When pandemic-related business closures drove millions of consumers online to make their purchases, many shoppers quickly realized how easy it was to switch brands if they had a bad experience. As a result, businesses around the world quickly realized the critical importance of providing seamless, efficient online customer interactions.
For more than a decade, Five9 (FIVN 3.25%) has been instrumental in helping companies address this challenge by improving the way they interact with their customers -- whether it be via phone, email, chat, web, or social media.
Born in the Cloud
Founded in 2001, Five9 is a leading global provider and industry pioneer of cloud-based software solutions for contact centers. The company's software is designed to constantly improve the quality of customer interactions while increasing the productivity of contact center agents.
After a call comes into a client's contact center, Five9's intelligent software routes the call to the appropriate agent who -- after quickly being presented with a screen of the most up to date customer information -- can efficiently provide high value service tailored to the customer's specific needs. Over time, data gathered by the software from ongoing customer interactions can help Five9 clients build stronger bonds with their customers -- which, in turn, increases brand loyalty.
In addition to dealing with the challenges of maintaining customer loyalty when competitors' offerings are just a click away, companies today are also struggling to manage their rising contact center labor costs -- some are even having a hard time attracting the agents to answer calls in the first place. As Five9 software functionality grows, companies are increasingly realizing the potential of Five9 software to alleviate these challenges. Current versions of the software can route calls to interactive virtual agents, eliminating the need for expensive human agent interaction in many cases. New software functionality, such as machine learning and artificial intelligence, is also starting to help clients monetize their vast amounts of customer data by tailoring sales programs to meet specific needs of their customers. Management believes that its advancement of these new technologies -- which are becoming increasingly valuable to its clients -- can be in a significant competitive advantage for the company over the coming years.
Exceeding expectations
Five9 grew second quarter 2022 revenues by 32% to $189 million, exceeding analysts' consensus estimate of $180 million. Non-GAAP EPS was $0.34 vs. $0.23 in the second quarter of 2021, handily exceeding the consensus estimate of $0.18. The company was able to achieve strong profit growth in the quarter despite front-loaded investments in research and development (R&D) and global infrastructure expansion.
These substantial investments in 2022 are expected to accelerate profit growth in 2023 and beyond. Management currently believes that it has set up the building blocks to achieve $2.4 billion in revenue and 23% adjusted EBITDA n 2026.
Big customer wins
Five9 is growing rapidly in the massive market for contact center software, but management believes it has just started to tap a $58 billion total addressable market. Five9 is outpacing industry growth, largely by winning progressively larger new enterprise customers, many of whom likely chose Five9 because of its increasing functionality, reliability, enhanced cloud security, and growing number of cloud software integration partnerships.
Notable wins in the first half of 2022 include a contract expansion with a leading European insurance company, two new large financial services companies, a healthcare conglomerate with an expected $40 million in ARR, and a major contract expansion with a parcel delivery service company which is now expected to bring nearly $50 million in ARR to Five9.
Volatility creates opportunity for patient investors
Like most cloud software stocks, Five9 shares will likely continue to be more volatile than the average stock and are better suited for investors with long term time horizons. But If management can deliver on its forecast for robust sales growth and margin expansion in the massive contact center software market, patient investors could be rewarded handsomely over the coming years. Additionally, as the company builds out its global scale, it increases its chances of attracting a premium buyout bid from a larger cloud software company in the customer relationship management (CRM) space.
