10-Q: Five9 Q3 2025 Earnings: Net Income Rises, Revenue Up 8%

Five9, Inc. reported a significant turnaround in Q3 2025, achieving net income of $18.0 million on an 8% revenue increase, alongside strategic investments in AI and a new share repurchase program.

Summary

• Revenue for the three months ended September 30, 2025, increased by 8% to $285.8 million, up from $264.2 million in the same period of 2024.
• Revenue for the nine months ended September 30, 2025, increased by 11% to $848.8 million, up from $763.3 million in the same period of 2024.
• The company achieved net income of $18.0 million for the three months ended September 30, 2025, a significant improvement from a net loss of $4.5 million in Q3 2024.
• Net income for the nine months ended September 30, 2025, was $19.7 million, compared to a net loss of $24.4 million in the prior year period.
• Gross profit increased by 11% to $157.3 million for the three months ended September 30, 2025, with gross margin improving from 54% to 55%.
• Adjusted EBITDA for the three months ended September 30, 2025, rose to $71.7 million from $52.4 million in Q3 2024.
• The Annual Dollar-Based Retention Rate for the twelve months ended September 30, 2025, was 107%, a slight decrease from 108% in the prior year.
• Cash and cash equivalents stood at $193.4 million, and marketable investments at $482.7 million as of September 30, 2025.
• The Board of Directors authorized a $150.0 million share repurchase program on October 29, 2025, including a $50.0 million accelerated share repurchase plan, set to terminate on December 31, 2027.
• A reduction in force plan (the 2025 Plan) was approved on March 31, 2025, reducing global full-time employees by approximately 4%, incurring $7.9 million in restructuring costs and $2.1 million in stock-based compensation costs during the nine months ended September 30, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated a strong financial recovery, moving from net losses to net income, coupled with solid revenue growth and improved gross margins. The authorization of a significant share repurchase program indicates management's confidence. However, the slight decline in the dollar-based retention rate and the acknowledgment of ongoing macroeconomic headwinds and legal challenges temper the overall positive sentiment.

Positives

• Achieved a significant turnaround from net losses to net income for both the three months ($18.0 million) and nine months ($19.7 million) ended September 30, 2025.
• Reported solid revenue growth of 8% for the quarter and 11% for the nine-month period, primarily driven by larger customers and increased sales and marketing activities.
• Gross profit increased by 11% for the quarter and 14% for the nine-month period, with gross margin improving from 54% to 55%.
• Adjusted EBITDA saw substantial growth, increasing from $52.4 million to $71.7 million for the quarter and from $131.7 million to $192.4 million for the nine-month period.
• Operating expenses (Research and Development, Sales and Marketing, General and Administrative) decreased as a percentage of revenue, indicating improved operational efficiency.
• Maintained strong liquidity with $193.4 million in cash and cash equivalents and $482.7 million in marketable investments.
• The Board authorized a $150.0 million share repurchase program, signaling confidence in future cash flow generation and a commitment to returning value to shareholders.
• Projected U.S. income tax expense decreased due to the positive impact of H.R.1, the One Big Beautiful Bill Act, signed into law on July 4, 2025, allowing immediate expensing of domestic R&D and 100% bonus depreciation.

Negatives

• The Annual Dollar-Based Retention Rate decreased year-over-year from 108% to 107%, attributed to macroeconomic headwinds and challenges related to a single large new customer's ramping.
• Interest income and other decreased significantly by 49% for the three months and 33% for the nine months ended September 30, 2025, primarily due to lower investable balances following the maturity of the 2025 convertible senior notes and lower interest rates.
• Ongoing macroeconomic challenges, global tariff increases, and geopolitical conflicts (Russia-Ukraine, Middle East) are expected to continue to adversely impact revenue in future periods.
• The company is involved in ongoing legal proceedings, including a securities class action and a shareholder derivative action, which could result in unquantified losses and require significant legal defense.

Risks

• Adverse economic conditions, including macroeconomic challenges, global tariff increases, continued inflation, uncertainty regarding consumer spending, high interest rates, and geopolitical conflicts, may continue to harm the business.
• Inability to attract new customers or sell additional services and functionality to existing customers could harm revenue and revenue growth.
• Termination or reduction of subscriptions by existing customers, or failure to grow subscriptions at expected rates, would harm revenues and gross margins.
• Failure to manage technical operations infrastructure could lead to service outages, deployment delays, and claims for credits or damages.
• Inability to attract and retain highly skilled leaders and other employees could harm business and results of operations.
• If AI solutions perform an increasing proportion of contact center interactions, failure to replace decreases in subscription revenue from licenses with revenue from additional AI solutions will harm revenue, results of operations, and business.
• Further development of AI solutions may not be successful and could result in reputational harm and materially harm future operating results.
• AI technology and features incorporated into the solution include new and evolving technologies that may present both legal and business risks.
• Failure to effectively develop, manage, and maintain the network of technology solution distributors and resellers could materially harm revenues.
• Quarterly and annual results may fluctuate significantly and may not fully reflect the underlying performance of the business, potentially leading to decreases in the common stock price.
• Historical growth may not be indicative of future growth, and failure to manage growth effectively could be detrimental.
• Failure to adequately retain and expand the sales force will impede growth.
• The use of AI by the workforce may present risks to the business.
• The contact center software solutions market is subject to rapid technological change, requiring continuous development and sale of incremental and new solutions.
• Growth depends in part on the success of strategic relationships with third parties; failure to successfully maintain, grow, and manage these relationships could harm the business.
• The markets in which the company participates involve a high and increasing number of competitors; failure to compete effectively could harm operating results.
• Expansion of international operations exposes the company to significant macroeconomic and other risks.
• Security breaches, cybersecurity incidents, and improper access to, use of, or disclosure of data could result in litigation, regulatory risk, harm reputation, business, or financial results.
• Acquisitions of other companies or technologies, or being the target of strategic transactions, could divert management's attention, result in additional dilution, or use significant cash resources.
• Selling solutions to larger organizations requires longer sales and implementation cycles and often demands more configuration and integration services or customized features, which could delay or prevent sales and harm growth rates.
• Reliance on third-party telecommunications and internet service providers; any failure by these providers could cause customer loss and claims.
• A history of losses and potential inability to achieve or sustain profitability.
• Stock price volatility and potential decline due to factors beyond control.
• Inability to secure additional financing on favorable terms, or at all, to meet future capital needs.
• Failure to comply with laws and regulations could harm business and reputation.
• Insufficient cash to service convertible senior notes and repay such notes, if required.

Future Outlook

The company expects macroeconomic challenges to continue to adversely impact revenue in future periods. It plans to continue investing in professional services, public cloud, cloud operations, customer support, and network infrastructure, anticipating absolute dollar increases in cost of revenue but long-term percentage of revenue declines through economies of scale. Research and development, and sales and marketing expenses are expected to increase in absolute dollars and fluctuate as a percentage of revenue in the near and longer term, while general and administrative expenses are expected to increase in absolute dollars but decline as a percentage of revenue in the longer term. Gross margin is projected to increase in the long-term with revenue growth outpacing continued investments. Existing cash and cash equivalents are believed to be sufficient for working capital and capital expenditure needs for at least the next 12 months, with potential for additional capital raises through equity or debt financings to fund future requirements or acquisitions.

Management Comments

• "We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all sizes transition from legacy on-premises contact center systems to our cloud solution."
• "We believe this shift has helped us diversify our customer base, while significantly enhancing our opportunity for future revenue growth."
• "We have continued to make significant expenditures and investments, including in sales and marketing, research and development, infrastructure and investments in complementary businesses, technologies and intellectual property rights."
• "We primarily evaluate the success of our business based on revenue growth and the efficiency and effectiveness of our investments."
• "The growth of our business and our future success depend on many factors, including our ability to continue to expand our base of larger customers, grow revenue from our existing customers, innovate and expand internationally."
• "We intend to vigorously defend this lawsuit."

Industry Context

The company operates in the cloud contact center market, which is characterized by a significant industry-wide transition from legacy on-premises systems to cloud-based solutions. Its strategic focus on AI enhancements, with AI embedded throughout its platform and AI solutions offered on a consumption or capacity basis, aligns with broader industry trends towards integrating artificial intelligence for improved customer experience and agent productivity. The market is highly competitive and subject to rapid technological change, necessitating continuous innovation and expansion of solutions.

Comparison to Industry Standards

• The company's PRSU performance is compared to companies in the S&P Software and Services Select Index for relative total shareholder return (RTSR) performance.
• The Annual Dollar-Based Retention Rate is a common SaaS metric used to evaluate the ability to retain and grow revenue from existing customers, providing a benchmark for long-term customer value.
• Adjusted EBITDA is presented as a non-GAAP measure to allow investors to compare core business operating results with other companies in the industry, although specific industry benchmarks are not provided in the filing.

Legal Proceedings

• A putative class action complaint was filed on December 4, 2024, against the Company, its Chief Executive Officer, and its then-current Chief Financial Officer, alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint alleges false and/or misleading statements or omissions regarding the Company and its business from June 4, 2024, through August 8, 2024, seeking unspecified damages. Lucid Alternative Fund, LP was appointed lead plaintiff on March 18, 2025, and an amended complaint was filed on May 30, 2025. The Company filed a motion to dismiss on July 29, 2025, and intends to vigorously defend the lawsuit, but cannot predict its duration or outcome or estimate possible losses.
• A related shareholder derivative action was filed on March 18, 2025, against the Company's directors and certain officers, alleging breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934. This action was stayed on April 8, 2025, until the resolution of the motion to dismiss in the securities class action.

Stakeholder Impact

• Shareholders: Positive impact from the return to profitability, revenue growth, and the newly authorized $150.0 million share repurchase program. Potential negative impact from stock price volatility, macroeconomic headwinds, and the uncertainty of ongoing legal proceedings. Future equity capital raises could lead to dilution.
• Employees: Negative impact from the 2025 reduction in force plan, which resulted in a 4% reduction in global full-time employees, incurring restructuring costs and additional stock-based compensation costs due to accelerated vesting.
• Customers: Continued investment in AI solutions and platform enhancements aims to improve customer experience and agent productivity. However, potential for service outages exists if technical infrastructure is not managed effectively.
• Creditors: The company successfully settled its 2025 convertible senior notes in cash and has outstanding 2029 convertible senior notes. Liquidity appears sufficient for the next 12 months, but future capital requirements and market conditions could affect debt servicing ability.
• Suppliers/Vendors: Increased third-party costs, including payments to telecommunications providers, are driven by increased customer activities and usage.

Next Steps

• Continue to expand the base of larger customers.
• Grow revenue from existing customers.
• Innovate and expand internationally, particularly in AI solutions.
• Vigorously defend the ongoing securities class action and shareholder derivative lawsuit.
• Execute the $150.0 million share repurchase program, including a $50.0 million accelerated share repurchase plan, by December 31, 2027.
• Assess the impact of new accounting pronouncements (ASU 2023-09, ASU 2024-03, ASU 2024-04, ASU 2025-01, ASU 2025-05, ASU 2025-06).

Key Dates

Recommendation

The company demonstrated a strong financial recovery with a return to profitability and robust revenue growth, supported by improved operational efficiency and a new share repurchase program. This indicates a positive trajectory and management's commitment to shareholder value. However, the slight decline in the Annual Dollar-Based Retention Rate, coupled with persistent macroeconomic headwinds and ongoing legal challenges, introduces a degree of uncertainty. While the positives are compelling, the existing risks and the need to monitor the retention rate suggest a "hold" position, allowing investors to observe the sustained impact of strategic initiatives and the resolution of external pressures before making a more aggressive move.

Keywords

Cloud contact center, SaaS, AI, customer experience, financial results, Q3 2025, revenue, net income, EBITDA, share repurchase, convertible notes, SEC filing, FIVN, software, enterprise, contact center software, corporate governance, risk management