Five9(FIVN) - 2023 Q4 - Annual Report

PART I Business Five9, Inc. provides intelligent cloud software for contact centers, leveraging its VCC platform and SaaS model, with 2023 revenue reaching $910.5 million, a 17% increase - The company's business is centered on its purpose-built, reliable, scalable, and secure Virtual Contact Center (VCC) cloud platform, which delivers a comprehensive suite of applications for customer service, sales, and marketing[181] Annual Revenue Growth | Fiscal Year | Revenue (in millions) | Year-over-Year Growth | | :--- | :--- | :--- | | 2023 | $910.5 | 17% | | 2022 | $778.8 | 28% | | 2021 | $609.6 | - | - Key industry trends driving growth include the rapid adoption of cloud contact center solutions, digital transformation to meet consumer demands for seamless experiences, and advancements in AI, including Generative AI and Large Language Models (LLMs)[181] - As of December 31, 2023, the company had a diverse global client base of over 3,000 organizations, with no single client accounting for more than 10% of revenues in 2023, 2022, or 2021[191] - The company competes with large legacy on-premise vendors like Avaya and Cisco, other cloud providers like Genesys and NICE, and newer entrants such as Amazon, Twilio, and Microsoft[198] Risk Factors The company faces significant risks from adverse economic conditions, client retention challenges, service outages, intense competition, and evolving AI and regulatory landscapes - Adverse economic conditions, including inflation, increased interest rates, and geopolitical conflicts, may harm the business by reducing client demand and lengthening sales cycles[224][294] - The business's growth is dependent on attracting new clients and selling additional services to existing ones; failure to do so, or the loss of existing clients, would harm revenue growth[241][251] - The company's technical infrastructure is critical; service outages or failures could lead to client loss, claims for damages, and reputational harm[262] - The development and integration of AI and Generative AI technologies present new and evolving legal, business, and reputational risks, including potential for inaccuracy, bias, and intellectual property infringement claims[266] - The company is subject to a complex and evolving regulatory environment, including telecommunications laws (TCPA, STIR/SHAKEN), data privacy laws (GDPR, CCPA), and tax obligations, with non-compliance potentially leading to significant fines and penalties[313][314][326] Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments were identified[356] Cybersecurity The company maintains a formal, risk-based Information Security Management System with Board oversight, incident response, and no material cybersecurity incidents to date - The company has implemented a formal Information Security Management System (ISMS) designed to protect information confidentiality, integrity, and availability, which complies with standards such as ISO 27001:2013 and PCI DSS 3.2.1[357] - The Board of Directors provides direct oversight of cybersecurity risk, receiving quarterly reports from management; several board members possess substantial cybersecurity experience[360] - A formal incident response process is in place, managed by an Incident Response Team and an Incident Classification Team, which includes senior executives like the CISO, CLO, and CFO[357] - The company has not identified any risks from known cybersecurity incidents that have materially affected or are reasonably likely to materially affect its operations, business, or financial condition[359] Properties The company leases approximately 180,000 square feet of global office space, including its San Ramon headquarters, and utilizes third-party data centers Principal Leased Properties | Location | Principal Use | Square Footage | Lease Expiration | | :--- | :--- | :--- | :--- | | San Ramon, CA | Corporate headquarters, R&D, Sales | 104,000 | Jan 2031 | | The Philippines | Technical support, training | 26,600 | Jul 2026 | | Portugal | Engineering and operations | 20,600 | Aug 2025 | | Australia | R&D, sales, client support | 14,000 | Oct 2027 | Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 of the Notes to Consolidated Financial Statements - Details on legal matters are located in Note 10 of the financial statements[364] Mine Safety Disclosures This item is not applicable to the company - Not applicable[365] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "FIVN"; it has never paid cash dividends and plans to retain earnings for growth - The company's common stock is traded on The NASDAQ Global Market under the ticker symbol "FIVN"[370] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future, intending to retain future earnings for business growth[371] Reserved This item is reserved - This item is reserved[376] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, revenue grew 17% to $910.5 million, with a net loss of $81.8 million, an Annual Dollar-Based Retention Rate of 110%, and Adjusted EBITDA of $166.3 million Overview The company, a cloud contact center solution provider, reported $910.5 million in 2023 revenue, up from $778.8 million in 2022, but incurred an $81.8 million net loss due to growth investments - The company generates revenue through a SaaS business model with recurring subscriptions based on agent seats and usage fees based on call minutes[378] Key Financial Results | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | $910.5M | $778.8M | $609.6M | | Net Loss | ($81.8M) | ($94.7M) | ($53.0M) | - The company is monitoring the impact of macroeconomic factors like inflation and geopolitical conflicts, noting that its installed base business continues to experience headwinds[379][381] Key Operating and Non-GAAP Financial Performance Metrics Key metrics include an Annual Dollar-Based Retention Rate of 110% in 2023 (down from 115%), and Adjusted EBITDA increasing to $166.3 million from $140.4 million in 2022 Annual Dollar-Based Retention Rate | Period Ended | Rate | | :--- | :--- | | Dec 31, 2023 | 110% | | Dec 31, 2022 | 115% | Adjusted EBITDA Reconciliation (in thousands) | Line Item | 2023 | 2022 | | :--- | :--- | :--- | | Net loss | $(81,764) | $(94,650) | | Stock-based compensation | 206,292 | 172,507 | | Depreciation & amortization | 48,515 | 44,671 | | Other adjustments | (7,278) | (2,092) | | Adjusted EBITDA | $166,265 | $140,436 | Results of Operations In 2023, revenue grew 17% to $910.5 million, with cost of revenue up 18% to $432.7 million, resulting in a 52% gross margin and a $81.8 million net loss Revenue Comparison (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $910,488 | $778,846 | $131,642 | 17% | Cost of Revenue Comparison (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenue | $432,690 | $367,501 | $65,189 | 18% | Operating Expenses Comparison (in thousands) | Expense Category | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Research & Development | $156,582 | $141,794 | $14,788 | 10% | | Sales & Marketing | $296,713 | $261,990 | $34,723 | 13% | | General & Administrative | $123,079 | $95,143 | $27,936 | 29% | Liquidity and Capital Resources As of December 31, 2023, the company reported $756.8 million in working capital, including $143.2 million cash and $587.1 million marketable investments, with $128.8 million net cash from operating activities - As of December 31, 2023, the company had $143.2 million in cash and cash equivalents and $587.1 million in marketable investments, with total working capital of $756.8 million[414] Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $128,838 | $88,865 | | Net cash (used in)/from investing activities | $(259,562) | $30,963 | | Net cash from/(used in) financing activities | $94,579 | $(30,232) | - The company's 2023 convertible senior notes matured on May 1, 2023, and were settled; the settlement of associated capped calls resulted in the company receiving 370,877 shares of its common stock and $74.5 million in cash[414] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, including balance sheets, income statements, equity, cash flows, and accompanying notes, along with KPMG LLP's auditor's report Note 1: Description of Business and Summary of Significant Accounting Policies This note describes the company's cloud software business and details significant accounting policies, including revenue recognition, goodwill, intangible assets, stock-based compensation, and income taxes - Revenue is recognized when control of promised services is transferred to customers; the company allocates the transaction price to each performance obligation based on estimated standalone selling prices[487] - Goodwill is tested for impairment annually in the fourth quarter or more frequently if impairment indicators exist; intangible assets like developed technology and customer relationships are amortized on a straight-line basis over their estimated economic lives of three to eight years[486] - Stock-based compensation is measured at the grant date fair value; the company uses the Black-Scholes model for stock options and ESPP rights, and a Monte Carlo simulation for PRSUs with market conditions[494] Note 2: Revenue This note details revenue balances, showing $65.4 million in net contract liabilities and $1,055.9 million in remaining performance obligations as of December 31, 2023 Contract Balances (in thousands) | Balance | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Accounts receivable, net | $97,424 | $87,494 | | Deferred contract acquisition costs, net | $198,282 | $162,122 | | Net contract liabilities | $(65,431) | $(55,593) | - As of December 31, 2023, remaining performance obligations for contracts longer than one year totaled $1,055.9 million, with about 75% expected to be recognized as revenue over the next 24 months[22] Note 3: Investments and Fair Value Measurements This note details $587.1 million in marketable investments as of December 31, 2023, primarily in U.S. treasury and agency securities, and fair value measurements, including $718.3 million for 2025 convertible senior notes Marketable Investments by Type (Fair Value, in thousands) | Investment Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | U.S. treasury securities | $315,437 | $185,402 | | U.S. agency securities | $239,259 | $196,851 | | Commercial paper | $17,391 | $25,386 | | Corporate bonds | $12,618 | $3,636 | | Other | $2,391 | $23,353 | | Total | $587,096 | $434,628 | - The company's assets measured at fair value are primarily classified as Level 1 (e.g., U.S. treasury securities) and Level 2 (e.g., U.S. agency securities, corporate bonds), with no significant Level 3 assets[27][29] - As of December 31, 2023, the estimated fair value of the outstanding 2025 convertible senior notes was $718.3 million, classified as Level 2[29] Note 4: Financial Statement Components This note details balance sheet accounts, showing $143.2 million in cash and cash equivalents and $108.6 million in net property and equipment as of December 31, 2023 Property and Equipment, Net (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Computer and network equipment | $155,997 | $148,789 | | Computer software | $59,452 | $50,955 | | Internal-use software development costs | $19,734 | $6,111 | | Total Property and equipment | $246,274 | $215,755 | | Less: Accumulated depreciation | $(137,702) | $(114,534) | | Property and equipment, net | $108,572 | $101,221 | - Depreciation and amortization expense for property and equipment was $36.5 million for the year ended December 31, 2023, up from $33.0 million in 2022[41] Note 5: Goodwill and Intangible Assets Goodwill increased to $227.4 million and net intangible assets to $38.3 million in 2023, primarily due to the Aceyus acquisition, with no goodwill impairment identified - Goodwill increased by $62.0 million and intangible assets by $22.1 million as a result of the acquisition of Aceyus, Inc. in August 2023[44] Goodwill and Intangible Asset Balances (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Goodwill | $227,412 | $165,420 | | Intangible Assets, Net | $38,323 | $28,192 | - The annual goodwill impairment test completed in the fourth quarter of 2023 indicated no impairment[44] - Amortization expense for intangible assets was $12.0 million in 2023, compared to $11.7 million in 2022[45] Note 6: Debt This note details $747.5 million in 0.500% convertible senior notes due 2025, with the 2023 notes having matured and settled, including associated capped call transactions - The company has $747.5 million in aggregate principal amount of 0.500% convertible senior notes due June 1, 2025; the net carrying amount was $742.1 million as of December 31, 2023[48][52] - The 2023 convertible senior notes matured on May 1, 2023, and were settled; there were no 2023 notes outstanding as of December 31, 2023[55] - In connection with the 2025 notes issuance, the company entered into capped call transactions covering approximately 5.6 million shares to reduce potential dilution upon conversion[52] Note 7: Stockholders' Equity As of December 31, 2023, the company had 73.3 million shares outstanding, with total stock-based compensation expense of $206.3 million for 2023 and $304.8 million in unrecognized expense - As of December 31, 2023, the company had 73,316,968 shares of common stock issued and outstanding[57] Stock-Based Compensation Expense (in thousands) | Expense Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cost of revenue | $38,259 | $33,297 | $17,734 | | Research and development | $50,430 | $44,367 | $29,179 | | Sales and marketing | $66,229 | $59,300 | $35,269 | | General and administrative | $51,374 | $35,543 | $26,623 | | Total | $206,292 | $172,507 | $108,805 | Unrecognized Stock-Based Compensation (as of Dec 31, 2023) | Award Type | Unrecognized Expense (in thousands) | Weighted-Avg. Amortization Period | | :--- | :--- | :--- | | Stock Option | $4,660 | 1.5 years | | RSU (excluding PRSUs) | $284,201 | 2.7 years | | PRSU | $13,068 | 1.8 years | | ESPP | $2,888 | 0.4 years | Note 8: Net Loss Per Share For 2023, the company reported a basic and diluted net loss per share of $1.13 on an $81.8 million net loss, with all potentially dilutive securities excluded due to anti-dilution Net Loss Per Share Calculation | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net loss (in thousands) | $(81,764) | $(94,650) | $(53,000) | | Weighted-average shares (in thousands) | 72,048 | 69,920 | 67,512 | | Basic and diluted net loss per share | $(1.13) | $(1.35) | $(0.79) | - For 2023, a total of 10.56 million potentially dilutive shares from stock options, RSUs, and convertible senior notes were excluded from the diluted net loss per share calculation because they were anti-dilutive[78][80] Note 9: Income Taxes The company reported a $2.3 million income tax provision on a $79.4 million pre-tax loss in 2023, with a $134.8 million valuation allowance against deferred tax assets due to historical operating losses Provision for (Benefit from) Income Taxes (in thousands) | Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Current | $2,288 | $1,300 | $60 | | Deferred | $53 | $3,088 | $(11,345) | | Total | $2,341 | $4,388 | $(11,285) | - As of December 31, 2023, the company had federal and state net operating loss carryforwards of $403.4 million and $298.6 million, respectively[87] - A valuation allowance of $134.8 million was recorded against U.S. and U.K. net deferred tax assets due to uncertainty about their recoverability, based on historical operating losses[87][85] Note 10: Commitments and Contingencies As of December 31, 2023, the company had $747.5 million in 2025 convertible senior notes, $52.0 million in operating lease obligations, and $104.4 million in cloud service commitments, plus accrued liabilities for USF and sales tax contingencies - Major commitments include $747.5 million for 2025 convertible senior notes, $52.0 million for operating leases, and $104.4 million for cloud services and software agreements[93] - The company has an unresolved dispute with the FCC regarding USF contributions for the period 2003-2007, with an accrued interest liability of $0.1 million[102] - An accrued liability of $1.7 million exists for potential state and local sales taxes and surcharges that may be imposed by various taxing authorities[97] Note 11: Geographical Information In 2023, 89% of the company's revenue ($812.7 million) and 94% of its net property and equipment ($101.6 million) were concentrated in the United States Revenue by Geographic Region (in thousands) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | United States | $812,708 | $702,206 | $556,385 | | International | $97,780 | $76,640 | $53,206 | | Total | $910,488 | $778,846 | $609,591 | Property and Equipment, Net by Geographic Region (in thousands) | Region | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | United States | $101,567 | $92,659 | | International | $7,005 | $8,562 | | Total | $108,572 | $101,221 | Note 12: Retirement Plans The company incurred $2.4 million in 401(k) contribution expense in 2023 and maintains a $0.8 million defined benefit plan liability for employees in the Philippines - The company's contribution expense for its 401(k) plan was $2.4 million in 2023 and $2.1 million in 2022[107] - A defined benefit plan for employees in the Philippines had a total liability of $0.8 million as of December 31, 2023[109] Note 13: Leases As of December 31, 2023, total operating lease liabilities were $47.1 million and finance lease liabilities were $4.6 million, with a total lease expense of $14.6 million for 2023 Lease Liabilities (in thousands, as of Dec 31, 2023) | Lease Type | Right-of-Use Assets | Total Liabilities | | :--- | :--- | :--- | | Operating Leases | $38,873 | $47,109 | | Finance Leases | $4,564 | $4,644 | Maturities of Lease Liabilities (in thousands, as of Dec 31, 2023) | Year | Operating Leases | Finance Leases | | :--- | :--- | :--- | | 2024 | $12,283 | $1,991 | | 2025 | $9,329 | $1,991 | | 2026 | $7,109 | $1,013 | | 2027 | $5,969 | — | | Thereafter | $17,291 | — | | Total Payments | $51,981 | $4,995 | Note 14: Acquisitions On August 14, 2023, the company acquired Aceyus, Inc. for approximately $82.0 million in cash, resulting in $62.0 million of goodwill and $22.1 million of identifiable intangible assets - The company acquired Aceyus, Inc. on August 14, 2023, for total cash consideration of approximately $82.0 million[115] Preliminary Purchase Price Allocation (in thousands) | Assets Acquired / Liabilities Assumed | Amount | | :--- | :--- | | Tangible & Other Assets | $4,809 | | Acquired technology | $19,100 | | Customer relationships | $2,550 | | Trademarks | $500 | | Goodwill | $61,992 | | Liabilities assumed | $(6,939) | | Total | $82,012 | Note 15: Selected Quarterly Financial Data (Unaudited) This note presents unaudited quarterly financial data for 2023 and 2022, showing sequential revenue growth in 2023, from $218.4 million in Q1 to $239.1 million in Q4 2023 Quarterly Results (Unaudited, in thousands) | Quarter | Revenue | Gross Profit | Net Loss | | :--- | :--- | :--- | :--- | | Q1 2023 | $218,439 | $113,683 | $(27,248) | | Q2 2023 | $222,882 | $118,521 | $(21,739) | | Q3 2023 | $230,105 | $119,025 | $(20,419) | | Q4 2023 | $239,062 | $126,569 | $(12,358) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[147] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[149] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2023[150] - There were no changes in internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls[151] Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q4 2023 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading plan in Q4 2023[153] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[154] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the 2024 Proxy Statement[128][157] Executive Compensation The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Required information is incorporated by reference from the 2024 Proxy Statement[129] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Required information is incorporated by reference from the 2024 Proxy Statement[158] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Required information is incorporated by reference from the 2024 Proxy Statement[158] Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Required information is incorporated by reference from the 2024 Proxy Statement[158] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules, including consolidated financial statements (Item 8) and an index of corporate governance documents, debt agreements, and material contracts - The Consolidated Financial Statements of Five9, Inc. are set forth under Part II, Item 8 of the report[162] - An index of exhibits filed with the report is provided, including corporate governance documents, debt agreements, and material contracts[164][165] Form 10–K Summary No Form 10-K summary is provided - No Form 10-K summary is provided[141]