Five9 Earnings: Robust Client Wins Offset by Soft Demand From Installed Base Amid Macro Headwinds

We maintain our $59 fair value estimate for no-moat Five9 FIVN following sound second-quarter results which were in line with our top line and profitability expectations. Five9 continues to enjoy tailwinds from the ongoing contact center cloud transition and rising appetite for artificial intelligence and automation tools. However, we believe the firm’s impressive growth outlook has been more than priced in, with shares trading at a lofty 31% premium to our unchanged valuation.

Revenue in the second quarter increased 18% year on year, as strong momentum in net new enterprise client wins was offset by macroeconomic pressures within the installed base and modest growth in the small to midsize segment. Five9′s exposure to the cyclical consumer and retail sector weighed on the result, as softening consumer spending amid macroeconomic headwinds led to lower demand for Five9′s customer service solutions. This was reflected in deteriorating dollar-based retention which fell sequentially by 2 points to 112% for the quarter.

Nevertheless, Five9 achieved a healthy 110 basis points of adjusted EBITDA margin expansion during the quarter to 18.6% on improved operating leverage on a larger client base, partly offset by investment in implementation and service operations, and sales and marketing.

For full-year fiscal 2023, we continue to forecast revenue growth of 17%, marginally ahead of management’s updated guidance. For the remainder of the year, we assume high-teens average growth in agent seats aided by a continued skew upmarket, and low-single-digit growth in average monthly revenue per seat. We assume Five9 continues to take steady share of contact center software market as legacy on premise vendors continue to retreat. Simultaneously, we assume about 120 basis points of adjusted EBITDA margin expansion for the full year, on improving operating leverage as Five9 continues to scale the business, partly offset by ongoing investment to onboard new large enterprise customers.