Five9, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud contact-center software, including virtual contact center applications supporting voice, chat, email, web, social media and mobile interactions. The company reported unaudited results for the three months ended March 31, 2023, compared with the same period in 2022. Five9 had more than 2,500 clients, and no single client represented more than 10% of revenue.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $218.4 million | $182.8 million | Up 20% |
| Cost of revenue | $104.8 million | $88.9 million | Up 18% |
| Gross profit | $113.7 million | $93.9 million | Up 21% |
| Gross margin | 52% | 51% | Up 1 percentage point |
| Operating loss | $29.0 million | $30.8 million | Improved $1.8 million |
| Operating margin | (13%) | (17%) | Improved 4 percentage points |
| Net loss | $27.2 million | $34.1 million | Improved $6.9 million |
| Net loss per share | $0.38 | $0.49 | Improved |
| Adjusted EBITDA | $35.1 million | $24.5 million | Up $10.7 million |
| Operating cash flow | $33.4 million | $28.7 million | Up $4.7 million |
- Subscription and related usage revenue represented 92% of total revenue, compared with 91% in Q1 2022.
- Annual dollar-based retention declined to 114% from 120%, primarily because of macroeconomic pressure on the installed client base.
- Research and development expense increased 6% to $38.1 million; sales and marketing increased 18% to $76.3 million; and general and administrative expense increased 16% to $28.3 million.
- Stock-based compensation increased to $50.7 million from $39.4 million and represented a significant reconciliation item in adjusted EBITDA.
- Interest income and other increased to $4.1 million from $0.8 million, primarily due to higher interest income on marketable investments.
- At March 31, 2023, cash and cash equivalents were $141.4 million, short-term marketable investments were $488.4 million, and long-term marketable investments were $13.5 million. Reported working capital was $640.2 million.
- Net cash, cash equivalents and restricted cash decreased by $39.1 million during the quarter, primarily because of net purchases of marketable investments and capital expenditures.
- Capital expenditures were $9.9 million and capitalized software development costs were $1.8 million.
- Aggregate principal debt outstanding was approximately $747.7 million, consisting primarily of $747.5 million of 2025 convertible senior notes. The notes carry a 0.500% fixed interest rate and mature June 1, 2025.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by larger clients, increased sales and marketing activity and improved brand awareness.
- Gross margin expanded because revenue grew faster than cost of revenue. Cost of revenue increased due to higher third-party hosted software, infrastructure, personnel, data-center, public-cloud and Universal Service Fund costs, partly offset by lower usage and carrier rates.
- Operating losses narrowed despite continued investment in growth initiatives. Sales and marketing costs increased due to personnel, commissions, travel and client-acquisition activities.
- Net loss improved partly because of higher interest income and lower income-tax expense. The Q1 2022 tax provision included foreign tax associated with an intercompany transfer of Australian intellectual property.
- Russian operations closure and relocation costs declined to approximately $0.7 million from $2.7 million. Five9 established a European development center in Portugal.
- Investing cash flow changed from $11.2 million provided in Q1 2022 to $75.7 million used in Q1 2023, reflecting increased net purchases of marketable investments.
- Five9 issued shares through option exercises and restricted stock unit vesting; shares outstanding increased to approximately 71.5 million at March 31, 2023 from approximately 71.0 million at December 31, 2022.
Outlook, Commentary, Risks and Unusual Items
Management stated that adverse macroeconomic conditions are expected to continue affecting revenue, particularly installed-base growth. The largest Q1 headwind occurred in the financial-services vertical. Management expects continued investment in professional services, public cloud, cloud operations, client support, network infrastructure, research and development, and sales and marketing. The filing does not provide clear numerical revenue or earnings guidance.
- Management believed existing cash and cash equivalents would be sufficient for working capital and capital expenditure needs for at least the following 12 months, while noting that future liquidity depends on operating performance, growth, client retention, capital needs and financing access.
- The 2023 convertible senior notes matured on May 1, 2023 and were subsequently settled in cash and shares. Related capped calls resulted in Five9 receiving 370,877 shares and $74.5 million.
- Remaining performance obligations under contracts with original terms exceeding one year totaled $918.3 million at March 31, 2023; approximately three-fifths was expected to be recognized over the following 24 months.
- Outstanding commitments included $46.3 million for cloud services and software and maintenance, $15.3 million for co-location and telecommunications services, and $59.3 million of operating lease payments.
- Key risks include macroeconomic deterioration, lower client usage or retention, competition, long sales and implementation cycles, service outages, cybersecurity incidents, international operations, rapid technological change, executive transition, continued losses, stock-price volatility and the ability to refinance or repay convertible debt.
- Management reported no material changes to previously disclosed risk factors, no material legal claims known to the company, and effective disclosure controls as of March 31, 2023.
Important Facts for Investors to Verify
- Verify the final cash and share settlement of the 2023 convertible senior notes after the May 1, 2023 maturity.
- Assess whether the decline in annual dollar-based retention continues and whether macroeconomic pressure spreads beyond financial services.
- Monitor the sustainability of revenue growth and adjusted EBITDA, particularly after excluding $50.7 million of quarterly stock-based compensation.
- Review the liquidity impact and refinancing or repayment requirements associated with the $747.5 million of 2025 convertible senior notes due June 1, 2025.
- Evaluate whether increased sales and marketing, infrastructure and research and development spending produces sufficient client, seat and recurring-revenue growth.
- Reconcile non-GAAP adjusted EBITDA to GAAP net loss and consider the effect of acquisition-related, integration, stock-based compensation and other adjustments.