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Five9 (NASDAQ:FIVN) Posts Better-Than-Expected Sales In Q3 But Stock Drops


Full Report / November 07, 2022
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Call center software provider Five9 (NASDAQ: FIVN) beat analyst expectations in Q3 FY2022 quarter, with revenue up 28.5% year on year to $198.3 million. However, guidance for the next quarter was less impressive, coming in at $204.5 million at the midpoint, being 5.2% below analyst estimates. Five9 made a GAAP loss of $23.2 million, down on its loss of $20.5 million, in the same quarter last year.

Five9 (FIVN) Q3 FY2022 Highlights:

  • Revenue: $198.3 million vs analyst estimates of $195.6 million (1.35% beat)
  • EPS (non-GAAP): $0.39 vs analyst estimates of $0.35 (10.8% beat)
  • Revenue guidance for Q4 2022 is $204.5 million at the midpoint, below analyst estimates of $215.7 million
  • Free cash flow of $17.9 million, up from negative free cash flow of $25.1 million in previous quarter
  • Gross Margin (GAAP): 52.5%, down from 56.4% 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 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 two years, growing from quarterly revenue of $112.1 million in Q3 FY2020, to $198.3 million.

Five9 Total Revenue

This quarter, Five9's quarterly revenue was once again up a very solid 28.5% year on year. On top of that, revenue increased $8.96 million quarter on quarter, a very strong improvement on the $6.6 million increase in Q2 2022, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Five9 is expecting revenue to grow 17.8% year on year to $204.5 million, slowing down from the 35.7% 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 21.6% 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 52.5% 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, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

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's free cash flow came in at $17.9 million in Q3, turning positive year on year.

Five9 Free Cash Flow

Five9 has generated $2.89 million in free cash flow over the last twelve months, 0.38% of revenues. This FCF margin is a result of Five9 asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Five9's Q3 Results

With a market capitalization of $3.48 billion Five9 is among smaller companies, but its more than $577.1 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Five9 deliver strong revenue growth and positive cash flow this quarter. On the other hand, it was unfortunate that revenue guidance missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Five9. The company is down 5.1% on the results and currently trades at $44.6 per share.

Is Now The Time?

When considering Five9, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 3.6x, 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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