Five9 Inc. (FIVN 2.16%) this week posted higher-than-expected fourth-quarter revenue and earnings per share. Management's 2020 guidance also exceeded analysts' expectations. But beyond these strong short-term results, the cloud contact center specialist will face intensifying competition over the next several quarters, which could pressure its rich valuation.
Contact centers are also moving to the cloud
Contact centers are not immune to the shift of computing infrastructures and applications to the cloud. In a study Cisco Systems conducted last summer, 62% of contact center executives said they planned to implement a cloud contact center within the next 18 months.
As an illustration, despite its large customer base, the legacy communications vendor Avaya has been struggling with flattish revenue from its contact center segment -- from $361 million in fiscal 2017 to $359 million in fiscal 2019 -- partly because of its lack of cloud-based solutions.
Five9, on the other hand, has developed a competitive contact center-as-a-service (CCaaS) offering. The research company Gartner positioned Five9 as a leader in CCaaS in North America, based on its completeness of vision and its ability to execute.
And thanks to the programmability and integration capabilities of its CCaaS solution, which facilitates its implementation with enterprise systems and workflows, the company posted fourth-quarter revenue growth of 28% year over year and results exceeded guidance.
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In addition, management forecasted revenue growth of 16.4% in 2020, based on the midpoint of the guidance range of $380.5 million to $383.5 million, surpassing analysts' expectations of $372.5 million.
Because of Five9's increasing revenue base, growth is decelerating. But the company's upside potential remains significant in its contact center software market management estimates at $24 billion.
With 8% of its billings outside of the U.S. during the first nine months of 2019, international markets represent a strong growth opportunity for Five9. And besides its sales and marketing and research and development efforts, the company is reinforcing its offering with acquisitions. It recently purchased Whendu to facilitate its integration with other systems. On Wednesday, it also announced its intention to acquire Virtual Observer, which provides solutions such as forecasting workload to optimize workforce organization.
Intensifying competition in the cloud contact center market
Five9's strong double-digit revenue growth over the last several years was partly due to the slow response of some of its competitors in offering a solid cloud contact center alternative. But this competitive advantage is waning.
Avaya will release a CCaaS solution during the third quarter. It remains to be seen whether Avaya's late response will be competitive, but it represents an extra threat for Five9.
Cisco is also ramping up its efforts in that market. It didn't give any information about its contact center business during the last quarter, but the 8% year-over-year revenue drop in its applications segment, which includes its unified communications and contact center portfolio, seems to indicate some weakness in this area. However, this situation could change. In September, Cisco announced its new CCaaS solution, Webex Contact Center, which includes integration, analytics, and artificial intelligence capabilities -- all part of Five9's differentiating offerings.
The unified communication and CCaaS provider Vonage Holdings could become a stronger competitor, too. Last quarter, it announced a strategic review of its consumer business to assess the possibility of focusing on its mid-market and enterprise segment, which is where Five9 is trying to boost its growth.
Despite the increasingly competitive landscape, Five9 will likely remain a growth stock over the next several years given the forecasted shift of contact centers to the cloud and the large size of that market opportunity.
Yet investors should keep in mind revenue growth may not translate into a higher share price. The company's high enterprise value-to-sales ratio of 14.9 indicates the market already prices solid performance over the long term. Besides, because of expected increased spending to support its revenue growth, Five9's GAAP profitability remains far away: Management forecasted losses to increase from $4.6 million in 2019 to a range of $30.9 million to $27.9 million in 2020.