Five9, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Five9 provides cloud-based contact-center software and related telephony services through a software-as-a-service model. The filing covers the fiscal year ended December 31, 2019, with comparative results for 2018 and 2017. Five9 operated as one reportable segment, served more than 2,000 clients, and facilitated more than six billion call minutes annually. Approximately 92% of 2019 revenue was generated from U.S. billing addresses.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $328.0 million | $257.7 million | 27% increase |
| Gross profit | $193.5 million | $153.6 million | 26% increase |
| Gross margin | 59% | 60% | Down 1 percentage point |
| Income from operations | $3.3 million | $7.0 million | Down $3.7 million |
| Net loss | $4.6 million | $0.2 million | Loss increased |
| Adjusted EBITDA | $60.8 million | $46.4 million | 31% increase |
| Net cash from operating activities | $51.2 million | $38.6 million | 33% increase |
Subscription and related usage revenue represented 92% of total revenue. Annual Dollar-Based Retention improved to 105% from 103%, primarily because larger clients increased agent-seat usage. Fourth-quarter revenue was $92.3 million, compared with $72.3 million in the fourth quarter of 2018; fourth-quarter net income was $0.8 million, compared with a $3.7 million net income in the prior-year quarter.
Operating expenses were $190.2 million, or 58% of revenue, compared with $146.6 million, or 57%, in 2018. Research and development expense increased 32% to $45.2 million, sales and marketing increased 33% to $95.6 million, and general and administrative expense increased 22% to $49.4 million. Stock-based compensation increased to $42.1 million from $28.5 million.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $78.0 million and marketable investments were $242.0 million at December 31, 2019, for combined liquidity of approximately $319.9 million.
- Working capital was $315.3 million, compared with $286.0 million at December 31, 2018.
- Operating cash flow was $51.2 million. Investing cash flow was negative $63.6 million, including $19.2 million of capital expenditures and $13.9 million paid for the Whendu asset acquisition.
- Capital expenditures increased to $19.2 million from $9.3 million as Five9 expanded infrastructure and data-center capacity.
- Five9 had $258.8 million principal amount of 0.125% convertible senior notes due May 2023; the balance-sheet carrying amount was $209.6 million. The notes had a $437.0 million estimated fair value at year-end.
- Finance lease liabilities were $4.3 million and operating lease liabilities were $9.4 million at year-end. Total contractual obligations were $281.4 million, including the convertible notes.
- Management stated that existing cash and cash equivalents were expected to fund working-capital and capital-expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth remained strong at 27%, driven mainly by larger clients increasing agent seats and expanded sales and marketing activity.
- Gross margin declined from 60% to 59%, primarily because of higher personnel costs and stock-based compensation in cost of revenue.
- Operating income declined despite revenue growth because operating expenses grew faster than gross profit, particularly sales and marketing and research and development.
- Interest expense increased by $3.5 million because of the convertible senior notes issued in May 2018.
- Cash flow from operations improved by $12.6 million, while investing outflows declined substantially from 2018, when Five9 made significant marketable-investment purchases.
- Five9 completed the acquisition of substantially all Whendu assets in November 2019 for approximately $15.8 million, primarily adding an iPaaS platform.
- Five9 adopted ASC 842 leases in 2019, recognizing approximately $8.7 million of operating lease right-of-use assets and $9.4 million of operating lease liabilities; the adoption did not affect operating results or cash flows.
Outlook, Commentary, Risks and Unusual Items
Management expects to continue investing in sales and marketing, research and development, infrastructure, international expansion and AI-enabled products. It expects costs and operating expenses to increase in absolute dollars, while certain costs may decline as a percentage of revenue as the business scales. The filing does not provide formal numerical revenue or earnings guidance.
- Growth depends on acquiring new clients, expanding existing client deployments, retaining clients, increasing agent seats and maintaining partner relationships.
- The business remains exposed to intense competition, rapid technological change, pricing pressure, longer enterprise sales cycles and client cancellations or reductions in usage.
- Service outages, data-center failures, third-party telecommunications disruptions, cybersecurity incidents and privacy-law violations could result in lost clients, credits, litigation, regulatory penalties and reputational damage.
- Five9 remains historically loss-making, with an accumulated deficit of $156.0 million at year-end. Adjusted EBITDA is non-GAAP and includes substantial add-backs, including $42.1 million of stock-based compensation and $14.4 million of depreciation and amortization.
- Five9 accrued $0.9 million for disputed Universal Service Fund assessments for 2003–2007 and $1.2 million for potential state and local taxes and surcharges. Actual liabilities could exceed recorded accruals.
- The Melcher litigation and related indemnification proceedings were settled and dismissed in 2019; Five9 incurred approximately $1.4 million in total fees, expenses and settlement contributions.
- Convertible-note conversion features were triggered during the third and fourth quarters of 2019. Five9 received limited conversion elections and elected cash settlement. Future conversions or a fundamental change could require substantial cash payments or cause dilution.
- On January 15, 2020, Five9 agreed to acquire Coordinated Systems, Inc., rebranded as Virtual Observer, for approximately $32.0 million in cash, subject to closing adjustments and conditions. Closing was expected in the second quarter of 2020.
Most Important Facts for Investors to Verify
- Whether revenue growth, 105% dollar-based retention and larger-client expansion remain durable.
- Whether gross-margin pressure from personnel, telecommunications, data-center and regulatory costs improves or worsens.
- The extent to which $60.8 million of adjusted EBITDA converts into sustainable operating cash flow after stock-based compensation and other adjustments.
- Liquidity requirements and potential cash or equity dilution associated with the $258.8 million convertible notes, including conversion activity and the May 2023 maturity.
- Exposure to USF assessments, state and local tax liabilities, privacy regulation, TCPA compliance and cybersecurity or service-outage claims.
- Integration costs and expected benefits from the Whendu acquisition and the planned Virtual Observer acquisition.
- Future capital spending, international expansion costs, AI development spending and the company’s ability to achieve sustained GAAP profitability.