Business Context and Reporting Period
Five9, Inc. provides cloud software for contact centers through a SaaS model, including voice, chat, email, web, social media and mobile capabilities. The Form 10-Q covers the three and six months ended June 30, 2019, filed July 31, 2019. The company reported more than 2,000 clients and more than five billion annual call minutes.
Financial and Operating Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $77.4 million, up 27% | $152.0 million, up 27% |
| Gross profit | $46.2 million; 60% margin | $89.9 million; 59% margin |
| Operating income (loss) | $0.1 million; approximately 0% margin | $(0.2) million; approximately (0.2)% margin |
| Net income (loss) | $(1.9) million; $(0.03) per share | $(3.8) million; $(0.06) per share |
| Adjusted EBITDA | $14.4 million | $26.2 million |
| Cash flow from operations | Not separately provided | $18.0 million |
- Subscription and related usage fees represented 92% of revenue, compared with 93% in the prior-year periods.
- Annual dollar-based retention was 107% for the twelve months ended June 30, 2019, versus 99% in the comparable prior period.
- At June 30, 2019, cash and cash equivalents were $110.5 million and marketable investments were $197.0 million, totaling $307.5 million. Working capital was $302.6 million.
- Capital expenditures were $8.2 million in the first six months, compared with $1.1 million in the prior-year period.
- Convertible senior notes had a $258.8 million principal balance and a $203.1 million carrying value. The notes mature May 1, 2023 and bear a 0.125% contractual interest rate; accounting amortization resulted in substantially higher reported interest expense.
Material Changes Versus the Prior Comparable Period
- Revenue increased $16.3 million in the second quarter and $31.9 million in the first six months, primarily from larger clients, increased sales and marketing activity and improved brand awareness.
- Gross margin improved to 60% from 59% in the second quarter, reflecting professional-services efficiencies, subscription scale and improved usage economics.
- Operating expenses rose 28% in the second quarter and 28% in the first six months, driven by higher headcount, stock-based compensation, sales commissions and growth investments.
- Net loss narrowed in the second quarter from $2.0 million to $1.9 million, but widened for the first six months from $2.6 million to $3.8 million, primarily because of higher interest expense and increased operating investment.
- Operating cash flow increased 31% to $18.0 million for the first six months. The prior-year investing and financing cash flows benefited substantially from the 2018 convertible-note offering; 2019 financing cash flow was $4.5 million versus $190.8 million in the prior-year period.
- The company adopted ASC 842 on January 1, 2019, recognizing $10.2 million of operating lease right-of-use assets and $10.8 million of operating lease liabilities at June 30, 2019. Management stated the adoption did not affect operating results or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expects revenue growth investments to continue. Research and development expense was expected to increase faster than historical rates and as a percentage of revenue during the remainder of 2019; sales and marketing expense was expected to increase in absolute dollars.
- Management expects cost of revenue and operating expenses to rise in absolute dollars but potentially decline as a percentage of revenue over time as the business scales.
- Management stated that existing cash and cash equivalents should fund working-capital and capital-expenditure needs for at least the next 12 months, while noting that weaker operating performance or the need for additional financing could impair liquidity.
- Customer agreements generally permit changes in agent seats, including reductions to zero, with approximately 30 days’ notice. Larger-client sales and implementation cycles may be lengthy and require customization.
- Key risks include client retention and expansion, competition, rapid technological change, cybersecurity and service outages, dependence on third-party telecommunications providers, execution of rapid growth, continued operating losses, financing needs and the ability to service or repay the convertible notes.
- The company recorded approximately $1.4 million of legal and indemnification fees related to the Melcher litigation during the first six months, including a $0.4 million settlement contribution. The litigation and related arbitration were dismissed following June 2019 settlements.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the 27% revenue growth and 60% second-quarter gross margin with client additions, larger-client expansion and usage trends.
- Assess whether higher research, development, sales and marketing spending can produce sustained retention, bookings and operating profitability.
- Separate adjusted EBITDA from GAAP performance, particularly the effects of $10.4 million of quarterly stock-based compensation and $3.4 million of interest expense.
- Review liquidity relative to the $258.8 million note maturity in 2023, finance and operating lease obligations, and the company’s stated potential need for future financing.
- Monitor customer concentration and churn exposure given the generally short notice period for reducing agent seats or terminating usage.
- Evaluate the impact of the Melcher settlement, ongoing legal contingencies and the company’s cybersecurity, service availability and third-party network dependencies.