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Five9 (NASDAQ:FIVN) Surprises With Q2 Sales


Full Report / September 21, 2022
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Call center software provider Five9 (NASDAQ: FIVN) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 31.7% year on year to $189.3 million. The company expects that next quarter's revenue would be around $193 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Five9 made a GAAP loss of $23.6 million, down on its loss of $16.5 million, in the same quarter last year.

Five9 (FIVN) Q2 FY2022 Highlights:

  • Revenue: $189.3 million vs analyst estimates of $180 million (5.16% beat)
  • EPS (non-GAAP): $0.34 vs analyst estimates of $0.18 ($0.16 beat)
  • Revenue guidance for Q3 2022 is $193 million at the midpoint, roughly in line with what analysts were expecting
  • The company lifted revenue guidance for the full year, from $771.5 million to $781.5 million at the midpoint, a 1.29% increase
  • Free cash flow was negative $26 million, down from positive free cash flow of $15.7 million in previous quarter
  • Gross Margin (GAAP): 53.4%, down from 55.2% 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.

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 very strong over the last year, growing from quarterly revenue of $143.7 million, to $189.3 million.

Five9 Total Revenue

And unsurprisingly, this was another great quarter for Five9 with revenue up 31.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $6.6 million in Q2, compared to $9.17 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Five9 is expecting revenue to grow 25% year on year to $193 million, slowing down from the 37.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 22.5% over the next twelve months.

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 53.4% in Q2.

Five9 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.53 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Five9 burned through $26 million in Q2, with cash flow turning negative year on year.

Five9 Free Cash Flow

Five9 has burned through $29.6 million in cash over the last twelve months, resulting in a negative 4.23% free cash flow margin. This below average FCF margin is a result of Five9's need to invest in the business to continue penetrating its market.

Key Takeaways from Five9's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Five9’s balance sheet, but we note that with a market capitalization of $6.63 billion and more than $498.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed seeing Five9’s improve their gross margin materially this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $81.6 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, and its customer acquisition costs are higher than we like to see.

Five9's price to sales ratio based on the next twelve months is 8.0x, 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, 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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