Five9: No-Moat CCaaS Provider Benefits From Attractive Industry Tailwinds  

Equity Analyst

Emma Williams

Five9 is squarely positioned to benefit from industry tailwinds including the transition of contact center operations to the cloud, and a shift toward digital first customer engagement and automation. While we forecast Five9 will continue to take market share, the firm faces intensifying competition from contact center as a service, or CCaaS, peers, and communication industry titans competing for a slice of the massive contact center cloud transition pie. In this environment, we expect Five9 will need to continue to invest heavily in go-to-market efforts and product innovation to attract and retain new clients, weighing on profitability upside. 

Five9’s CCaaS offering, Virtual Contact Center, or VCC, supports channel-agnostic customer engagement across all digital channels (email, SMS, voice, social media and so on), workforce management solutions, and artificial intelligence-based analytics and automation tools such as agent prompts and self-service chatbots. The sophisticated platform is tightly integrated with tangential business applications through out-of-the-box integrations, and custom-built integrations to meet clients' unique needs. In practice, when the VCC platform receives inbound communication, integrations to business applications pull a complete customer history and relevant data, enabling efficient, targeted customer engagement and first contact resolution. 

As with cloud-based CCaaS peers, Five9 benefits from an attractive contact center cloud transition opportunity. The contact center industry has been a relative laggard in the cloud transition, with only about 20% of the estimated 16 million global contact center agents using cloud software as of 2022. Amid increasing appetite for AI and automation solutions best served via cloud technology, and a retrenchment of investment by legacy on premise providers, we expect contact center transitions to accelerate over the coming decade.

Business Strategy & Outlook

We assign Five9 a no moat rating. While we believe the company benefits from high customer switching costs among its existing customer base and is executing well on a land-and-expand strategy, we think Five9 faces intensifying competition for new customer wins. The firm has generated uneven returns on invested capital in recent years, and rising competitive pressure leaves us cautious about whether Five9 can generate consistent economic profits in the future. If Five9 can effectively fend off competitors, leverage investments in product innovation to win sticky enterprise customers, and rapidly scale operations in coming years, we could see the company eventually earning a narrow moat rating. 

We believe CCaaS providers like Five9 benefit from high customer switching costs among its existing client base due to the strategic importance of customer service operations, and deep integrations with related business applications. Software, in general, tends to have high switching costs as software system installations are time consuming, meticulous processes that generally require thorough upfront verification, have many touchpoints throughout an organization, are linked to various business applications, and often have new processes built upon them. We think the shift to the cloud has likely reduced implementation costs somewhat, but this is offset by the ability to provide a much larger range of bundled products through the cloud, such as analytics and artificial intelligence. 

Alongside monetary costs, switching CCaaS providers could lead to operational disruptions and inefficiencies such as having to train employees on the new system, reintegrate with existing software, and the potential loss of customer data. Together, these disruptions may lead to subpar customer experiences, and costly customer defections. We believe the relatively slow industry transition to more cost effective, and functionality rich cloud alternatives is reflective of the complexity of contact center operations, and the associated switching costs. 

While Five9 does not report gross client retention, the firm boasts strong dollar based net retention (DBNR) averaging about 110-120% in recent years, up from 100% in 2014 (and on par with narrow moat NICE), driven by year on year seat growth per client and greater module attachment. As of 2022, Five9 generated 86% of revenue from enterprise customers (150 to 500 seats), up from 60% in 2014. We expect both DBNR and client retention to improve over time as Five9 continues to skew toward sticky enterprise customers and realizes greater module attachment, fueled by the ongoing enterprise transition to cloud solutions. 

However, Five9 faces rising competition for new client wins from other cloud CCaaS providers and industry titans vying for a slice of the massive contact center cloud transition opportunity. The primary cloud CCaaS competitors offering comparable out of the box solutions include NICE with its CXOne platform, Genesys (privately owned) with its Cloud CX platform, and emerging contact center offerings from Zoom and Salesforce. NICE CXOne and Genesys Cloud CX have been market leaders in the CCaaS space for several years, whereas Zoom and Salesforce’s offerings are relatively new, launching in 2022. As of 2022, NICE serves around 1 million customer service agents on the cloud, or about 33% of the cloud CCaaS market by agents, relative to Five9’s 440 thousand customer service agents, or about 15% share. Five9 also competes with build it yourself CCaaS toolkit solutions like Twilio Flex, and Amazon Connect. 

While we anticipate multiple providers to benefit from the contact center cloud transition, we expect Five9 will need to continue to aggressively invest in product innovation and go to market efforts to remain competitive and achieve meaningful scale, weighing on profitability upside in the near term. In recent years, Five9’s efforts to expand product functionality via acquisitions of AI, automation and workforce optimization technology, and investment in improving the reliability and scalability of the platform to attract enterprise customers and support international growth have dampened ROICs to below our estimated WACC. Assuming Five9 continues to attract new sticky enterprise clients at a healthy rate (management quotes a 75% win rate versus NICE and Genesys), we expect these investments to eventually bear fruit as the firm achieves meaningful scale-based leverage. Nonetheless, given intensifying competition for new clients, comparable product functionality among peers and weak recent returns on invested capital, we lack confidence awarding the firm a moat rating.

None

Economic Moat

Five9

Five9, Inc. engages in the provision of cloud software for contact centers. It specializes in omnichannel routing, analytics, workforce organization and reporting. The company was founded in December 2001 and is headquartered in San Ramon, CA.

Earnings data Q3 2023

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