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Five9 (NASDAQ:FIVN) Beats Expectations in Strong Q3, Stock Soars


Full Report / November 08, 2021
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Call center software provider Five9 (NASDAQ: FIVN) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 37.6% year on year to $154.3 million. Guidance for next quarter's revenue was surprisingly good, being $165 million at the midpoint, 4.39% above what analysts were expecting. Five9 made a GAAP loss of $20.5 million, down on its loss of $11.4 million, in the same quarter last year.

Five9 (FIVN) Q3 FY2021 Highlights:

  • Revenue: $154.3 million vs analyst estimates of $146.6 million (5.21% beat)
  • EPS (non-GAAP): $0.28 vs analyst estimates of $0.23 (20.9% beat)
  • Revenue guidance for Q4 2021 is $165 million at the midpoint, above analyst estimates of $158 million
  • Gross Margin (GAAP): 56.4%, down from 58.4% same quarter last year

Started in 2001, Five9 (NASDAQ: FIVN) offers software as a service that makes it easier for companies to set up and efficiently run call centers, and offer more tailored customer support.

Its virtual contact center software provides phone connectivity, monitors agent performance, and guides agents through conversations to make them more effective. Arguably, the key advantage of a virtual contact center is that the software can automate some of the processes, including substituting humans with robot “intelligent virtual agents” for the easier requests. Crucially, Five9 integrates with multiple major enterprise software platforms, for example integration with Salesforce allows contact center agents to access customer profiles and manage customer data during interactions.

As more of our commercial interactions take place over the internet, the need for call centres and online support will only grow. Furthermore, the virtual call centre software providers can benefit from the remote work trend because they allow contact center agents to work from home using just a computer and a headset. In early 2021 Zoom Communications (ZM) attempted to buy Five9 in an all stock deal, but the acquisition fell through.

Work is becoming more distributed, both across geographies and devices. In order for businesses to keep functioning efficiently, they need to be able to communicate as well as they did when the teams were co-located, which drives the demand for integrated communication platforms.

Five9’s closest competitor in this space is a fellow cloud software provider Nice Systems (NASDAQ:NICE), but it also competes with legacy on-premise systems from Oracle (NYSE:ORCL) and Avaya (NYSE:AVYA), which are losing market share.

Sales Growth

As you can see below, Five9's revenue growth has been impressive over the last year, growing from quarterly revenue of $112.1 million, to $154.3 million.

Five9 Total Revenue

And unsurprisingly, this was another great quarter for Five9 with revenue up an absolutely stunning 37.6% year on year. On top of that, revenue increased $10.5 million quarter on quarter, a very strong improvement on the $5.9 million increase in Q2 2021, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 20.8% over the next twelve months, although estimates are likely to change post earnings.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Five9's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 56.4% in Q3.

Five9 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.56 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Five9's Q3 Results

With a market capitalization of $10 billion and more than $415.2 million in cash, the company has the capacity to continue to prioritise growth.

We enjoyed the positive outlook Five9 provided for the next quarter’s revenue. And we were also excited to see the really strong revenue growth. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 8.02% on the results and currently trades at $156.75 per share.

Is Now The Time?

Five9 may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Five9 we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses.

Five9's price to sales ratio based on the next twelve months is 14.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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