Summary
- Five9, Inc. Q4 results were strong, with a beat on both the top and bottom lines.
- No issues with the outlook, especially given the macro pressures.
- High valuation is the primary risk for Five9, Inc., but the growth is strong and justifies a premium.
Five9, Inc. ( FIVN ) is a very interesting company in our opinion. The draw to its operations is that it solves problems for companies that they may not even know they have through automation of tasks. As we move further into the 21st century and artificial intelligence is all the rage, when it comes to businesses and decision making, businesses want to be efficient and one way this happens is by automating manual tasks. Such automation helps with a tight labor market and can help preserve margins by reducing costs. By automating manual tasks, companies will save money.
Five9 has been on our radar for months. We liked it when it dropped under $100, but the stock got crushed in the market malaise of the final calendar quarter of 2022. The stock has rallied recently with the market, but on its own, the company and the stock deserve a premium due to its exceptional growth metrics.
That said, the results of the just-reported quarter were strong. The growth in Q4 was so good. In this column, we discuss the just-reported earnings. The price action has been wild, and suggests the market is not sure how to value the company. By most metrics the stock is expensive, but the long-term promise offsets much of this. Let us discuss.
Five9's Q4 earnings demonstrate continued growth
The company has continued to enjoy strong and consistent revenue growth as more and more customers are onboarded.
As you can see, revenue for Q4 2022 increased 20% to a record $208.3 million, compared to $173.6 million for Q4 2021. There was also strong enterprise subscription revenue growth.
The revenue growth that we are seeing continues to be driven primarily by the strength of the Enterprise business, where last 12 months (or LTM for short) subscription revenue grew 32% year-over-year. We do note that the pace of growth is slowing, but it is harder to grow high percentage when you have grown rapidly quarter after quarter. The revenue is recurring at over 90%.
Most revenue is recurring and this recurring revenue stream as a percentage of total revenue has been stable for many quarters. This helps forecast expectations going forward. When 92% of your revenue is from recurring sources, you have strong visibility. What is more, the company has strong margins, too.
In Q4, the GAAP gross margin was 53.8% compared to 54.1% for Q4 2021. Adjusted gross margin was strong, but down slightly to 62.3% compared to 62.8% a year ago. As you can see since the IPO in 2014, the company has expanded margins from 51.5%. Further, there has been a 39.2% improvement in operating expenses as a percent of revenue, while EBITDA margins are now highly positive.
Five9 makes money
Unlike many tech companies that innovate, this company is not just growing revenues but also makes real money, and real profit. Adjusted net income was $39.0 million in Q4, or $0.54 per share, a massive increase from the $30.1 million, or $0.42 per share a year ago. On top of that, adjusted EBITDA for Q4 was $46.2 million, or 22.2% of revenue, compared to $36.9 million, or 21.3% of revenue, last year. Operating cash flow remains strong. Operating cash flow for Q4 2022 was $32.7 million, compared to GAAP operating cash flow of $8.6 million a year ago.
Earnings are improving over time. For the full year 2022, Five9 saw revenue jump 28% to $779 million. With over 60% margins, net income was $107 million, or $1.50 per share, rising from $1.16 per share.
Our early 2023 reads suggested $1.40 to possibly $2.00 in 2023 EPS. Management has now forecast $1.67 to $1.71. This is strong growth, though, the company's valuation is a bit stretched here at $80 per share. This is 47X FWD eps. That is pricey. Growth is strong, but the pace is moderating.
Final thoughts
We like Five9, Inc. long term. The growth is solid year-after-year. An investment will pay off, but trading this name is really about momentum. At these valuations, the stock could easily fall 20% from here and still be a touch pricey. On the flip side, with more and more automation of more and more tasks, and a macro environment where business want to save money, we expect ongoing customer growth. The recurring revenue profile and strong margins suggest Five9, Inc. could also easily rise 20%, since valuation here is offset by the potential for the long term.
For further details see:
Five9: The Market Does Not Know How To Value This One