Wall Street is raising its earnings estimates for this cloud company after its $0.04 earnings beat for its latest quarter. The forecasted 5-year growth rate is 35% annually.
Five9, Inc. (FIVN)
From Canaccord Genuity Research
In our experience, the best drivers of stock price appreciation are accelerating revenue growth and expanding margins. Well, guess what? Five9 delivered both in Q2, as revenue increased 28% and EBITDA margins were 15.4% in the quarter.
Our view continues to be that this is an early days opportunity, Five9 (FIVN) is pulling away from the comps as the only pure play cloud vendor of scale, and in a software market where the strong get stronger, this bodes well for sustainable revenue growth and continued margin improvement.
The hard thing for us on this stock is that we can look back on days not too long ago when FIVN was trading at 2.5x forward revenues. Fast forward to today, and sure there’s a much better track record of execution, but with FIVN trading close to 8x EV/R on C2019E after-hours, our sense is that you probably don’t have the double whammy of healthy growth plus multiple expansion to push the stock higher.
Instead, with estimates that still need to move higher and a stock that’s trading more or less in-line with the group, the odds are that, barring a major correction in the space, FIVN’s multiple stays where it is, and the stock gradually works higher with growth. That’s enough to support our continued BUY rating, and we are increasing our target to $42.
Revenue growth accelerated to the fastest pace we have seen in two years, and EBITDA margins expanded 270 bps from last quarter (+920 bps y-o-y); the firm called out record Q2 bookings as well as a record pipeline exiting the quarter; blended net dollar retention ticked up to 99% in the quarter, up from 98% in Q1; the commercial business saw reacceleration in the quarter, getting back close to 10% growth (this accounts for ~24% of LTM subscription); management detailed Five9’s data advantage when it comes to implementing and partnering with respect to AI strategies in the contact center (see Google announcement from last week).
Green lights across the board. Five9 posted strong Q2/18 results, reporting revenue, adjusted EBITDA and EPS of $61.1M, $9.4M, and $0.11, which were respectively $4.3M, $3.8M, and $0.07 ahead of our estimates. Total revenue grew by 28% y-o-y, driven by Enterprise LTM subscription revenue that increased 37%.
We calculate incremental EBITDA margins at 48%, which is up from 41% in Q1. Five9 generated $5.7M in OCF during the quarter, up from essentially breakeven a year ago, and the firm generated $5.1M in FCF, which was nicely ahead our $3.4M forecast—trailing 12-month FCF margins finished Q2 at 9.8%.
We are increasing our price target to $42.00, up from $34.00, which is based on a 9.2x and 7.8x EV/revenue multiples applied to our C2019 and newly introduced C2020 estimates of $287M and $335M plus approximately $100M in prospective net cash and assumes ~65M fully diluted shares outstanding. For perspective, on very approximate upside scenario estimates, we believe this target could be more like 8.5x and 7.0x respective C2019/20 estimates.
David Hynes Jr., Richard Davis, CFA, and Mark Belcarz, CFA, Canaccord Genuity Research,
www.canaccordgenuity.com, August 7, 2018