500 clients and generated more than 90% of revenue from subscription and related usage fees.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $198.3 million | $154.3 million | $570.5 million | $436.0 million |
| Revenue growth | 29% | — | 31% | — |
| Gross profit | $104.2 million | $87.2 million | $299.3 million | $244.7 million |
| Gross margin | 53% | 56% | 52% | 56% |
| Loss from operations | $(21.7) million | $(19.0) million | $(74.3) million | $(44.3) million |
| Net loss | $(23.2) million | $(20.5) million | $(81.0) million | $(49.4) million |
| Net loss per share | $(0.33) | $(0.30) | $(1.16) | $(0.73) |
| Adjusted EBITDA | $36.7 million | $27.4 million | $94.3 million | $73.6 million |
| Operating cash flow | — | — | $56.1 million | $20.3 million |
Revenue growth was primarily attributed to larger clients, increased sales and marketing activity, and improved brand awareness. No single client represented more than 10% of revenue.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $129.5 million at September 30, 2022, compared with $90.9 million at December 31, 2021.
- Short-term marketable investments were $447.6 million, and long-term marketable investments were $2.0 million. Cash, cash equivalents, and marketable securities totaled $579.1 million.
- Working capital was $590.1 million. Management stated that existing cash and cash equivalents should fund working capital and capital expenditure needs for at least the next 12 months.
- Aggregate convertible-note principal outstanding was approximately $747.7 million: $747.5 million of 2025 notes and approximately $0.2 million of 2023 notes.
- The 2025 notes mature June 1, 2025 and bear interest at 0.50%. The remaining 2023 notes mature May 1, 2023 and bear interest at 0.125%.
- Operating lease liabilities totaled $52.7 million. Cloud-service commitments totaled $46.7 million, and hosting and telecommunications commitments totaled $15.8 million.
Material changes versus the prior comparable period
- Revenue increased 29% in Q3 and 31% for the first nine months.
- Cost of revenue increased 40% in Q3 and 42% for the first nine months, exceeding revenue growth and reducing gross margin by approximately three to four percentage points.
- Sales and marketing expense increased 35% in Q3 and 40% for the first nine months, reflecting higher personnel, commissions, travel, and marketing costs.
- Research and development expense increased 15% in Q3 and 37% for the first nine months.
- Net losses widened to $23.2 million in Q3 and $81.0 million for the first nine months, compared with $20.5 million and $49.4 million, respectively, in 2021.
- Adjusted EBITDA increased, but it remained dependent on significant non-GAAP adjustments, including stock-based compensation of $44.5 million in Q3 and $128.7 million for the first nine months.
- Annual dollar-based retention declined to 118% from 123%, primarily due to the fading COVID-19 benefit and macroeconomic headwinds.
- The company closed its Russia office and began establishing a development center in Porto, Portugal. Russia-related closure and relocation costs were approximately $0.7 million in Q3 and $4.6 million for the first nine months.
- During the first nine months, Five9 paid $34.1 million in cash and issued 573,633 shares to settle approximately $34.0 million of 2023 convertible notes. It also paid $24.0 million of contingent consideration related to the Inference acquisition.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical revenue, earnings, or cash-flow guidance figure. Management expects continued investment in research and development, sales and marketing, cloud operations, infrastructure, client support, and international expansion. It expects gross margin to improve over the long term through economies of scale, although near-term investments may pressure margins.
- Management reported slower agent-seat growth in the installed base, particularly in financial services, consumer, healthcare, outsourcers, and real estate. Mid-market new-client activity was also affected, partly offset by strategic and international businesses.
- Key macroeconomic risks include inflation, higher interest rates, reduced economic output, supply-chain disruption, foreign-exchange volatility, and the Russia-Ukraine conflict.
- The company continues to incur costs and may experience operational disruption while transferring operations from Russia to Portugal.
- Five9 has a history of losses and may not achieve or sustain GAAP profitability. Operating cash flow benefited materially from non-cash stock-based compensation and other adjustments.
- The CEO resigned effective November 28, 2022. Chairman and former CEO Michael Burkland was appointed CEO effective the same date. The transition could disrupt operations, employee retention, client relationships, and execution.
- Convertible-note obligations, particularly the $747.5 million due in 2025, create a significant future liquidity and refinancing or settlement consideration.
- Other material risks include competition, client churn or reduced usage, service outages, cybersecurity incidents, dependence on third-party telecommunications and cloud providers, international regulatory exposure, acquisition integration, and stock-price volatility.
Investor verification checklist
- Verify the sustainability of 29% to 31% revenue growth and the decline in annual dollar-based retention to 118%.
- Assess whether rising cost of revenue and infrastructure spending can be absorbed without further gross-margin deterioration.
- Reconcile adjusted EBITDA with GAAP losses, particularly the substantial stock-based compensation adjustment.
- Review liquidity relative to the $747.5 million 2025 convertible-note principal and the remaining 2023-note maturity.
- Monitor cash conversion, deferred contract-acquisition costs, capital expenditures, and future cloud and telecommunications commitments.
- Evaluate the financial and operational effects of the Russia-to-Portugal transition and the new CEO transition.
- Review exposure to macroeconomic conditions, client seat reductions, cybersecurity events, third-party service failures, and international regulatory requirements.