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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36383 Five9, Inc.
(Exact Name of Registrant as Specified in Its Charter) | | | | | | | | |
Delaware | | 94-3394123 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
3001 Bishop Drive, Suite 350
San Ramon, CA 94583
(Address of Principal Executive Offices) (Zip Code)
(925) 201-2000
(Registrant’s Telephone Number, Including Area Code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common stock, par value $0.001 per share | FIVN | The NASDAQ Global Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ |
| | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes: ☐ No: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒
As of August 2, 2024, there were 74,736,098 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.
FIVE9, INC.
FORM 10-Q
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve substantial risks and uncertainties. These statements reflect the current views of our senior management with respect to our future events, strategies and financial trends and performance. These forward-looking statements include statements with respect to our business, expenses, strategies, losses, growth plans, product and client initiatives, market growth projections, and our industry. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. These factors include the information under the caption "Risk Factors" set forth in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and Part II, Item 1A, of this Quarterly Report, which we encourage you to carefully read, and include the following:
•adverse economic conditions, including the impact of macroeconomic deterioration, including continued inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency rates, the impact of the Russia-Ukraine conflict, the impact of the conflict in Israel, and other factors, may continue to harm our business;
•if we are unable to attract new clients or sell additional services and functionality to our existing clients, our revenue and revenue growth will be harmed;
•if our existing clients terminate their subscriptions or reduce their subscriptions and related usage, or fail to grow subscriptions at the rate they have in the past or that we might expect, our revenues and gross margins will be harmed, and we will be required to spend more money to grow our client base;
•because a significant percentage of our revenue is derived from existing clients, downturns or upturns in new sales will not be immediately reflected in our operating results and may be difficult to discern;
•if we fail to manage our technical operations infrastructure, our existing clients may experience service outages, our new clients may experience delays in the deployment of our solution and we could be subject to, among other things, claims for credits or damages;
•we have established, and are continuing to increase, our network of technology solution distributors and resellers to sell our solution; our failure to effectively develop, manage, and maintain this network could materially harm our revenues;
•our quarterly and annual results may fluctuate significantly, including as a result of the timing and success of new product and feature introductions by us, may not fully reflect the underlying performance of our business and may result in decreases in the price of our common stock;
•if we are unable to attract and retain highly skilled leaders and other employees, our business and results of operations may be adversely affected;
•our historical growth may not be indicative of our future growth, and even if we continue to grow rapidly, we may fail to manage our growth effectively;
•failure to adequately retain and expand our sales force will impede our growth;
•further development of our AI solutions may not be successful and may result in reputational harm and our future operating results could be materially harmed;
•the AI technology and features incorporated into our solution include new and evolving technologies that may present both legal and business risks;
•the use of AI by our workforce may present risks to our business;
•the contact center software solutions market is subject to rapid technological change, and we must develop and sell incremental and new solutions in order to maintain and grow our business;
•our growth depends in part on the success of our strategic relationships with third parties and our failure to successfully maintain, grow and manage these relationships could harm our business;
•the markets in which we participate involve a high number of competitors that is continuing to increase, and if we do not compete effectively, our operating results could be harmed;
•we continue to expand our international operations, which exposes us to significant macroeconomic and other risks;
•security breaches and improper access to, use of, or disclosure of our data or our clients’ data, or other cyber attacks on our systems, could result in litigation and regulatory risk, harm our reputation, our business or financial results;
•we may acquire other companies, or technologies or be the target of strategic transactions, or be impacted by transactions by other companies, which could divert our management’s attention, result in additional dilution to our stockholders or use a significant amount of our cash resources and otherwise disrupt our operations and harm our operating results;
•we sell our solution to larger organizations that require longer sales and implementation cycles and often demand more configuration and integration services or customized features and functions that we may not offer, any of which could delay or prevent these sales and harm our growth rates, business and operating results;
•we rely on third-party telecommunications and internet service providers to provide our clients and their customers with telecommunication services and connectivity to our cloud contact center software and any failure by these service providers to provide reliable services could cause us to lose clients and subject us to claims for credits or damages, among other things;
•we have a history of losses and we may be unable to achieve or sustain profitability;
•our stock price has been volatile, may continue to be volatile and may decline, including due to factors beyond our control;
•we may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs;
•failure to comply with laws and regulations could harm our business and our reputation; and
•we may not have sufficient cash to service our convertible senior notes and repay such notes, if required.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in, or incorporated into, this report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may differ materially from what we anticipate. You should not place undue reliance on our forward-looking statements. Any forward-looking statements you read in this report reflect our views only as of the date of this report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE9, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) | | | | | | | | | | | | | | |
| | | | |
| | June 30, 2024 | | December 31, 2023 |
| | (Unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 175,699 | | | $ | 143,201 | |
Marketable investments | | 930,639 | | | 587,096 | |
Accounts receivable, net | | 104,382 | | | 97,424 | |
Prepaid expenses and other current assets | | 41,760 | | | 34,622 | |
Deferred contract acquisition costs, net | | 69,622 | | | 61,711 | |
Total current assets | | 1,322,102 | | | 924,054 | |
Property and equipment, net | | 124,600 | | | 108,572 | |
Operating lease right-of-use assets | | 34,107 | | | 38,873 | |
Finance lease right-of-use assets | | 3,653 | | | 4,564 | |
Intangible assets, net | | 33,027 | | | 38,323 | |
Goodwill | | 227,269 | | | 227,412 | |
Other assets | | 17,755 | | | 16,199 | |
Deferred contract acquisition costs, net — less current portion | | 147,867 | | | 136,571 | |
Total assets | | $ | 1,910,380 | | | $ | 1,494,568 | |
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 29,405 | | | $ | 24,399 | |
Accrued and other current liabilities | | 76,320 | | | 62,131 | |
Operating lease liabilities | | 9,509 | | | 10,731 | |
Finance lease liabilities | | 1,819 | | | 1,767 | |
| | | | |
| | | | |
Deferred revenue | | 65,286 | | | 68,187 | |
Convertible senior notes | | 432,364 | | | — | |
Total current liabilities | | 614,703 | | | 167,215 | |
Convertible senior notes - less current portion | | 730,012 | | | 742,125 | |
| | | | |
Operating lease liabilities — less current portion | | 32,177 | | | 36,378 | |
Finance lease liabilities — less current portion | | 1,949 | | | 2,877 | |
Other long-term liabilities | | 5,661 | | | 7,888 | |
Total liabilities | | 1,384,502 | | | 956,483 | |
Commitments and contingencies (Note 10) | | | | |
Stockholders’ equity: | | | | |
| | | | |
Common stock | | 75 | | | 73 | |
Additional paid-in capital | | 951,048 | | | 942,280 | |
Accumulated other comprehensive (loss) income | | (502) | | | 582 | |
Accumulated deficit | | (424,743) | | | (404,850) | |
Total stockholders’ equity | | 525,878 | | | 538,085 | |
Total liabilities and stockholders’ equity | | $ | 1,910,380 | | | $ | 1,494,568 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
FIVE9, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited, in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2024 | | June 30, 2023 | | June 30, 2024 | | June 30, 2023 |
Revenue | | $ | 252,086 | | | $ | 222,882 | | | $ | 499,096 | | | $ | 441,321 | |
Cost of revenue | | 118,414 | | | 104,361 | | | 232,944 | | | 209,117 | |
Gross profit | | 133,672 | | | 118,521 | | | 266,152 | | | 232,204 | |
Operating expenses: | | | | | | | | |
Research and development | | 40,717 | | | 39,210 | | | 82,235 | | | 77,318 | |
Sales and marketing | | 78,332 | | | 74,077 | | | 159,441 | | | 150,391 | |
General and administrative | | 33,988 | | | 30,477 | | | 64,536 | | | 58,735 | |
Total operating expenses | | 153,037 | | | 143,764 | | | 306,212 | | | 286,444 | |
Loss from operations | | (19,365) | | | (25,243) | | | (40,060) | | | (54,240) | |
Other income (expense), net: | | | | | | | | |
Interest expense | | (3,906) | | | (1,866) | | | (6,473) | | | (3,711) | |
Gain on early extinguishment of debt | | — | | | — | | | 6,615 | | | — | |
Interest income and other | | 13,800 | | | 6,123 | | | 24,359 | | | 10,244 | |
Total other income (expense), net | | 9,894 | | | 4,257 | | | 24,501 | | | 6,533 | |
Loss before income taxes | | (9,471) | | | (20,986) | | | (15,559) | | | (47,707) | |
Provision for income taxes | | 3,345 | | | 753 | | | 4,334 | | | 1,280 | |
Net loss | | $ | (12,816) | | | $ | (21,739) | | | $ | (19,893) | | | $ | (48,987) | |
Net loss per share: | | | | | | | | |
Basic and diluted | | $ | (0.17) | | | $ | (0.30) | | | $ | (0.27) | | | $ | (0.69) | |
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Shares used in computing net loss per share: | | | | | | | | |
Basic and diluted | | 74,203 | | | 71,627 | | | 73,845 | | | 71,444 | |
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Comprehensive Loss: | | | | | | | | |
Net loss | | $ | (12,816) | | | $ | (21,739) | | | $ | (19,893) | | | $ | (48,987) | |
Other comprehensive (loss) income | | (199) | | | (436) | | | (1,084) | | | 1,291 | |
Comprehensive loss | | $ | (13,015) | | | $ | (22,175) | | | $ | (20,977) | | | $ | (47,696) | |
See accompanying notes to the unaudited condensed consolidated financial statements.
FIVE9, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Additional Paid-In Capital | | | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| | | | | | Shares | | Amount | | | | |
Balance as of March 31, 2023 | | | | | | 71,544 | | | $ | 72 | | | $ | 690,309 | | | | | | | $ | (961) | | | $ | (350,334) | | | $ | 339,086 | |
Issuance of common stock upon partial conversion of the 2023 convertible senior notes | | | | | | 2 | | | — | | | — | | | | | | | — | | | — | | | — | |
Settlement at maturity of the outstanding capped calls and retirement of common stock related to the 2023 convertible senior notes | | | | | | (371) | | | — | | | 74,453 | | | | | | | — | | | — | | | 74,453 | |
Issuance of common stock upon exercise of stock options | | | | | | 240 | | | — | | | 3,856 | | | | | | | — | | | — | | | 3,856 | |
Issuance of common stock upon vesting of restricted stock units | | | | | | 561 | | | — | | | (1) | | | | | | | — | | | — | | | (1) | |
Issuance of common stock under ESPP | | | | | | 204 | | | — | | | 9,444 | | | | | | | — | | | — | | | 9,444 | |
Stock-based compensation | | | | | | — | | | — | | | 54,136 | | | | | | | — | | | — | | | 54,136 | |
Other comprehensive loss | | | | | | — | | | — | | | — | | | | | | | (436) | | | — | | | (436) | |
Net loss | | | | | | — | | | — | | | — | | | | | | | — | | | (21,739) | | | (21,739) | |
Balance as of June 30, 2023 | | | | | | 72,180 | | | $ | 72 | | | $ | 832,197 | | | | | | | $ | (1,397) | | | $ | (372,073) | | | $ | 458,799 | |
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Balance as of March 31, 2024 | | | | | | 73,849 | | | $ | 74 | | | $ | 895,754 | | | | | | | $ | (303) | | | $ | (411,927) | | | $ | 483,598 | |
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Issuance of common stock upon exercise of stock options | | | | | | 1 | | | — | | | 11 | | | | | | | — | | | — | | | 11 | |
Issuance of common stock upon vesting of restricted stock units | | | | | | 660 | | | 1 | | | — | | | | | | | — | | | — | | | 1 | |
Issuance of common stock under ESPP | | | | | | 209 | | | — | | | 9,522 | | | | | | | — | | | — | | | 9,522 | |
Stock-based compensation | | | | | | — | | | — | | | 45,761 | | | | | | | — | | | — | | | 45,761 | |
Other comprehensive loss | | | | | | — | | | — | | | — | | | | | | | (199) | | | — | | | (199) | |
Net loss | | | | | | — | | | — | | | — | | | | | | | — | | | (12,816) | | | (12,816) | |
Balance as of June 30, 2024 | | | | | | 74,719 | | | $ | 75 | | | $ | 951,048 | | | | | | | $ | (502) | | | $ | (424,743) | | | $ | 525,878 | |
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| | | | Common Stock | | Additional Paid-In Capital | | | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity | |
| | | | | | Shares | | Amount | | | | | |
Balance as of December 31, 2022 | | | | | | 71,047 | | | $ | 71 | | | $ | 635,668 | | | | | | | $ | (2,688) | | | $ | (323,086) | | | $ | 309,965 | | |
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Issuance of common stock upon partial conversion of the 2023 convertible senior notes | | | | | | 2 | | | — | | | — | | | | | | | — | | | — | | | — | | |
Settlement at maturity of the outstanding capped calls and retirement of common stock related to the 2023 convertible senior notes | | | | | | (371) | | | — | | | 74,453 | | | | | | | — | | | — | | | 74,453 | | |
Issuance of common stock upon exercise of stock options | | | | | | 379 | | | — | | | 6,981 | | | | | | | — | | | — | | | 6,981 | | |
Issuance of common stock upon vesting of restricted stock units | | | | | | 919 | | | 1 | | | (1) | | | | | | | — | | | — | | | — | | |
Issuance of common stock under ESPP | | | | | | 204 | | | — | | | 9,444 | | | | | | | — | | | — | | | 9,444 | | |
Stock-based compensation | | | | | | — | | | — | | | 105,652 | | | | | | | — | | | — | | | 105,652 | | |
Other comprehensive income | | | | | | — | | | — | | | — | | | | | | | 1,291 | | | — | | | 1,291 | | |
Net loss | | | | | | — | | | — | | | — | | | | | | | — | | | (48,987) | | | (48,987) | | |
Balance as of June 30, 2023 | | | | | | 72,180 | | | $ | 72 | | | $ | 832,197 | | | | | | | $ | (1,397) | | | $ | (372,073) | | | $ | 458,799 | | |
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Balance as of December 31, 2023 | | | | | | 73,317 | | | $ | 73 | | | $ | 942,280 | | | | | | | $ | 582 | | | $ | (404,850) | | | $ | 538,085 | | |
Issuance of new capped calls associated with the 2029 convertible senior notes | | | | | | — | | | — | | | (93,438) | | | | | | | — | | | — | | | (93,438) | | |
Partial termination of existing capped calls associated with the 2025 convertible senior notes | | | | | | — | | | — | | | 539 | | | | | | | — | | | — | | | 539 | | |
Issuance of common stock upon exercise of stock options | | | | | | 15 | | | — | | | 397 | | | | | | | — | | | — | | | 397 | | |
Issuance of common stock upon vesting of restricted stock units | | | | | | 1,178 | | | 2 | | | — | | | | | | | — | | | — | | | 2 | | |
Issuance of common stock under ESPP | | | | | | 209 | | | — | | | 9,522 | | | | | | | — | | | — | | | 9,522 | | |
Stock-based compensation | | | | | | — | | | — | | | 91,748 | | | | | | | — | | | — | | | 91,748 | | |
Other comprehensive loss | | | | | | — | | | — | | | — | | | | | | | (1,084) | | | — | | | (1,084) | | |
Net loss | | | | | | — | | | — | | | — | | | | | | | — | | | (19,893) | | | (19,893) | | |
Balance as of June 30, 2024 | | | | | | 74,719 | | | $ | 75 | | | $ | 951,048 | | | | | | | $ | (502) | | | $ | (424,743) | | | $ | 525,878 | | |
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See accompanying notes to the unaudited condensed consolidated financial statements.
FIVE9, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands) | | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2024 | | June 30, 2023 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (19,893) | | | $ | (48,987) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 25,121 | | | 23,071 | |
Amortization of operating lease right-of-use assets | | 6,312 | | | 5,838 | |
Amortization of deferred contract acquisition costs | | 33,825 | | | 25,710 | |
Accretion of discount on marketable investments | | (11,217) | | | (4,315) | |
Provision for credit losses | | 677 | | | 528 | |
Stock-based compensation | | 88,316 | | | 104,110 | |
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Amortization of discount and issuance costs on convertible senior notes | | 2,509 | | | 1,839 | |
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Gain on early extinguishment of debt | | (6,615) | | | — | |
Deferred taxes | | 356 | | | 250 | |
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Other | | (64) | | | 622 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | (7,635) | | | (1,494) | |
Prepaid expenses and other current assets | | (7,137) | | | (8,764) | |
Deferred contract acquisition costs | | (53,032) | | | (44,606) | |
Other assets | | (1,868) | | | (5,344) | |
Accounts payable | | 3,931 | | | 2,316 | |
Accrued and other current liabilities | | 3,934 | | | 4,453 | |
| | | | |
Deferred revenue | | (3,484) | | | (680) | |
Other liabilities | | (1,805) | | | 717 | |
Net cash provided by operating activities | | 52,231 | | | 55,264 | |
Cash flows from investing activities: | | | | |
Purchases of marketable investments | | (816,492) | | | (337,595) | |
Proceeds from sales of marketable investments | | 12,517 | | | 245 | |
Proceeds from maturities of marketable investments | | 470,755 | | | 227,836 | |
Purchases of property and equipment | | (18,722) | | | (16,642) | |
Capitalization of software development costs | | (8,260) | | | (3,565) | |
Cash paid to acquire Aceyus, Inc. | | 99 | | | — | |
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Net cash used in investing activities | | (360,103) | | | (129,721) | |
Cash flows from financing activities: | | | | |
Proceeds from issuance of 2029 convertible senior notes, net of issuance costs | | 728,843 | | | — | |
Payments for capped call transactions associated with the 2029 convertible senior notes | | (93,438) | | | — | |
Repurchase of a portion of 2025 convertible senior notes, net of costs | | (304,485) | | | — | |
Repayment of outstanding 2023 convertible senior notes at maturity | | — | | | (169) | |
Cash received from the settlement at maturity of the outstanding capped calls associated with the 2023 convertible senior notes | | — | | | 74,453 | |
Cash received from partial termination of capped calls associated with the 2025 convertible senior notes | | 539 | | | — | |
Proceeds from exercise of common stock options | | 397 | | | 6,981 | |
Proceeds from sale of common stock under ESPP | | 9,522 | | | 9,444 | |
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Payment of finance lease liabilities | | (966) | | | — | |
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Net cash provided by financing activities | | 340,412 | | | 90,709 | |
Net increase in cash, cash equivalents and restricted cash | | 32,540 | | | 16,252 | |
Cash, cash equivalents and restricted cash: | | | | |
Beginning of period | | 144,842 | | | 180,987 | |
End of period | | $ | 177,382 | | | $ | 197,239 | |
Supplemental disclosures of cash flow data: | | | | |
Cash paid for interest | | $ | 1,603 | | | $ | 1,872 | |
Cash paid for income taxes | | $ | 1,512 | | | $ | 812 | |
Non-cash investing and financing activities: | | | | |
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Property and equipment unpaid at period-end | | $ | 16,684 | | | $ | 5,849 | |
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Stock-based compensation included in capitalized software development costs | | $ | 3,432 | | | $ | 1,542 | |
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Reconciliation of Cash, Cash Equivalents and Restricted Cash to the Condensed Consolidated Balance Sheets - Beginning of Period: | | | | |
Cash and cash equivalents | | $ | 143,201 | | | $ | 180,520 | |
Restricted cash in other assets | | 1,641 | | | 467 | |
Total cash, cash equivalents and restricted cash | | $ | 144,842 | | | $ | 180,987 | |
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Reconciliation of Cash, Cash Equivalents and Restricted Cash to the Condensed Consolidated Balance Sheets - End of Period: | | | | |
Cash and cash equivalents | | $ | 175,699 | | | $ | 195,592 | |
Restricted cash in other assets | | 1,683 | | | 1,647 | |
Total cash, cash equivalents and restricted cash | | $ | 177,382 | | | $ | 197,239 | |
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See accompanying notes to the unaudited condensed consolidated financial statements.
FIVE9, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Five9, Inc. and its wholly-owned subsidiaries (the “Company”) is a provider of cloud software for contact centers. The Company was incorporated in Delaware in 2001 and is headquartered in San Ramon, California. The Company has offices in Europe, Asia and Australia, which primarily provide research, development, sales, marketing, and client support services.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The significant estimates made by management affect revenue and related reserves, as well as the fair value of assets acquired and liabilities assumed through business combinations and the fair value of performance-based restricted stock units ("PRSUs"). Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes from the significant accounting policies previously disclosed in Part II, Item 8, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC on February 22, 2024.
Recent Accounting Pronouncements Not Yet Effective
In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ ASU”) No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. This ASU is effective for the Company’s fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. The Company is currently evaluating the impact of this ASU on its consolidated financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires disclosure of specific categories in the effective tax rate reconciliation and additional information on income taxes paid. This ASU is effective for the Company’s fiscal years beginning after December 15, 2024. Early adoption is permitted and may be adopted on a prospective or retrospective basis. The Company is currently evaluating the impact of this ASU on its consolidated financial statement disclosures.
2. Revenue
Contract Balances
The following table provides information about accounts receivable, net, deferred contract acquisition costs, net, contract assets and contract liabilities from contracts with customers (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Accounts receivable, net | | $ | 104,382 | | | $ | 97,424 | |
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Deferred contract acquisition costs, net: | | | | |
Current | | $ | 69,622 | | | $ | 61,711 | |
Non-current | | 147,867 | | | 136,571 | |
Total deferred contract acquisition costs, net | | $ | 217,489 | | | $ | 198,282 | |
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Contract assets and contract liabilities: | | | | |
Contract assets (included in prepaid expenses and other current assets) | | $ | 1,975 | | | $ | 4,106 | |
Contract liabilities (deferred revenue) | | (65,286) | | | (68,187) | |
Noncurrent contract liabilities (deferred revenue) (included in other long-term liabilities) | | (767) | | | (1,350) | |
Net contract liabilities | | $ | (64,078) | | | $ | (65,431) | |
The Company receives payments from customers based upon billing cycles. Invoice payment terms are usually 30 days or less. Accounts receivable are recorded when the right to consideration becomes unconditional.
Deferred contract acquisition costs are recorded when incurred and are amortized over an estimated customer benefit period of five years.
The Company’s contract assets consist of unbilled amounts typically resulting from professional services revenue recognition when it exceeds the total amounts billed to the customer. The Company’s contract liabilities consist of advance payments and billings in excess of revenue recognized.
In the three and six months ended June 30, 2024, the Company recognized revenue of $11.0 million and $46.6 million, respectively related to its contract liabilities at December 31, 2023.
Remaining Performance Obligations
As of June 30, 2024, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $1,047.1 million. The Company expects to recognize revenue on approximately three-fourths of the remaining performance obligations over the next 24 months, with the balance recognized thereafter. The Company excludes amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less. Such remaining performance obligations represent unsatisfied or partially unsatisfied performance obligations.
3. Investments and Fair Value Measurements
Marketable Investments
The Company’s marketable investments have been classified and accounted for as available-for-sale. The Company’s intent is that all marketable investments are available for use in its current operations, including marketable investments with maturity dates greater than one year from June 30, 2024. The Company’s marketable
investments as of June 30, 2024 and December 31, 2023 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | June 30, 2024 |
Short-Term Marketable Investments | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | | $ | 857 | | | $ | — | | | $ | — | | | $ | 857 | |
U.S. treasury securities | | 600,984 | | | — | | | (795) | | | 600,189 | |
U.S. agency and government-sponsored securities | | 261,681 | | | 14 | | | (319) | | | 261,376 | |
Commercial paper | | 23,027 | | | 1 | | | (14) | | | 23,014 | |
Municipal bonds | | 1,000 | | | — | | | — | | | 1,000 | |
Corporate bonds | | 44,255 | | | 35 | | | (87) | | | 44,203 | |
Total | | $ | 931,804 | | | $ | 50 | | | $ | (1,215) | | | $ | 930,639 | |
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| | December 31, 2023 |
Short-Term Marketable Investments | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | | $ | 1,463 | | | $ | — | | | $ | — | | | $ | 1,463 | |
U.S. treasury securities | | 315,608 | | | 191 | | | (362) | | | 315,437 | |
U.S. agency and government-sponsored securities | | 239,358 | | | 78 | | | (177) | | | 239,259 | |
Commercial paper | | 17,382 | | | 9 | | | — | | | 17,391 | |
Municipal bonds | | 927 | | | 1 | | | — | | | 928 | |
Corporate bonds | | 12,630 | | | 4 | | | (16) | | | 12,618 | |
Total | | $ | 587,368 | | | $ | 283 | | | $ | (555) | | | $ | 587,096 | |
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The following table presents the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than 12 months as of June 30, 2024 and December 31, 2023 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
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| | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
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U.S. treasury securities | | $ | (795) | | | $ | 592,669 | | | $ | (362) | | | $ | 79,644 | |
U.S. agency and government-sponsored securities | | (319) | | | 217,756 | | | (177) | | | 165,493 | |
Commercial paper | | (14) | | | 17,228 | | | — | | | — | |
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Corporate bonds | | (87) | | | 24,796 | | | (16) | | | 7,550 | |
Total | | $ | (1,215) | | | $ | 852,449 | | | $ | (555) | | | $ | 252,687 | |
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Although the Company had certain available-for-sale debt securities in an unrealized loss position as of June 30, 2024, no impairment loss was recorded since it did not intend to sell them, did not anticipate a need to sell them, and the decline in fair value was not due to any credit-related factors.
The amortized cost and fair value of the Company’s marketable investments by contractual maturity as of June 30, 2024 were as follows (in thousands):
| | | | | | | | | | | |
| Cost | | Fair Value |
Due within one year | $ | 702,098 | | | $ | 701,177 | |
Due after one year through two years | 229,706 | | | 229,462 | |
Total | $ | 931,804 | | | $ | 930,639 | |
Fair Value Measurements
The Company carries cash equivalents and marketable investments at fair value. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Observable inputs, which include unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 inputs, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are based on management’s assumptions, including fair value measurements determined by using pricing models, discounted cash flow methodologies or similar techniques.
The Company determined the fair value of its Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Marketable investments classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers. To validate the fair value determination provided by its investment managers, the Company reviews the pricing movement in the context of overall market trends and trading information from its investment managers. The Company performs routine procedures such as comparing prices obtained from independent sources to ensure that appropriate fair values are recorded.
The following tables set forth the Company’s assets measured at fair value by level within the fair value hierarchy (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | | | | | | | |
Money market funds | $ | 86,014 | | | $ | — | | | $ | — | | | $ | 86,014 | |
Certificates of deposit | — | | | 498 | | | — | | | 498 | |
| | | | | | | |
| | | | | | | |
Municipal bonds | — | | | 245 | | | — | | | 245 | |
| | | | | | | |
| | | | | | | |
Total cash equivalents | $ | 86,014 | | | $ | 743 | | | $ | — | | | $ | 86,757 | |
| | | | | | | |
Marketable investments | | | | | | | |
Certificates of deposit | $ | — | | | $ | 857 | | | $ | — | | | $ | 857 | |
U.S. treasury securities | 600,189 | | | — | | | — | | | 600,189 | |
U.S. agency and government sponsored securities | — | | | 261,376 | | | — | | | 261,376 | |
Commercial paper | — | | | 23,014 | | | — | | | 23,014 | |
Municipal bonds | — | | | 1,000 | | | — | | | 1,000 | |
Corporate bonds | — | | | 44,203 | | | — | | | 44,203 | |
Total marketable investments | $ | 600,189 | | | $ | 330,450 | | | $ | — | | | $ | 930,639 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents | | | | | | | |
Money market funds | $ | 66,661 | | | $ | — | | | $ | — | | | $ | 66,661 | |
Certificates of deposit | — | | | 493 | | | — | | | 493 | |
U.S. treasury securities | 4,983 | | | — | | | — | | | 4,983 | |
Commercial paper | — | | | 1,498 | | | — | | | 1,498 | |
Total cash equivalents | $ | 71,644 | | | $ | 1,991 | | | $ | — | | | $ | 73,635 | |
| | | | | | | |
Marketable investments | | | | | | | |
Certificates of deposit | $ | — | | | $ | 1,463 | | | $ | — | | | $ | 1,463 | |
U.S. treasury securities | 315,437 | | | — | | | — | | | 315,437 | |
U.S. agency and government-sponsored securities | — | | | 239,259 | | | — | | | 239,259 | |
Commercial paper | — | | | 17,391 | | | — | | | 17,391 | |
Municipal bonds | — | | | 928 | | | — | | | 928 | |
Corporate bonds | — | | | 12,618 | | | — | | | 12,618 | |
Total marketable investments | $ | 315,437 | | | $ | 271,659 | | | $ | — | | | $ | 587,096 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
In March 2024, the Company issued $747.5 million aggregate principal amount of 1.00% convertible senior notes due 2029 (the "2029 convertible senior notes") in a private offering. In connection with the issuance of the 2029 convertible senior notes, the Company used part of the net proceeds from the issuance to repurchase approximately $313.1 million aggregate principal amount of its 0.50% convertible senior notes due 2025 (the "2025 convertible senior notes"). As of June 30, 2024 and December 31, 2023, the estimated fair value of the Company's outstanding 2025 convertible senior notes was $413.2 million and $718.3 million, respectively. As of June 30, 2024, the estimated fair value of the Company's outstanding 2029 convertible senior notes was $667.7 million. The fair values were determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and have been classified as Level 2 in the fair value hierarchy. See Note 6 for further information on the Company’s convertible senior notes.
In February 2022, the Company made a $2.0 million equity investment in a privately-held company that the Company does not have the ability to exercise significant influence over. The Company elected to utilize the measurement alternative for an equity security without a readily determinable fair value. Accordingly, this investment is accounted for at its cost minus impairment, if any, and is classified within Level 3. If the Company identifies observable price changes in orderly transactions for such investment or a similar investment, it will measure the investment at fair value as of the date that the observable transactions or events occurred. The Company concluded that there was no indicator of impairment of this investment as of June 30, 2024.
Except for the $2.0 million equity investment described above, there were no assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2024 and December 31, 2023.
The fair value of the Company’s other financial instruments, including accounts receivable, accounts payable and other current liabilities, approximate their carrying value due to the relatively short maturity of those instruments. The carrying amounts of the Company’s operating and finance leases approximate their fair value, which is the present value of expected future cash payments based on assumptions about current interest rates and the creditworthiness of the Company.
4. Financial Statement Components
Cash and cash equivalents consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Cash | | $ | 88,942 | | | $ | 69,566 | |
Money market funds | | 86,014 | | | 66,661 | |
Certificates of deposit | | 498 | | | 493 | |
U.S. treasury securities | | — | | | 4,983 | |
| | | | |
Commercial paper | | — | | | 1,498 | |
Municipal bonds | | 245 | | | — | |
Total cash and cash equivalents | | $ | 175,699 | | | $ | 143,201 | |
Accounts receivable, net consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Trade accounts receivable | | $ | 94,389 | | | $ | 86,912 | |
Unbilled trade accounts receivable, net of advance client deposits | | 10,282 | | | 10,776 | |
Provision for credit losses | | (289) | | | (264) | |
Accounts receivable, net | | $ | 104,382 | | | $ | 97,424 | |
There was one client that represented 12% and 11% of accounts receivable as of June 30, 2024 and December 31, 2023, respectively,
Prepaid expenses and other current assets consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Prepaid expenses | | $ | 30,357 | | | $ | 22,023 | |
Other current assets | | 9,428 | | | 8,493 | |
Contract assets | | 1,975 | | | 4,106 | |
| | | | |
Prepaid expenses and other current assets | | $ | 41,760 | | | $ | 34,622 | |
Property and equipment, net consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Computer and network equipment | | $ | 175,017 | | | $ | 155,997 | |
Computer software | | 62,623 | | | 59,452 | |
Internal-use software development costs | | 30,847 | | | 19,734 | |
Furniture and fixtures | | 4,799 | | | 4,666 | |
Leasehold improvements | | 6,444 | | | 6,425 | |
Property and equipment | | 279,730 | | | 246,274 | |
Accumulated depreciation and amortization | | (155,130) | | | (137,702) | |
Property and equipment, net | | $ | 124,600 | | | $ | 108,572 | |
Depreciation and amortization expense associated with property and equipment was $10.3 million and $19.8 million for the three and six months ended June 30, 2024, respectively. Depreciation and amortization expense associated with property and equipment was $8.9 million and $17.4 million for the three and six months ended June 30, 2023, respectively.
Other assets consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Other assets | | $ | 12,345 | | | $ | 10,433 | |
Equity investment in a privately-held company | | 2,000 | | | 2,000 | |
Deferred tax assets | | 3,410 | | | 3,766 | |
Other assets | | $ | 17,755 | | | $ | 16,199 | |
Accrued and other current liabilities consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Accrued expenses | | $ | 29,723 | | | $ | 18,282 | |
Accrued compensation and benefits | | 38,508 | | | 35,927 | |
Accrued federal fees | | 4,759 | | | 4,166 | |
Sales tax liabilities | | 3,330 | | | 3,756 | |
| | | | |
Accrued and other current liabilities | | $ | 76,320 | | | $ | 62,131 | |
Other long-term liabilities consisted of the following (in thousands): | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
Deferred revenue | $ | 767 | | | $ | 1,350 | |
| | | |
Sales tax liabilities | 705 | | | 926 | |
Other long-term liabilities | 4,189 | | | 5,612 | |
| | | |
Other long-term liabilities | $ | 5,661 | | | $ | 7,888 | |
5. Goodwill and Intangible Assets
Goodwill of $61.8 million and intangible assets of $22.1 million were recognized as a result of the Company's acquisition of Aceyus, Inc. ("Aceyus") in August 2023. See Note 13 for further details. The following table summarizes the activity in the Company's goodwill and intangible asset balances during the six months ended June 30, 2024 (in thousands): | | | | | | | | | | | | | | | | |
| | Goodwill | | Intangible Assets | | |
Beginning of the period, December 31, 2023 | | $ | 227,412 | | | $ | 38,323 | | | |
Measurement period adjustment (Aceyus) | | (143) | | | — | | | |
Amortization | | — | | | (5,296) | | | |
End of the period, June 30, 2024 | | $ | 227,269 | | | $ | 33,027 | | | |
The components of intangible assets were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization period (Years) |
Developed technology | | $ | 75,314 | | | $ | (45,124) | | | $ | 30,190 | | | 5.0 | | $ | 75,314 | | | $ | (40,327) | | | $ | 34,987 | | | 5.2 |
Acquired workforce | | 470 | | | (470) | | | — | | | 0.0 | | 470 | | | (470) | | | — | | | 0.0 |
Customer relationships | | 4,150 | | | (1,667) | | | 2,483 | | | 3.7 | | 4,150 | | | (1,252) | | | 2,898 | | | 4.1 |
Trademarks | | 500 | | | (146) | | | 354 | | | 2.1 | | 1,000 | | | (562) | | | 438 | | | 2.6 |
Total | | $ | 80,434 | | | $ | (47,407) | | | $ | 33,027 | | | 4.8 | | $ | 80,934 | | | $ | (42,611) | | | $ | 38,323 | | | 5.1 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Amortization expense related to intangible assets was $2.6 million and $5.3 million for the three and six months ended June 30, 2024, respectively. Amortization expense related to intangible assets was $2.8 million and $5.7 million for the three and six months ended June 30, 2023, respectively.
As of June 30, 2024, the expected future amortization expense for intangible assets was as follows (in thousands): | | | | | | | | |
Period | | Expected Future Amortization Expense |
Remaining 2024 | | $ | 5,295 | |
2025 | | 8,660 | |
2026 | | 7,201 | |
2027 | | 2,898 | |
2028 | | 2,706 | |
Thereafter | | 6,267 | |
Total | | $ | 33,027 | |
| | |
6. Debt
Repurchase Transaction
In connection with the issuance of the 2029 convertible senior notes on March 1, 2024, the Company used part of the net proceeds from the issuance to repurchase approximately $313.1 million aggregate principal amount of the outstanding 2025 convertible senior notes in privately-negotiated transactions for aggregate cash consideration of approximately $304.9 million (the “Repurchase Transaction”).
The Repurchase Transaction was accounted for as a debt extinguishment. The difference between the consideration used to extinguish the 2025 convertible senior notes and the carrying value of the 2025 convertible senior notes (including unamortized debt discount and issuance costs) resulted in an extinguishment gain of approximately $6.6 million recorded through Other income (expense), net on the Company’s condensed consolidated statements of operations and comprehensive loss.
In connection with the Repurchase Transaction, the Company also entered into a partial termination agreement with each bank counterparty and unwound a corresponding portion of the previously purchased capped call instruments entered into in connection with the issuance of the 2025 convertible senior notes (the “2025 Capped Calls”). The Company received approximately $0.5 million in cash in connection with these partial terminations, representing the fair value at the date of settlement of the unwound 2025 Capped Calls.
2029 Convertible Senior Notes and Related Capped Call Transactions
In March 2024, the Company issued $747.5 million aggregate principal amount of 2029 convertible senior notes in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $97.5 million principal amount of the 2029 convertible senior notes. The 2029 convertible senior notes mature on March 15, 2029 and bear interest at a fixed rate of 1.00% per annum, payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2024. The total net proceeds from the issuance of the 2029 convertible senior notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.
Each $1,000 principal amount of the 2029 convertible senior notes is initially convertible into 12.5918 shares of the Company’s common stock (the “2029 Conversion Option”), which is equivalent to an initial conversion price of approximately $79.42 per share of common stock, subject to adjustment upon the occurrence of specified events. The initial conversion price represents a premium of approximately 30% to the $61.09 per share closing price of the Company’s common stock on The Nasdaq Global Market on February 27, 2024. There have been no changes to the initial conversion price of the 2029 convertible senior notes since issuance. The 2029 convertible senior notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding December 15, 2028, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2024 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “2029 Measurement Period”) in which the trading price (as defined in the 2029 Indenture governing the 2029 convertible senior notes) per $1,000 principal amount of the 2029 convertible senior notes for each trading day of the 2029 Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2029 convertible senior notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after December 15, 2028 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2029 convertible senior notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the Company undergoes a fundamental change (as defined in the indenture governing the 2029 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2029 convertible senior notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the 2029 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.
The Company may not redeem the 2029 convertible senior notes prior to March 22, 2027. The Company may redeem for cash all or any portion of the 2029 convertible senior notes, at its option, on or after March 22, 2027 and prior to December 15, 2028, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2029 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. However, the Company may not redeem less than all of the
outstanding 2029 convertible senior notes unless at least $100.0 million aggregate principal amount of 2029 convertible senior notes are outstanding and not called for redemption at the time the redemption notice is sent. No sinking fund is provided for the 2029 convertible senior notes.
The 2029 convertible senior notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2029 convertible senior notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated (including the 2025 convertible senior notes); effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities.
The net carrying amount of the 2029 convertible senior notes as of June 30, 2024 was as follows (in thousands):
| | | | | | | | | | |
| | June 30, 2024 | | |
Principal | | $ | 747,500 | | | |
Unamortized issuance costs | | (17,488) | | | |
Net carrying amount | | $ | 730,012 | | | |
Interest expense related to the 2029 convertible senior notes was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2024 | | June 30, 2024 |
Contractual interest expense | | $ | 1,869 | | | $ | 2,492 | |
Amortization of issuance costs | | 886 | | | 1,170 | |
Total interest expense | | $ | 2,755 | | | $ | 3,662 | |
The debt issuance costs are amortized into interest expense over the term of the 2029 convertible senior notes at an effective interest rate of 1.49%.
In connection with the issuance of the 2029 convertible senior notes, the Company entered into privately negotiated capped call transactions (each a “2029 Capped Call,” and collectively the "2029 Capped Calls") with certain financial institutions. The 2029 Capped Call has an initial strike price of approximately $79.42, subject to certain adjustments, which corresponds to the initial conversion price of the 2029 convertible senior notes. The 2029 Capped Calls have an initial cap price of $122.18 per share, subject to certain adjustments. The 2029 Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2029 convertible senior notes, with such offset subject to a cap based on the cap price. Each 2029 Capped Call covers, subject to anti-dilution adjustments, approximately 9.4 million shares of the Company’s common stock. The 2029 Capped Call is subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers, and announcement events. In addition, each 2029 Capped Call is subject to certain specified additional disruption events that may give rise to a termination of the 2029 Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings, and hedging disruptions. For accounting purposes, each 2029 Capped Call is treated as a separate transaction from, and not part of the terms of the 2029 convertible senior notes. As these transactions meet certain accounting criteria, the 2029 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The 2029 Capped Calls will not be remeasured as long as they continue to meet the conditions for equity classification.
2025 Convertible Senior Notes and Related Capped Call Transactions
In May and June 2020, the Company issued $747.5 million aggregate principal amount of 2025 convertible senior notes in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $97.5 million principal amount of the 2025 convertible senior notes. The 2025 convertible senior notes mature on June 1, 2025 and bear interest at a fixed rate of 0.500% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The total net proceeds from the issuance of the 2025 convertible senior notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.
In March 2024, the Company used part of the net proceeds from the issuance of the 2029 convertible senior notes to repurchase $313.1 million aggregate principal amount of the 2025 convertible senior notes in privately-negotiated transactions. As of June 30, 2024, after giving effect to the Repurchase Transaction, approximately $434.4 million aggregate principal amount of 2025 convertible senior notes remained outstanding.
Each $1,000 principal amount of the 2025 convertible senior notes is initially convertible into 7.4437 shares of the Company’s common stock (the “2025 Conversion Option”), which is equivalent to an initial conversion price of approximately $134.34 per share of common stock, subject to adjustment upon the occurrence of specified events. The initial conversion price represents a premium of approximately 30% to the $103.34 per share closing price of the Company’s common stock on The Nasdaq Global Market on May 21, 2020. The 2025 convertible senior notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding March 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “2025 Measurement Period”) in which the trading price (as defined in the 2025 Indenture governing the 2025 convertible senior notes) per $1,000 principal amount of the 2025 convertible senior notes for each trading day of the 2025 Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2025 convertible senior notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 convertible senior notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the Company undergoes a fundamental change (as defined in the indenture governing the 2025 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2025 convertible senior notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the 2025 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.
There have been no changes to the initial conversion price of the 2025 convertible senior notes since issuance. The closing market price of the Company's common stock of $44.10 per share on June 28, 2024, the last trading day during the three months ended June 30, 2024, was below $174.64 per share, which represents 130% of the initial conversion price of $134.34 per share. Additionally, the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day, June 28, 2024, was not greater than or equal to 130% of the initial conversion price. As such, during the three months ended June 30, 2024, the conditions allowing holders of the 2025 convertible senior notes to convert were not met. The 2025 convertible senior notes are therefore not convertible during the three months ending September 30, 2024.
The 2025 convertible senior notes became redeemable at the Company's option on June 6, 2023. The Company may redeem for cash all or any portion of the 2025 convertible senior notes, at its option, prior to March 1, 2025, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the 2025 convertible senior notes. During the three months ended June 30, 2024, the conditions allowing the Company to redeem for cash all or any portion of the 2025 convertible senior notes were not met.
The 2025 convertible senior notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2025 convertible senior notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
The net carrying amount of the 2025 convertible senior notes as of June 30, 2024 and as of December 31, 2023 was as follows (in thousands): | | | | | | | | | | | | | | |
| | June 30, 2024 | | December 31, 2023 |
Principal | | $ | 747,500 | | | $ | 747,500 | |
Unamortized issuance costs | | (2,041) | | | (5,375) | |
Principal repaid | | (313,095) | | | — | |
Net carrying amount | | $ | 432,364 | | | $ | 742,125 | |
| | | | |
Interest expense related to the 2025 convertible senior notes was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2024 | | June 30, 2023 | | June 30, 2024 | | June 30, 2023 |
Contractual interest expense | | $ | 543 | | | $ | 934 | | | $ | 1,347 | | | $ | 1,868 | |
| | | | | | | | |
Amortization of issuance costs | | 549 | | | 931 | | | 1,339 | | | 1,839 | |
Total interest expense | | $ | 1,092 | | | $ | 1,865 | | | $ | 2,686 | | | $ | 3,707 | |
The debt issuance costs are amortized into interest expense over the term of the 2025 convertible senior notes at an effective interest rate of 1.00%.
In connection with the issuance of the 2025 convertible senior notes, the Company entered into privately negotiated capped call transactions (each a “2025 Capped Call,” and collectively the "2025 Capped Calls") with certain financial institutions. The 2025 Capped Calls each have an initial strike price of approximately $