Five9 Reports Solid Headline Numbers Even as Seat Expansion Slows; Guidance in Line

Five9 FIVN reported fourth-quarter results slightly above our expectations on both the top and bottom lines, and mostly maintained its conservative outlook heading into fiscal 2023. Guidance is the result of macroeconomic uncertainty and assumes a strengthening of the business in the second half of the year. Even with the maintained outlook, with our annual model roll we are raising our fair value estimate for the no-moat name to $59 per share from $52 per share. Despite our raised fair value, amid stagnating metrics and a difficult operating environment, we view shares as overvalued and prefer several of the wide-moat names in our coverage.

Five9′s metrics were again mostly stagnant, including recurring revenue representing 92% of the total and a disappointing dollar-based retention rate of 115%, down 300 basis points compared with last quarter as macroeconomic headwinds drove fewer seat adds than the company would typically expect. Management reiterated that by 2027 it expects the dollar-based retention rate to be in the high-120% area as it moves upmarket to larger enterprise customers that use a more extensive product suite. Five9 again struggled with slower seat expansion from existing customers, particularly with a slowdown in consumer and healthcare, which are typically strong performers in the fourth quarter.

Non-GAAP operating margin was 16.8%, versus 16.9% a year ago and 14.3% last quarter. Flat margins are not surprising given ongoing investments in professional services, public cloud, and international, which we view as a rational strategy. International expansion continues unabated despite macroeconomic headwinds. The firm has been making significant international investments and entered Germany, Spain, and several other countries during the quarter, For the year, international revenue grew 44% and has been seeing strong partner certification for sales momentum.