Five9, Inc. Q2 FY2023 earnings

Five9's second quarter revenue rose 17.7% to a record $222.9 million, and gross profit rose 17.2% to $118.5 million. Gross margin slipped 0.2 percentage points to 53.2%. The company posted an operating loss of $25.2 million, which widened from the prior-year quarter. The net loss narrowed to $21.7 million, and diluted EPS improved to -$0.30. Operating cash flow reached a record $21.9 million. Capital expenditures fell 69.6% to $6.7 million. Deferred revenue rose 11.6% to $57.5 million, and remaining performance obligations rose 46.0% to $1.04 billion. Operating margin was -11.3%, up 0.2 percentage points. For the six months, revenue was $441.3 million, up 18.6%, and operating cash flow was $55.3 million, up 115.9%. Management attributed the top-line gain to larger clients, more sales and marketing activity, and improved brand awareness.

Non-GAAP profitability improved faster than the top line. Adjusted gross margin was 61.8%, against 60.7% a year earlier. Adjusted EBITDA was $41.5 million, or 18.6% of revenue, compared with $33.1 million, or 17.5% of revenue. Non-GAAP net income was $37.4 million, or $0.52 per diluted share, compared with $24.3 million, or $0.34 per diluted share. Trailing twelve month enterprise subscription revenue grew 28% year over year. The annual dollar-based retention rate was 112%, down from 118%. Five9 ended the quarter with more than 2,500 clients. Subscription and related usage fees made up 91% of revenue in the quarter and 92% in the first half. No single client accounted for more than 10% of revenue.

Management called it a particularly strong quarter for new logo bookings and pointed to continued investment in AI and automation as a tailwind that expands the total addressable market. The installed base business, which typically contributes about half of annual revenue growth, kept facing macroeconomic headwinds, with the consumer vertical taking the largest hit. Five9 closed its Russia office and built a new European development center in Portugal, incurring about $1.1 million of related costs in the quarter.

Guidance is set for the third quarter of 2023 and for the full year. For the third quarter, management guided non-GAAP net income per share of $0.42 to $0.44 on roughly 73.7 million diluted shares. For the full year 2023, it guided non-GAAP net income per share of $1.79 to $1.83 on roughly 73.3 million diluted shares. Both targets assume current market conditions and carry the cautionary factors described in the release.

Liquidity looks comfortable. Working capital was $683.0 million at June 30, 2023, including $195.6 million of cash and cash equivalents and $464.2 million of short-term marketable investments, plus $85.1 million of long-term marketable investments. The 2023 convertible senior notes matured on May 1, 2023 and were settled in cash and stock, and the related capped calls returned $74.5 million. Even so, the risk list is long. Five9 expects adverse economic conditions to keep pressuring revenue, competition is intensifying, and the company cites risks tied to AI development and regulation, security breaches, international expansion, dependence on third-party telecommunications providers, a history of losses, and the recent CEO transition. Management also warned that future capital needs could be met with equity or debt, which would dilute holders or add restrictive covenants.