Five9, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Five9 provides cloud contact center software through a SaaS model, including voice, chat, email, web, social media and mobile capabilities. The filing covers the quarter and nine months ended September 30, 2015. Five9 reported more than 2,000 clients and approximately 680 employees. Subscription and related usage fees represented 96% of third-quarter revenue and 97% of nine-month revenue.
Financial performance and position
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Revenue | $32.3 million | $25.9 million | $92.8 million | $74.8 million |
| Revenue growth | 25% | — | 24% | — |
| Gross profit | $17.5 million | $12.4 million | $49.0 million | $34.7 million |
| Gross margin | 54% | 48% | 53% | 46% |
| Loss from operations | $(4.9) million | $(10.4) million | $(18.8) million | $(27.2) million |
| Net loss | $(6.0) million | $(11.4) million | $(22.3) million | $(28.4) million |
| Basic and diluted loss per share | $(0.12) | $(0.24) | $(0.45) | $(0.84) |
| Adjusted EBITDA | $(1.1) million | $(5.0) million | $(6.5) million | $(18.3) million |
Operating expenses were $22.4 million in the third quarter and $67.8 million for the nine months. Nine-month sales and marketing expense increased 12% to $31.3 million, while research and development expense increased 5% to $17.1 million. General and administrative expense increased 10% for the nine months, partly because the prior-year period included a $2.8 million release of a contingent state tax liability.
Cash and cash equivalents were $59.5 million at September 30, 2015, compared with $58.3 million at December 31, 2014. The company used $12.9 million in operating activities, generated $20.1 million from investing activities—primarily short-term investment maturities—and used $6.0 million in financing activities. Net cash increased by $1.2 million during the first nine months.
Total debt, net of discounts, was $37.8 million, including a $12.5 million revolving credit balance. Capital lease obligations totaled approximately $8.9 million. The company had $7.5 million available under its revolving facility and $10.0 million remaining available under its term loan facility. Management stated that existing cash and available borrowing capacity were expected to fund working capital and capital expenditures at least through September 30, 2016, subject to operating performance and other conditions.
Material changes versus the prior comparable period
- Revenue increased 25% in the quarter and 24% for the nine months, primarily from new clients and, to a lesser extent, higher agent-seat usage by existing clients.
- Gross margin improved from 48% to 54% in the quarter and from 46% to 53% for the nine months, driven mainly by improved usage efficiencies and economies of scale.
- Operating loss and net loss narrowed substantially, although the company remained unprofitable.
- Adjusted EBITDA improved by $3.9 million in the quarter and $11.8 million for the nine months, but remained negative.
- Dollar-Based Retention Rate declined to 95% from 97%, primarily because of lower growth from clients supporting Affordable Care Act enrollment.
- Interest expense increased due to higher average debt balances and imputed interest associated with the FCC civil penalty.
- Short-term investments were converted into cash during the period, with $40.0 million of maturities and $20.0 million of new purchases.
Guidance, outlook, risks and unusual items
Management expected continued investment in sales and marketing, research and development, headcount, infrastructure and client support. It expected costs and operating expenses to increase in absolute dollars, while declining as a percentage of revenue as the business scales. The filing does not provide formal revenue or earnings guidance.
- Five9 agreed to pay a $2.0 million FCC civil penalty in twelve quarterly installments beginning in July 2015 and must maintain regulatory compliance monitoring and training for three years. The remaining payable balance was approximately $1.8 million at September 30, 2015.
- The company had a $4.5 million accrued liability for disputed historical Universal Service Fund contributions, interest and penalties, in addition to the $1.7 million USAC promissory note. FCC proceedings could require additional back assessments, particularly for 2003–2007.
- Accrued state and local sales taxes and surcharges totaled $2.6 million. Actual liabilities could exceed estimates if taxing authorities challenge the company’s positions.
- NobelBiz patent litigation remained pending. The company believes it has valid defenses and had not accrued a loss; trial was scheduled for June 2016 if the case was not resolved through summary judgment.
- Key business risks include client churn and short termination periods, competitive pressure, service outages, cybersecurity and data-center disruption, dependence on telecommunications providers, longer enterprise sales cycles, international operations, regulatory compliance and the company’s history of losses.
- The company had an accumulated deficit of $150.9 million and stated that losses were expected to continue for the foreseeable future.
Important facts for investors to verify
- Whether revenue growth and the 54% quarterly gross margin were sustained after September 30, 2015.
- Trends in Dollar-Based Retention Rate, client additions, agent seats and usage-based revenue.
- Progress toward positive Adjusted EBITDA and eventual GAAP profitability, including the impact of stock-based compensation.
- Operating cash burn, debt maturities and compliance with secured-credit covenants.
- Resolution of the disputed USF assessments and the potential for additional federal, state or local tax liabilities.
- Status and potential financial impact of the NobelBiz patent litigation and ongoing FCC compliance obligations.
- Exposure to service outages, cybersecurity incidents, third-party telecommunications failures and data-center concentration.