Five9, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018, compared with the three months ended March 31, 2017. Five9 provides cloud contact-center software, subscription services, related telephony usage, and professional services to more than 2,000 clients.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $58.9 million | $47.0 million | Up 25% |
| Gross profit | $34.2 million | $27.0 million | Up 26% |
| Gross margin | 58% | 58% | Stable |
| Loss from operations | $0.2 million loss | $4.4 million loss | Improved |
| Net loss | $0.6 million | $5.3 million | Improved |
| Net loss per share | $0.01 | $0.10 | Improved |
| Adjusted EBITDA | $7.5 million | $2.6 million | Improved |
| Cash flow from operations | $8.0 million | $0.2 million | Improved |
Subscription and related usage revenue represented 92% of revenue, compared with 94% in the prior-year quarter. United States revenue was $55.2 million and international revenue was $3.7 million. Annual dollar-based retention declined to 98% from 99%, primarily due to one customer termination for non-payment and another customer bankruptcy.
Cash and cash equivalents increased to $80.7 million from $68.9 million at December 31, 2017. Net cash provided by investing activities was $1.5 million, including $1.9 million of proceeds from the sale of convertible notes held for investment. Financing activities provided $2.2 million, primarily from $4.8 million of stock-option exercises, partially offset by capital lease and notes-payable payments.
Total debt was $32.8 million, consisting primarily of $32.6 million outstanding under a revolving credit facility. The facility has a $50.0 million capacity, leaving $17.4 million available, and matures August 1, 2019. Capital lease obligations totaled $14.5 million. Five9 was in compliance with its debt covenants and was required to maintain $25.0 million of unrestricted cash with its lenders.
Material Changes Versus the Prior Comparable Period
- Revenue increased 25%, driven primarily by larger clients and increased sales and marketing activity.
- Gross margin remained approximately 58% despite higher third-party hosted software costs, personnel costs, and federal telecommunications fees.
- Operating expenses increased 9% overall, but declined to 58% of revenue from 67%. Sales and marketing expense declined to 30% of revenue from 34%, and general and administrative expense declined to 15% from 18%.
- Net loss narrowed substantially, while adjusted EBITDA increased to $7.5 million from $2.6 million.
- Operating cash flow improved to $8.0 million from $0.2 million, partly reflecting lower losses, non-cash expenses, improved collections, and timing of payables.
- Stock-based compensation increased to $5.3 million from $3.1 million.
- Headcount increased to 873 employees from 807 employees at March 31, 2017.
Accounting, Outlook, Risks, and Unusual Items
Five9 adopted ASC 606 and ASC 340-40 on January 1, 2018 using the modified retrospective method. The adoption reduced opening accumulated deficit by $24.1 million, primarily because $23.1 million of sales commissions were capitalized and will be amortized over a five-year benefit period. Deferred contract acquisition costs totaled $24.8 million at March 31, 2018. Management stated that the new standard did not materially affect revenue timing, but it reduced current-period sales commission expense by approximately $1.7 million and increased reported operating income relative to the prior accounting treatment.
Remaining performance obligations under contracts with original terms exceeding one year totaled $56.5 million, with approximately three-quarters expected to be recognized over the next 24 months. Management expects operating expenses and cost of revenue to increase in absolute dollars as the company continues investing in sales, marketing, research and development, infrastructure, and headcount, while declining as a percentage of revenue over time. Management stated that cash, cash equivalents, and available borrowing capacity should fund working capital and capital expenditure needs for at least the next 12 months.
Key risks include continued losses, client churn and short contract termination periods, competition from larger cloud and legacy providers, service outages, cybersecurity incidents, dependence on third-party telecommunications and data-center providers, regulatory and tax liabilities, international operations, and the need for additional financing. Management expects losses may continue for the foreseeable future and has no assurance that profitability will be achieved or sustained.
Contingencies include approximately $0.8 million of disputed historical USF assessments, including interest and penalties, and approximately $1.4 million of accrued state and local tax and surcharge liabilities. The company also faces an indemnification and advancement dispute involving a former Face It officer related to ongoing litigation; $62 thousand had been advanced as of the filing. The filing states that other legal matters are not expected to have a material impact, although outcomes remain uncertain.
Following the quarter, Five9 announced the appointment of a new Chief Executive Officer effective May 3, 2018. The CFO continued in that role after serving as interim CEO.
Important Facts for Investors to Verify
- Whether revenue growth and 98% dollar-based retention remain durable, particularly among larger clients.
- The effect of ASC 606 commission capitalization on future sales and marketing expense, operating margins, and cash flow comparability.
- Progress toward sustained GAAP profitability, given the $151.9 million accumulated deficit and management’s expectation of continued investment.
- Liquidity after considering the $32.6 million revolving facility, $14.5 million of capital leases, the $25.0 million cash covenant, and the 2019 revolving-facility maturity.
- Resolution of the disputed USF assessment, sales-tax contingencies, and Face It-related indemnification proceedings.
- Execution under the newly appointed CEO and the company’s ability to manage continued headcount, infrastructure, cybersecurity, and international expansion.