The video communications specialist Zoom Video Communications (ZM -0.28%) and the cloud contact center vendor Five9 (FIVN -0.24%) announced last week that they were terminating their merger agreement after Five9's shareholders voted against the deal. That's likely because Zoom's share price has been dropping since the end of August. The drop followed disappointing guidance communicated with fiscal second-quarter results, and the news made the all-stock transaction less attractive for Five9's shareholders.
From an operational perspective, the merger made sense. Five9's solutions complement Zoom's video platform with tools that manage enterprise communications with their customers. And Zoom's large footprint would have allowed Five9 to reach a broader audience.
Now the deal is over; let's see what's next for both companies.
Zoom already has replacement solutions -- kind of
Before the proposed deal, Zoom was already partnering with Five9 -- and other cloud contact center vendors -- to integrate contact centers into its communications platform. So Zoom still offers contact center solutions thanks to its existing partnerships. Yet, those agreements don't allow Zoom to take control of such capabilities and fully integrate them into its platform.
Alternatively, Zoom announced it will launch its internally developed contact center solution, Zoom Video Engagement Center (VEC), in early 2022. However, I don't expect VEC to displace leading cloud contact center solutions. Consistent with Zoom's core business, the tool will focus on video communications -- an innovative feature in the contact center area. But video communications don't seem essential for many interactions between customers and enterprises.
In addition, developing a comprehensive contact center platform requires time and experience. So besides its existing partnerships and solutions, Zoom will probably look for other opportunities to fully integrate extensive cloud contact center capabilities into its communications platform. Another acquisition attempt from Zoom wouldn't surprise me.
Five9 to remain a stand-alone company?
In complement to its failed merger's press release, Five9's management highlighted significant growth opportunities ahead for Five9 as a stand-alone company. Indeed, given the shift from legacy on-premises contact center solutions to the cloud, Five9's large addressable market is growing. And Five9 was able to capture that opportunity with strong revenue growth. As an illustration, revenue grew 44% to $143.8 million during the last quarter.
Also, the company benefits from the integrations of its cloud contact center solution with Zoom and other partners, such as the communications specialist RingCentral, the tech giant Microsoft, and the CRM (customer relationship management) vendor Salesforce.com.
However, because of its limited scale, Five9 is still not profitable. During the second quarter, the company's gross margin remained modest at 55%. And with sales and marketing expenses that represented 32% of revenue, net loss reached $16.5 million, compared to a net loss of $16 million in the prior-year quarter.
So Five9 would benefit from a larger partner to scale its footprint and improve its margins. And considering the company's contact center solutions represent an ideal fit for larger communication and client-facing players, another merger, acquisition, or partnership would make sense for Five9.
Besides, with a larger partner the company could also boost its research and development efforts to improve its offering against strong competition. Indeed, the research outfit Gartner ranked Five9 as a challenger in its Magic Quadrant for contact center as a service (CCaaS) in terms of ability to execute and completeness of vision, behind the leaders Genesys, Nice, and Talkdesk.
Deals must make sense for shareholders too
Thus, following their failed merger, I anticipate both Zoom and Five9 will take other initiatives to consolidate their platform and support revenue growth over the next many years.
However, long-term investors shouldn't invest depending on potential transactions given the speculative nature of such moves. Also, even if a deal makes sense from an operational perspective, it may not serve shareholders' interests, depending on the terms of the transaction. Instead, investors should focus on the companies' attractive long-term prospects in their respective markets and reevaluate their thesis when game-changing announcements hit the wire.