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Five9 (NASDAQ:FIVN) Q3: Beats On Revenue But Stock Drops On Weak Guidance


Full Report / November 02, 2023

Call center software provider Five9 (NASDAQ: FIVN) beat analysts' expectations in Q3 FY2023, with revenue up 16% year on year to $230.1 million. However, next quarter's revenue guidance of $237.6 million was less impressive, coming in 2.52% below analysts' estimates. Turning to EPS, Five9 made a non-GAAP profit of $0.52 per share, improving from its profit of $0.39 per share in the same quarter last year.

Five9 (FIVN) Q3 FY2023 Highlights:

  • Revenue: $230.1 million vs analyst estimates of $224.5 million (2.48% beat)
  • EPS (non-GAAP): $0.52 vs analyst estimates of $0.44 (18.9% beat)
  • Revenue Guidance for Q4 2023 is $237.6 million at the midpoint, below analyst estimates of $243.7 million
  • Free Cash Flow of $31.5 million, up 108% from the previous quarter
  • Gross Margin (GAAP): 51.7%, down from 52.6% in the 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 due to lack of shareholder support, after it was revealed that regulators were reviewing the planned deal due to concerns about foreign participation.

Video Conferencing

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 strong over the last two years, growing from $154.3 million in Q3 FY2021 to $230.1 million this quarter.

Five9 Total Revenue

This quarter, Five9's quarterly revenue was once again up 16% year on year. We can see that Five9's revenue increased by $7.22 million quarter on quarter, which is a solid improvement from the $4.44 million increase in Q2 2023. Shareholders should applaud the acceleration of growth.

Next quarter's guidance suggests that Five9 is expecting revenue to grow 14% year on year to $237.6 million, slowing down from the 20% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 16.4% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 51.7% in Q3.

Five9 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.52 left to spend on developing new products, sales and marketing, and general administrative overhead. Five9's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Five9's free cash flow came in at $31.5 million in Q3, up 66.1% year on year.

Five9 Free Cash Flow

Five9 has generated $94.8 million in free cash flow over the last 12 months, a solid 10.8% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Five9's Q3 Results

With a market capitalization of $4.02 billion, Five9 is among smaller companies, but its $700.3 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was good to see Five9 beat analysts' revenue expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter underwhelmed and its gross margin decreased. Overall, the results could have been better. The company is down 6.88% on the results and currently trades at $52.5 per share.

Is Now The Time?

Five9 may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for everyone who's making the lives of others easier through technology, but in case of Five9, we'll be cheering from the sidelines. Its revenue growth has been solid over the last two years, though we don't expect it to maintain that historical pace. And while its strong free cash flow generation gives it re-investment options, 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 12 months is 4.0x, 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, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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