Five9, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Five9 provides cloud contact center software that allows businesses to manage customer interactions across various channels, offering a scalable and flexible platform.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Let’s dive into an analysis of Five9, utilizing its latest quarterly results and related documents to evaluate its business, moat, and financials.

Business Overview

Five9, Inc. is a provider of cloud-based software for contact centers, enabling businesses to manage customer interactions across various channels. The company’s platform allows businesses to engage with customers through voice, chat, email, social media, and mobile channels, providing a comprehensive solution for customer engagement.

Revenue Distribution

Five9 generates revenue primarily through:

  • Subscription Revenue: Recurring revenue from software licenses and access to its platform, accounting for the vast majority of the company’s revenue.
  • Professional Services Revenue: Fees for implementation, configuration, and training services related to their software.

The vast majority of the revenue comes from the subscription model which is sticky, providing reoccurring revenue stream to the company.

  • The contact center software industry is rapidly shifting towards cloud-based solutions. This shift is driven by the demand for scalability, flexibility, and cost-effectiveness compared to legacy on-premises systems.
  • The industry is becoming increasingly competitive, with both established players and new entrants vying for market share.
  • The move towards omnichannel engagement (integrating various customer interaction channels) is a critical driver, as customers seek seamless interactions.
  • AI capabilities are increasingly critical for automation and enhanced insights from customer interactions.
  • Companies are increasingly adopting cloud-based solutions for greater scalability and efficiency.

The industry is moving toward AI powered cloud based contact center which is the major strength of FIVN.

Competitive Landscape

Five9 competes with other cloud contact center software providers, as well as larger players offering both on-premises and cloud solutions. Some of the major competitors include:

  • Twilio Inc. (TWLO): A large provider of cloud communications, now looking to move into contact center solutions.
  • Nice (NICE): A long-established provider of both on-premise and cloud-based contact center solutions.
  • Amazon Connect (AMZN): A part of Amazon Web Services, this platform is geared towards AWS clients
  • RingCentral (RNG): Another unified communications provider looking to expand into contact centers.

Competition is very strong in this industry with big players having a stronghold.

Differentiation

  • Five9 differentiates itself by providing an integrated platform that supports a comprehensive range of customer interaction channels. Their solution offers AI capabilities like predictive analytics, workforce management, and automatic dialers.
  • The platform is designed for companies of all sizes, but it mainly concentrates on large enterprises.
  • Five9 emphasizes scalability and flexibility, allowing clients to adapt their contact centers to changing business needs.

The company focuses on providing an integrated and advanced platform for the enterprises.

Financials

Revenue Growth

  • The latest quarterly results show a revenue of $243.8 million in Q3 2023, representing a 15% YoY growth.
  • Subscription revenue grew 17% YoY, while professional service revenue declined 1%.
  • Revenue growth has shown a slowing trend. But the company expects a growth rate of 13-14% for Q4 2023.

Margins

  • Gross margins are generally high and stable, averaging over 58% for the past 3 years, which reflects the strength of the SaaS business model. The company’s gross margins are very high due to its SaaS nature and hence shows a positive trend.
  • Operating margins have improved in the latest quarter, achieving 12%, but they are still lower than peers. The adjusted gross margin has continued to remain very high, and even increased.
  • Net income is often affected by one-time charges and stock compensation, with net losses in recent history.

The gross margin is very impressive but operating and net margin is still low.

Cash Flow

  • Free cash flow in 2022 was $158 million and the guidance for full year 2023 is around $147-$150 million. This shows a sustainable positive cash flow from the company’s core operations.

Debt and Capital Structure

  • The Company’s capital structure is a mix of debt and equity.
  • As of September 30, 2023, the company has $971 million in total cash and short-term investments, compared to $1.16B in total debt.
  • A large portion of debt is convertible notes. In 2023, the company repurchased some of the convertible notes.

The company has a healthy cash balance, a positive cash flow, however it has a bit higher debt.

Balance Sheet Health

Based on the available financials, the balance sheet is healthy, but needs to focus on reducing the debt and its long-term obligations.

Moat Analysis

Five9 possesses a moderate moat, rated at 3/5, stemming from several factors:

  1. Switching Costs: Once a company implements Five9’s software, it’s difficult to switch to a competitor because of the effort involved in data migration, process integration, training, and changing workflows.
  2. Scalability and Reliability: The proven ability of Five9’s cloud platform to handle large-scale operations and ensure consistent availability gives it a competitive advantage. This reliability reduces risk for large clients
  3. Intangible Assets: While not immediately noticeable, Five9 has amassed significant data on customer interactions, which combined with its AI platform provides a competitive advantage over new players in the industry.

However, barriers to entry are not very high and new competition in the field can pose a threat.

Risks to the Moat

Several factors could erode Five9’s moat, these are some:

  1. Intense Competition: Competitors like Twilio and Amazon Connect are very big in the industry and have been providing similar solutions in communications. Hence, it would be a competitive challenge for FIVN to compete with them head-to-head.
  2. Technology Obsolescence: The rapid pace of technological change in the communications field could make their current technology obsolete.
  3. Changing Market Needs: If the customers’ preferences in terms of how they interact with the company changes, Five9’s product suite may need major overhauls, which can pose significant strain on resources.
  4. Acquisition Risk: The company’s revenues have been increasingly coming through acquisitions. Over dependence on acquisitions for revenue growth poses certain integration and management related challenges and risk.
  5. Macroeconomic Risks: Economic downturns could lead to a reduction in spending by clients on new software, as well as higher defaults of customers on loans.

Business Resilience

Five9 has a reasonably good resilience that may need to be improved. It is primarily based on its ability to adapt to changing business needs with its current core strengths. It is dependent on its ability to maintain the moat. Their consistent effort in expanding products using their platform and recent focus on improving their margin seems like a good sign. However, there are potential risks to this resilience which include its ability to adapt to fast changing tech and the intense competition from well-funded companies with better resources.

The pace of technology innovation requires them to keep constantly updating their products and this becomes a challenge, as well.

Management Discussions from Earnings Call

  • Management has noted a slower growth rate of recurring revenue than usual but they are trying to increase margins to help with this problem.
  • Management has said that they are moving toward more AI based platforms to increase efficiency and profitability.
  • They have reported that their sales team is focused on targeting higher valued customers who are expected to stay with the company longer and provide better value.
  • They are focusing on the integration of AI and ML into their operations and product offerings.
  • They seem confident about improving and meeting their long-term targets.

Understandability

Rated 3/5 due to several factors:

  • The business is relatively easy to understand: it provides cloud based contact centers that enable businesses to improve communication.
  • However, analyzing the competitive landscape needs deeper thought and the financial statements needs some effort to make sense.
  • The company relies on many tech related metrics which an average investor might find difficult to understand.

Balance Sheet Health

Rated 4/5 because:

  • The company’s assets are larger than their liabilities, showing a balance and good financial strength.
  • They have a good cash balance and positive free cash flow.
  • There are convertible debt obligations, the company needs to work on reducing the debt over time.

Final Thoughts

Five9 seems to be a good company in the growing market of cloud based communications with a solid product. However, they need to work on improving their profitability, margins and lowering their debts. The moat of the company is reasonably strong, but there are clear threats and potential risks that need to be monitored. For the conservative investors, it is not a great choice at the current moment due to its higher volatility and lower profits, however, for an enterprising investor it is good for further investigation into the business.