Call center software provider Five9 (NASDAQ: FIVN) reported Q1 FY2023 results topping analyst expectations, with revenue up 19.5% year on year to $218.4 million. The company expects that next quarter's revenue would be around $214 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Five9 made a GAAP loss of $27.2 million, improving on its loss of $34.1 million, in the same quarter last year.
Five9 (FIVN) Q1 FY2023 Highlights:
- Revenue: $218.4 million vs analyst estimates of $208 million (5.03% beat)
- EPS (non-GAAP): $0.41 vs analyst estimates of $0.24 ($0.17 beat)
- Revenue guidance for Q2 2023 is $214 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $907.5 million at the midpoint
- Free cash flow of $21.7 million, down 18.2% from previous quarter
- Gross Margin (GAAP): 52%, in line with 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 $137.9 million in Q1 FY2021, to $218.4 million.
This quarter, Five9's quarterly revenue was once again up 19.5% year on year. We can see that revenue increased by $10.1 million in Q1, which was roughly the same as in Q4 2022. This steady quarter-on-quarter growth shows the company is able to maintain its paced growth trajectory.
Guidance for the next quarter indicates Five9 is expecting revenue to grow 13% year on year to $214 million, slowing down from the 31.7% 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 15.8% 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% in Q1.
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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Cash Is King
If you have followed 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 $21.7 million in Q1, up 37.6% year on year.
Five9 has generated $41.9 million in free cash flow over the last twelve months, a decent 5.15% of revenues. This FCF margin is a result of Five9 asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from Five9's Q1 Results
With a market capitalization of $4.05 billion Five9 is among smaller companies, but its more than $629.7 million in cash and positive free cash flow over the last twelve months give us confidence that Five9 has the resources it needs to pursue a high growth business strategy.
We liked to see that Five9 beat analysts’ revenue expectations pretty strongly this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 10.1% on the results and currently trades at $62.11 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. But while its ability to generate free cash flow avoids a dependency on capital markets, 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 4.3x, 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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