Five9, Inc. — Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
Five9 provides cloud-based contact-center software and related telephony usage through a subscription SaaS model. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Five9 reported more than 2,000 clients, and subscription and related usage fees represented 92% of revenue in both the quarter and year-to-date period.
Financial Performance and Liquidity
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $143.8 million | $99.8 million | $281.7 million | $194.9 million |
| Revenue growth | 44% | — | 45% | — |
| Gross profit | $79.4 million | $57.3 million | $157.5 million | $112.4 million |
| Gross margin | 55% | 57% | 56% | 58% |
| Loss from operations | $(14.2) million | $(8.2) million | $(25.3) million | $(13.2) million |
| Net loss | $(16.5) million | $(16.1) million | $(28.9) million | $(23.5) million |
| Net loss per share | $(0.25) | $(0.25) | $(0.43) | $(0.38) |
| Adjusted EBITDA | $24.0 million | $18.3 million | $46.2 million | $32.4 million |
Operating expenses were $93.6 million in Q2 and $182.7 million year to date, equal to approximately 65% of revenue in both periods. Research and development, sales and marketing, and general and administrative expense each increased substantially year over year, primarily because of higher headcount, stock-based compensation and growth-related spending.
Cash provided by operating activities was $25.2 million in the first six months of 2021, essentially unchanged from $25.2 million in the prior-year period. Investing activities used $61.5 million, principally for marketable investment purchases and $19.5 million of capital expenditures. Financing activities used $8.8 million, including $17.6 million of cash settlements for 2023 convertible notes.
At June 30, 2021, Five9 had $175.2 million of cash and cash equivalents and $463.7 million of marketable investments, totaling approximately $638.9 million. Management stated that existing cash and cash equivalents were sufficient for working capital and capital expenditure needs for at least the next 12 months. Working capital was $529.5 million.
Aggregate convertible-note principal was $788.8 million, consisting of $747.5 million due June 1, 2025 and approximately $41.3 million due May 1, 2023. The balance sheet reported $773.6 million of convertible senior notes after issuance-cost adjustments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 44% in Q2 and 45% year to date, primarily from larger clients, increased sales and marketing activity, and improved brand awareness.
- Gross margin declined two percentage points in both comparison periods, primarily because of higher public-cloud, data-center, depreciation, amortization and stock-based compensation costs.
- Net loss widened to $16.5 million in Q2 and $28.9 million year to date, despite higher revenue and adjusted EBITDA.
- Interest expense declined substantially following the 2023 note settlements and the adoption of ASU 2020-06, which eliminated amortization of certain convertible-debt discounts. The prior-year periods also included a $5.8 million loss on early extinguishment of debt.
- Stock-based compensation increased to $24.9 million in Q2 and $45.8 million year to date, compared with $16.8 million and $30.6 million, respectively.
- Annual dollar-based retention improved to 123% from 111%, driven primarily by larger clients increasing agent seats.
- Five9 early adopted ASU 2020-06 on January 1, 2021. The adoption increased reported debt by $145.7 million, reduced additional paid-in capital by $168.4 million, and reduced opening accumulated deficit by $22.7 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative revenue or earnings guidance figure. Management expects continued investment in infrastructure, research and development, sales and marketing, and client support. Cost of revenue and operating expenses are expected to increase in absolute dollars, while their percentages of revenue may fluctuate in the near term.
Management said COVID-19 had a moderately positive effect on 2020 and the first half of 2021 because of the shift from brick-and-mortar to virtual operations, but the duration and broader economic effects remain uncertain. Key risks include client retention and seat reductions, longer enterprise sales cycles, service outages, cybersecurity incidents, reliance on telecommunications and cloud providers, competition, inability to achieve profitability, and the need for additional financing.
Five9 recorded $5.2 million of contingent-consideration expense during the first six months of 2021, including $2.7 million in Q2, related to the Inference acquisition. The contingent earn-out liability was $23.3 million at June 30, 2021, with potential total payments of up to $24.0 million through December 31, 2021.
On July 16, 2021, after quarter-end, Five9 agreed to be acquired by Zoom Video Communications. Each Five9 share would convert into 0.5533 shares of Zoom Class A common stock. Closing was anticipated in the first half of 2022, subject to stockholder, regulatory and other conditions. Under specified termination circumstances, Five9 could owe Zoom a $450 million termination fee. The merger agreement also restricts certain acquisitions, capital expenditures, equity issuances and additional indebtedness before closing.
Remaining performance obligations under contracts with original terms longer than one year totaled $443.0 million at June 30, 2021; approximately three-fourths was expected to be recognized over the following 24 months.
The filing states that there were no material off-balance-sheet arrangements and that management concluded disclosure controls were effective as of June 30, 2021. Legal matters arising in the ordinary course were not expected to have a material effect, although an unfavorable resolution could affect a future period.
Important Facts for Investors to Verify
- Whether the proposed Zoom merger receives stockholder and regulatory approvals, closes on schedule, or triggers the $450 million termination fee.
- Whether revenue growth and the 123% dollar-based retention rate remain supported by larger-client expansion and additional agent seats.
- Whether gross-margin pressure from public-cloud, data-center, telecommunications and personnel costs moderates or continues.
- Whether Five9 can improve GAAP profitability while maintaining elevated sales, marketing, research and development, infrastructure and stock-based compensation spending.
- The timing and settlement method for the remaining 2023 convertible notes, including approximately $1.2 million of conversion elections outstanding at quarter-end.
- The final amount and timing of the Inference contingent earn-out, which could be up to $24.0 million.
- The market value and dilution implications of the fixed 0.5533-for-one Zoom share exchange ratio.