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Summary

  • Five9 is a cloud offering in difficult technology and cloud market conditions.
  • Headline growth is slowing down.
  • Five9 continues to burn cash.

Five9 (NASDAQ:FIVN) made its public debut on Monday, April 7. Shares of the cloud company, which empowers organizations to create customer engagement centers of excellence through its Virtual Contact Center, rose by 9.1% on their opening day.

It is understandable why investors passed on this offering given the slowing revenue growth and mounting losses. These two trends make it easy for me to skip Five9 stock as well.

The Public Offering

Five9 has developed the so-called Virtual Contact Center, which allows businesses and organizations to transform older legacy contact centers into better customer engagement centers. This should create better customer service at lower costs through scalable and secure offerings.

The company facilitates more than 3 billion interactions between more than 2,000 clients and customers per annum onto its platform. On the platform customer interactions like voice, chat, mail, web and more can be optimized in a real-time fashion.

Five9 sold 10 million shares for $7 apiece, thereby raising $70 million in gross proceeds. The proceeds will all go to the company, with no shares being offered by selling shareholders.

The offering is a bit disappointing as bankers and firms set an initial price range of $9-$11 per share. Such a price was no longer attainable given the recent correction in the so-called momentum stocks, which include many technology and biotechnology names. As such, underwriters had to adjust the pricing as well, prompting Five9 to sell its shares at a 30% discount.

Some 22% of the total shares outstanding were offered in the public offering. At Monday's closing price of $7.36 per share, the firm is valued at $339 million.

The major banks that brought the company public were JPMorgan (NYSE:JPM), Barclays (NYSE:BCS), Bank of America/Merrill Lynch (NYSE:BAC), Pacific Crest Securities, Canaccord Genuity (OTCPK:CCORF), and Needham & Company.

Valuation

Five9's VCC cloud platform matches each customer interaction to the agent, delivering real-time information, thereby boosting the customer experience as well as the productivity of the agent.

These offerings are attractive for customers as they typically require minimum up-front investments while maintenance costs are lowered by the fact that the platform is being run in the cloud. The SaaS business model creates recurring subscriptions, which combined with high retention rates, allow for accurate foreseeable cash flows.

For 2013, Five9 generated revenues of $84.1 million, which is up by 31.8% from the year before. Expansion came at a cost, with net losses increasing from $19.3 million in 2012 to $31.3 million over the past year.

Before the public offering took place, Five9 operated with $17.7 million in cash and equivalents and $30.3 million in debt. Factoring in gross proceeds of $70 million from the offering, and Five9 will operate with a net cash position of roughly $50 million.

Given the current market capitalization of almost $340 million, operating assets are valued at around $290 million. This values operations at 3.5 times annual revenues.

Investment Thesis

As noted above, Five9's offering was quite a disappointment in a difficult public offering market for technology and cloud names. The company priced the offering at $7 per share, some 30% below the midpoint of the preliminary offering range. Ever since, shares have recovered a tiny bit, but trading at $7.36 per share, they are still trading some 26.4% below the midpoint of the preliminary offering range.

This should not come as a surprise as Five9 has quite a few challenges ahead. Two of these are the slowing topline revenue growth and continued losses. For starters, revenue growth slowed down from 48% in 2012 to 32% in 2013. As a matter of fact, revenue growth slowed down to 23.7% in the final quarter of the year.

While gross margins of 42.0% are solid, the company is already spending a third of its revenues on sales and marketing efforts, while additional research and development expenses, as well as general and administrative costs are pushing the company deep in the red. While losses are stable in relation to revenues, absolute losses keep increasing and the company will burn through its offering proceeds rather quickly at this pace if nothing changes.

High compensation expenses to executives is not helpful either to boost sentiment surrounding the offering. The S1-filing reveals that CEO Mike Burkland took home a total compensation package of $2.3 million over the past year, nearly 3% of total revenues.

As such, I have more than enough reasons to pass on this offering.

Source: Five9 - Pass On This Loss-Making And Slowing-Growth Cloud Offering