Five9 Earnings: Strong Results, but the Guidance Raise Is Less Than the Upside

No-moat Five9 FIVN reported first-quarter results above our expectations on both the top and bottom lines, and slightly raised its outlook for fiscal 2023. Macro uncertainty resulted in elongated sales cycles for new logo bookings. The firm noted a large total addressable market expansion rooted in AI for contact-center-as-a-service providers as virtual agents can replace live agents, and be an upselling opportunity as AI works in tandem with live agents. We think one of the most obvious use cases for generative AI is in customer service and contact centers, so Five9 should benefit here. Despite the optically higher outlook, we are maintaining our $59 per share fair value estimate as we note guidance was raised by less than the amount of upside in the quarter. In other words, Five9 effectively lowered its outlook for the year. We view shares as slightly overvalued and prefer several of the wide-moat names within in our coverage.

Five9’s metrics are performing reasonably well given macro pressures. Recurring revenue again represents 92% of total revenue, while dollar-based retention was 114%, a level last seen three years ago. The seat expansion pressure Five9 is experiencing is consistent with trends seen at many peers under our coverage. Management did maintain its expectation that in 2027 dollar-based retention rates should be in the high-120% area as it continues to add larger enterprise customers that have higher retention rates and average revenue per user, as AI and automation is leveraged along with other offerings. On the large customer front, the company added an $8 million annually recurring revenue customer in the quarter. International revenue grew 48% year over year and the firm entered a strategic partnership with BT (formerly British Telecom) which provides a significant opportunity to replace legacy solutions predominantly throughout EMEA.