Five9, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud contact-center software and related telecommunications usage services through a software-as-a-service model. The filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Five9 reported more than 2,000 clients and approximately three billion annual customer interactions.
Financial Performance and Liquidity
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Revenue | $38.9 million | $30.3 million | $76.9 million | $60.5 million |
| Revenue growth | 28% | — | 27% | — |
| Gross profit | $22.1 million | $16.0 million | $43.5 million | $31.5 million |
| Gross margin | 57% | 53% | 57% | 52% |
| Loss from operations | $(2.2) million | $(6.2) million | $(5.8) million | $(13.9) million |
| Net loss | $(3.5) million | $(7.4) million | $(8.4) million | $(16.3) million |
| Net loss per share | $(0.07) | $(0.15) | $(0.16) | $(0.33) |
| Adjusted EBITDA | $2.3 million | $(2.3) million | $2.7 million | $(5.4) million |
| Operating cash flow | — | — | $2.3 million | $(9.7) million |
Cash and cash equivalents were $57.6 million at June 30, 2016, compared with $58.5 million at December 31, 2015. Total debt at June 30 was $33.6 million net of debt discounts, including a $12.5 million revolving line of credit. Capital leases totaled $9.9 million. Current liabilities were $51.6 million versus current assets of $71.8 million.
Deferred revenue increased to $7.9 million from $6.4 million at year-end. The company generated $2.3 million of operating cash flow, used $0.6 million in investing activities and $2.5 million in financing activities, resulting in an $0.8 million decrease in cash during the first six months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 28% in the second quarter and 27% year to date, primarily driven by larger clients, higher sales and marketing activity, improved brand awareness and modestly higher recurring revenue per agent seat.
- Gross margin improved to 57% from 53% in the quarter and to 57% from 52% year to date, reflecting usage efficiencies, improved subscription and professional-services economics and scale benefits.
- Sales and marketing expense increased 19% in the quarter and 23% year to date as Five9 expanded personnel, commissions and marketing programs.
- Research and development expense was broadly flat year to date, while general and administrative expense declined 7%, partly because 2015 included out-of-period sales-tax adjustments.
- Operating and net losses narrowed materially, and adjusted EBITDA improved from a loss to positive $2.3 million in the quarter and $2.7 million year to date.
- Annual dollar-based retention improved to 100% from 94% for the trailing twelve months ended June 30, primarily due to larger clients increasing agent seats and revenue per seat.
- Common shares outstanding increased to 52.6 million from 51.2 million at December 31, 2015, reflecting equity-plan activity and option exercises.
Guidance, Outlook, Risks and Unusual Items
No quantitative revenue or earnings guidance is provided in the filing. 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 but generally decline as percentages of revenue over time. Management expected existing cash and borrowing availability to fund working-capital and capital-expenditure needs at least through June 30, 2017, subject to operating performance and other factors.
On August 1, 2016, after quarter-end, Five9 entered into a new $50.0 million revolving credit facility maturing in August 2019. The company immediately drew $32.6 million and used the proceeds to repay the prior credit facilities, including principal, accrued interest and prepayment penalties totaling $32.4 million, plus $0.2 million of administrative fees. Management expects lower interest expense from the new facility but anticipated refinancing-related losses in the third quarter.
- The company remains loss-making, with an accumulated deficit of $162.8 million, and states that losses may continue for the foreseeable future.
- Clients generally may reduce agent seats or terminate service with approximately 30 days’ notice, creating retention and revenue-visibility risk.
- Five9 relies on third-party telecommunications providers and data centers; service outages, security incidents or infrastructure failures could result in credits, claims, client losses and reputational damage.
- Regulatory exposures include disputed Universal Service Fund assessments, accrued at $5.1 million, and ongoing federal, state, local and international tax and telecommunications obligations. The company also had an approximately $1.3 million FCC civil penalty payable and a $0.8 million USAC promissory note at June 30.
- The NobelBiz patent litigation was stayed pending an appeal in related cases. Five9 believes it has strong defenses, has accrued no loss, and states that the potential high end of any loss cannot currently be estimated and could be material.
- Brexit, international currency movements, evolving privacy and data-transfer rules, competition, longer enterprise sales cycles and potential financing needs are identified as additional risks.
- The company reported no material off-balance-sheet arrangements and stated that disclosure controls and procedures were effective as of June 30, 2016.
Investor Verification Checklist
- Verify whether revenue growth, 100% dollar-based retention and gross-margin expansion continued after the reporting period.
- Assess the sustainability of positive adjusted EBITDA and operating cash flow after excluding stock-based compensation and other non-GAAP adjustments.
- Review the terms, borrowing-base limitations, covenants and collateral requirements of the August 2016 refinancing.
- Reconcile total debt maturities, capital-lease commitments and near-term cash requirements with available liquidity.
- Monitor the resolution of the disputed USF assessments, sales-tax contingencies and NobelBiz patent litigation.
- Evaluate dilution from outstanding options, restricted stock units, warrants and employee equity plans; approximately 8.3 million potentially dilutive securities were excluded from diluted loss per share at June 30.