Five9 (FIVN)

Call center software provider Five9 (NASDAQ: FIVN) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 13.2% year on year to $279.7 million. The company expects next quarter’s revenue to be around $275 million, close to analysts’ estimates. Its non-GAAP profit of $0.64 per share was 32.5% above analysts’ consensus estimates.

Company Overview

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 to offer more tailored customer support.

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.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Five9 grew its sales at a 18% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Five9 reported year-on-year revenue growth of 13.2%, and its $279.7 million of revenue exceeded Wall Street’s estimates by 2.6%. Company management is currently guiding for a 9.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.4% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Five9’s ARR punched in at $1.06 billion in Q1, and over the last four quarters, its growth was solid as it averaged 14.9% year-on-year increases. This performance aligned with its total sales growth, reflecting the company’s ability to maintain strong customer relationships and secure longer-term commitments. Its growth also contributes positively to Five9’s predictability and valuation, as investors typically prefer businesses with recurring revenue.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Five9 to acquire new customers as its CAC payback period checked in at 134.9 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Five9, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Five9’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 54.7% gross margin over the last year. Said differently, Five9 had to pay a chunky $45.31 to its service providers for every $100 in revenue.

Five9 produced a 55% gross profit margin in Q1, marking a 1.3 percentage point increase from 53.6% in the same quarter last year. Five9’s full-year margin has also been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Five9’s expensive cost structure has contributed to an average operating margin of negative 3.4% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Five9 reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last year, Five9’s expanding sales gave it operating leverage as its margin rose by 6.3 percentage points. Still, it will take much more for the company to reach long-term profitability.

Five9’s operating margin was negative 1.9% this quarter. The company's consistent lack of profits raise a flag.

If you’ve followed StockStory for a while, you know 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 has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9%, subpar for a software business.

Five9’s free cash flow clocked in at $34.93 million in Q1, equivalent to a 12.5% margin. This result was good as its margin was 5.5 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Five9 reported $1.04 billion of cash and $1.23 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $211.1 million of EBITDA over the last 12 months, we view Five9’s 0.9× net-debt-to-EBITDA ratio as safe. We also see its $48.3 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Five9’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 3.6% to $26 immediately after reporting.

Updated: June 14, 2025 at 10:08 PM EDT

Before making an investment decision, investors should account for Five9’s business fundamentals and valuation in addition to what happened in the latest quarter.

Five9’s business quality ultimately falls short of our standards. For starters, its revenue growth was a little slower over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while Five9’s expanding operating margin shows it’s becoming more efficient at building and selling its software, its gross margins show its business model is much less lucrative than other companies.

Five9’s price-to-sales ratio based on the next 12 months is 2x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $37.15 on the company (compared to the current share price of $26.80).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.