Five9 (FIVN 44.43, +6.06, +15.79%) is trading higher today after reporting Q3 results
last night. Five9 is a provider of cloud software for contact centers. FIVN's
Virtual Contact Center (VCC) cloud platform enables clients to seamlessly
engage with their customers through voice, video, website, mobile, chat, email,
click-to-call, callback, social and messaging.
FIVN sees a big opportunity since though cloud penetration of the contact center market in North America is just 10-15%, it is also growing rapidly. Companies typically refresh their contact center systems every 8-10 years, which provides an opportunity for cloud providers to replace legacy on-premise systems when these replacement decisions arise.
Turning to the Q3 results, non-GAAP EPS jumped 350% yr/yr to $0.18 from just $0.04 a year ago. The $0.18 was well above prior guidance of $0.13-0.14. Revenue rose 30.3% year to $65.3 mln, which was slightly below prior guidance of $65.8-66.8 mln. Adjusted EBITDA margin improved to a record 19.6%, a big improvement from 10.3% last year. In terms of guidance for Q4, FIVN expects non-GAAP EPS of $0.13-0.14 and revenue of $65.8-66.8 mln. Both are slightly above market expectations.
That 30% revenue growth was the fastest for FIVN since it went public in 2014. The strong growth is being driven by its Enterprise business, which makes up 76% of LTM revenue. Its Commercial business, which represents the other 24%, saw growth of 10% yr/yr. Recurring revenue again accounted for 93% of revenue while the other 7% was from Professional Services.
Moving upstream to bigger, enterprise customers has been a key focus for FIVN. Enterprise customers tend to be larger deals and have healthy renewal rates. Also, it provides a high degree of recurring and thus predictable revenue for FIVN. Enterprise subscription revenue is FIVN's fastest growing and most profitable part of its business. It seems the company is making good progress in terms of building up the enterprise segment.
In sum, this was another good quarter for FIVN and it sounds like more growth lies ahead. The bigger picture to remember here is that this market is still in the early days of a massive shift to the cloud. What strikes us is that Q3 feels like an acceleration of growth. We have been following FIVN for years since its IPO. It always struck us as a small but steady grower. Now it feels like it's stepping on the gas, becoming a large player in this burgeoning market.
It's probably not a coincidence that FIVN seems to be accelerating just months after it hired a new CEO. Earlier this year, Rowan Trollope took the reins. He was formerly SVP & General Manager of Cisco's (CSCO) Applications Group. It's always good to see someone come over from a big tech company like Cisco in this case. It shows that he sees good potential here.
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