On Jul 18, 2021, FIVN and ZM entered into a merger agreement whereby FIVN would be acquired by ZM for a per share consideration of 0.5533 ZM share, for a 13% premium. The transaction valued FIVN at ~$200 per FIVN share or $13.6 billion equity value and ~$14 billion enterprise value. In August 2021, Zoom reported its Q2/21 results and provided forward guidance on future growth prospects. The market did not like what was told.... Zoom essentially intimated that future growth rate would taper as a result of people returning back to office.. Subsequently, Zoom shares price tumbled from $400/sh to currently $272/sh in a month, dragging FIVN down with it since it's in a deal to be taken out by Zoom's shares. Since then, FIVN has recovered a bit but still is weighed down by the Zoom bid which is now at a discount to FIVN's current market price. This has created an event-driven value opportunity in FIVN.

 

Based on my assessments here, I'd have a high certainty that the fair value of FIVN would be between ~$150/sh to $220/sh. A higher resolution assessment would ascertain that FIVN would be worth high $100s/sh to low $200/sh, based on a EV/2022 revenue multiple of 18x-21x. This would put FIVN slightly below its fair value range.

 

I provide this somewhat unconventional opportunity here on VIC only because 1) the downside based on my assessment of $150/sh is quite limited; 2) though the upside isn't high, FIVN should see value realization very quickly within the next month or two if not by the end of September, since Zoom is on a time crunch to re-propose a bid for FIVN. I think Zoom would either bump its bid or at least adjourn the shareholder meeting to allow more time for negotiations with FIVN. In the event that the deal breaks, FIVN should still trade higher, released from the overhang of a depressed Zoom bid and a potential acquirer that's attracting negative sentiment (problems with DOJ and with standalone growth prospects).

 

Five9, Inc. is a Software-as-a-Service (SaaS) company offering a cloud platform for call/contact centers. Five9's Call Center software is used by companies providing customers services to customers via phone calls, emails, texts and other forms of communication channels. Through the software, customer services agents manages/tracks customers interactions via voice, chat, email, web, social media and mobile channels and logs client interactions for further insights/analytics, much akin to a CRM, except that FIVN software revolves mostly on engaging client interactions/customer support. Unlike legacy on-premise physical infrastructure contact center systems, FIVN's cloud platform requires minimal upfront investments and is rapidly deployed and maintained by FIVN rather than by the individual company. The Five9 Contact Center Software allows customer service reps to interface with a browser-based platform maintained by the cloud.

 

FIVN offerings are sold via field sales teams and telesales teams marketing to large and small corporations. The SaaS is sold to customers on a recurring subscription priced primarily on number of users and minutes of usage, as well as functionalities and applications deployed by clients.

 

FIVN is a market share leader in the cloud contact center market, facilitating more than 7 billion call minutes between 2,000 clients and their customers per year. The company's identified $24 billion TAM, with an additional $34 billion from Automation (using customer service bots).

 

In Feb 2020, Five9 entered into an agreement to acquire Virtual Observer, a workforce optimization provider with whom FIVN has a 150 joint customers. Virtual Observer adds to FIVN a variety of features that improve the administration and data management. Among the functions offers by Virtual Observers are omnichannel recording and screen recording, advanced security, speech analytics, surveys, connectors to CRMs.

 

IN Oct 2020, FIVN entered into an agreement to acquire Inference Solutions - a provider of Intelligent Virtual Agent (IVA) platform. IVAs are AI-enabled customer service bots used to enhance company/service providers' capacity/ability to provide customer service experiences.

 

Performance over the past 5 years has been stellar, with topline growing from deeper market penetration and printing sequentially higher y/y percentage growth rate every year.

Further expense lines also show sequential improvements, with both sales & marketing and G&A showing some decline in recent years that're holding steady as a % of revenue.

Additionally, FIVN has beaten revenue guidance every quarter over the past 5 years.

The global contact center software market is estimated at $23.6 billion in 2021 and is expected to grow at 21% CAGR from 2021 to 2028, to $90.6 billion. (https://www.grandviewresearch.com/industry-analysis/contact-center-software-market)

 

There are two vectors propelling the growth of cloud contact center market. First, there is a proliferation of adoption of cloud contact center software propelled by a) cloud computing/CRM, b) a renewal in enterprise contact center infrastructure, replacing on-premise facilities with the more agile cloud platforms, c) emergence of remote working, favoring cloud solutions over infrastructure set up at a physical location. Second, the digital transformation - wherein evermore interactions and our daily lives are migrating over to the internet/digital context - has induced demand for insights/analytics and seamless experiences that are by design better served by cloud solutions that are quicker, and more easily tailored/revised than physical infrastructure could provide. Automation by which bots assisted interactions reduce workload of real persons also helps to increase efficiency of customers services.

 

This market is fragmented but highly competitive, with offering constantly evolving to consumer demands and needs spurred by the ever-disruptive adoption of mobile devices and social media. The multi-dimensional nature of the contact center industry draws to it an eclectic mixture of competitors from different markets and product heritage, with varying sizes and depth of software offerings.

 

A simple search for contact center software shows there are over 150 products available.

 

According to FIVN, competitors could be delineated into 5 categories defined by the background/characteristics/home markets of the competitors.

 

First, FIVN competes with large vendor of on-premise non-cloud contact center systems, including Avaya Inc, and Cisco, who are increasingly complementing/migrating these legacy, on-premise, non-cloud contact center solutions on to the cloud. Second, FIVN competes with other contact center vendors that are expanding into the cloud, such as NICE and Genesys Telecommunications Lab. Third, there are smaller contact center service providers such as Talkdesk and Seranova. Fourth, there are Amazon, Twilio and CRM vendors that are increasingly offering features/functions competing with those of contact center software. These CRMs not only partner with contact center service providers to offer integrated solutions but also acquire CRMs with whom they are partnered. These acquisitions therefore make the CRMs prospective competitors and may terminate existing contracts with Five9 services.

 

NICE Ltd. is a global enterprise software company with two divisions in 1) Customer Engagement; and 2) Financial Crime & Compliance. The Customer Engagement is the contact center software division that competes with FIVN. The Customer Engagement segment historically offered Workforce Optimization (WFO) and Workforce Engagement Management (WEM) software that are integrated with contact centers to improve the productivity of customer services reps. Whereas Contact Center Software facilitate the interaction between customer Service Agents and customers, WFO and WEM faciliate internal interactions within the companies to maintain improve productivity. NICE acquired Contact Center software company inContact in November 2016. As a result, NICE is now a contact center software provider with integrated WEM/WFO software component.

 

Similar to FIVN's contact center software, NICE's cloud software CXone offers omnichannel support including voice and digital, and AI interactions, virtual agents, etc. The company generated a total revenue of $1.6 billion in 2020, with roughly 80% of total revenue derived from Customer Engagement segment. NICE - along with Genesys Telecommunication which is private - constitute the most direct competitors to FIVN. All 3 companies offer very similar contact center software. In terms of actual offering, NICE is viewed by the industry to be a quality vendor with products on par in quality with that of FIVN. However, both NICE and Genesys are legacy vendors with root in on-premise that are transitioning to a cloud-based offering, whereas FIVN is purely a cloud-based vendor born on the cloud and therefore spared from a the on-premise-to-cloud migration process currently undergone by NICE and Genesys. NICE's cloud-based revenue for both Contact Center and Financial Crime & Compliance stood at $777 million in 2020, amounting to 47% of total revenue.

 

The company trades at a historically lower multiple of 8-10x NTM revenue because of its lower growth rate and the work required to transition the company from on-premise vendor to a cloud vendor.

 

Zendesk is a direct competitor of FIVN, offering software used by customer service reps to interact with customers. Similar to that of FIVN, Zendesk's platform offer omnichannel support, customer interactions analytics, and CRM etc. Unlike NICE, Zendesk as a cloud-based vendor is also spared from the migration process that on-premise vendors are currently conducting. Also similar to FIVN, ZEN has seen high 20%s to low-to-mid 30% CAGR and is expected to continue these growth rates in upcoming years. Product gross margin is higher than that of FIVN (80% vs. 65% for FIVN). However, ZEN operating expense margin seems to reflect a greater operating burden. For instance, FIVN's sales & marketing expense is <30% of total revenue whereas that of ZEN is 50%. Because of these notably higher operating expense margins, ZEN enjoys a lower EBITDA margin that is half of FIVN's (10% vs. FIVN ~20%).

 

RingCentral is a cloud-based communications / contact center software company. Unlike ZenDesk and NICE whose platforms are mostly focused on catering the interaction between customer services agents and customers, RingCentral's communication platform is geared more generally toward both company internal interactions as well as interactions with customers. In some regards, RingCentral services similar functions/purposes as does Zoom or Slack in that the communication are amongst company employees rather than dealing directly with customers. Although providing digital/texting channels, RingCentral's main offering points is VOIP-based communication, somewhat similar to FIVN.

 

Performance wise, RNG grew at similar rate as did ZEN and FIVN, however similar to ZEN, RNG despite having higher product margin sees comparable operating expense margin as that of ZEN, with total operating margin being ~80% of revenue versus 50% for FIVN. Sales & Marketing expenses as a % of sales for RNG alone is greater than the total operating expense margin for FIVN. Because of such, EBITDA margin for RNG stands at ~10% vs. FIVN at ~20%.

 

Valuation is derived via 3 methods; all points to a higher level.

First, from a trading perspective, since the deal was announced on Jul 16, 2021, peers have gone up by 10%-20%, the exceptions here being RNG and ZEN both of which saw weak Q2/21 earnings that drove the stocks to tumble. Though RNG and ZEN are ironically FIVN's most direct competitors, I don't think their declines would be applicable to FIVN here had FIVN traded on a standalone basis. For unlike RNG and ZEN, FIVN has maintained operating momentum in Q2/21, with revenue guidance meaningfully beaten again and progress intact. Therefore, it's plausible that in the current market environment, standalone FIVN trade at 10%-20% over its pre-deal price of $177.60/sh, at $195/sh to $213/sh.

 

Second, I delineated FIVN's public comps into 3 buckets. Bucket A comprise of the 3 direct competitors that were walked through earlier on the key competitors section. Bucket B comprise of Customer Experience Platforms companies that the FIVN's listed in its proxy statement relating to the FIVN/ZOOM transaction. This group include ZEN and RNG, but also Twilio and Qualtrics, which are platforms that also emphasize on generating analytics and derivations from interactions conducted with customers. Bucket C comprises of not any direct competitors that'd take sales away from FIVN, but of high growth software companies that enjoy similar growth prospects in the related enterprise cloud software space. These companies see topline sales comparable if not higher than that of FIVN, but mostly have emergent bottom line that are still volatile and minimalist.

 

With regards to Bucket A, all 3 competitors trade at 9-11x next year revenue, a notable discount to FIVN's current multiple. However, these peers discounts to FIVN are not without reasons. NICE is firstly not a pureplay customer engagement platform but has 20% involvement in back-office applications in financial crime & compliance programs. I believe this division is slower growth and overhangs on NICE's overall multiples; NICE is also a legacy on-premise contact center vendor that is defensively migrating to the cloud to adapt to new environment. For these reasons, NICE enjoys a slower overall growth rate that is expected to be less than half of FIVN's. So, it trades at a lower multiple. ZEN and RNG can be lumped in a similar category in that both are cloud-based Customer Engagement platform vendors that enjoy similar growth rate competing in the same space/industry as FIVN's. However, an operational defect shared by both ZEN and RNG but not by FIVN is the high operating expenses margin. The sales and marketing margin alone for either ZEN and RNG is greater than the entire operating expense margin for FIVN. For this compressed margins, ZEN and RNG also trades at a discount... These qualitative characteristics taken into account suggests at least to me that FIVN is superior to all 3 competitors in Bucket A, therefore deserves trade at least 10x+ next year revenue.

 

Moving on to Bucket B, it is self-evident here that the combined Customer Experience Platforms peers group - encompassing of the aforementioned ZEN and RNG as well as Twilio and Quatrics - trades in aggregate at ~14x 2022 revenue. However, while expected to see similar growth rate as expected for FIVN, the group as a whole as a EBITDA margin that is also at half of FIVN's. Yet even this group as a whole is trading at 14x. Therefore, I'd posit from this metric that FIVN should also trade higher than 14x 2022 revenue...

 

Bucket C are non-competitors (some are even complementary to FIVN's contact center software) that trade at double digit multiples because of their high growth prospects. In aggregate, the group expects to see low 30% CAGR for 2022, with emerging EBITDA margin in the low teens. FIVN compared to this group aggregate doesn't become that unattractive either... First, though consensus shows FIVN to grow 20% next year, I think the estimate here is stale and would expect FIVN to grow at mid to even high 20%s; so it's not like this high growth group leaves FIVN in the dust. And on the margin side, FIVN has this group aggregate beat with a strong - and still increasing - margin. So in all, a qualitative assessment of FIVN compared to Bucket C suggests to me that FIVN should (at least in the current environment) trade only slight below if not on par with this group. A subtraction of 1 - 4 turns in multiple for FIVN should reflect FIVN's valuation multiple compared to this group.

 

The comparisons between FIVN and each of the 3 buckets synthesized together points to my inferences that 1) FIVN is superior to Bucket A and therefore should trade above 10x multiple; 2) FIVN is qualitatively superior also to Bucket B and therefore should also trade higher than 14x; 3) FIVN is qualitatively slightly behind Bucket C though is well compensated by a stronger margin - therefore FIVN should trade on par if not slightly lower than 22x multiple by perhaps 1-4x discount. These derivations point to a FIVN multiple of 18x to 21x - which corresponds to what FIVN fetched prior to the the deal with Zoom and within the trading estimated price range of $195/sh to $214/sh.

 

Lastly, let's arrive at what FIVN could be worth based on 2024/2025 multiples discounted back to today. With high growth stocks like FIVN, it's difficult to . The difficult of projecting future sales target for high growth stocks makes it inherently that much more difficult to project into the future even a year or two let alone 5 to 10 years, making DCF based on future cash flow / terminal growth rates almost impossible. In an attempt to circumvent this projection difficulty as much we can, we will only project 1 figure - topline sales CAGR from now to 2025, and then apply a terminal multiple to 2025 revenue.

 

FIVN has been growing at high 20%s and recently achieved 2020 revenue growth of 34% on the backs of gaining much lauded operational momentum that's expected to carry into the upcoming years. Even if we assume that there is a slow down, with industry projected to grow at 21% and FIVN being an attractive market leader, it's reasonable to see FIVN CAGR of 25% from 2021 to 2025. Applying these figure to forward sales forecast, we arrive at 2025 sales of $1,408 (below current FIVN consensus estimate of $1.67 billion). If we apply a 12.5x forward multiple (which to conservatively account for FIVN's slower growth prospects after 2025) to this figure, we arrive at a 2014 EV of $17.6 billion, which equates to a share price of $191/sh discounted back to 2021.

 

A sensitivity table also shows a price range of $171/sh to $209/sh.

 

Admittedly, the upsides derived from the valuation methods above are quite limited... However, I think this could be still a good idea since the key catalyst should realize value within the next month or two - if not by the end of next week. FIVN shareholder vote for the Zoom deal is scheduled for Sep 30, 2021. Current Zoom consideration is $160/sh, so Zoom has to bump here or adjourn the meeting. I think it's likely that by the end of this week that Zoom will revise the bid or at least announce that it would negotiate for a new deal. This should drive up FIVN, which has been trading in somewhat of a limbo state, being pulled higher by standalone fundamentals but weighed down lower by Zoom's now discounted bid for the company.

 

Secondly, if the deal does break, FIVN should also trade higher to catch up with how peers have traded. Sell-side analysts have also withheld from re-rating the stock after a good Q2/21 because the company was already in a deal with Zoom. A break would allow sell-sides to update their views on FIVN, which should be positive for the company.

 

In any event, the name should trade higher on a deal or without a deal by the end of next week. If Zoom does bump its bid by next week or after a lengthier discussion, FIVN should also trade higher (or at least now lower).

 

Negative re-rating on the entire SaaS sector. I think it's extremely difficult to project and justify the projection of high growth companies like Zoom, or Five9 more than a few years out. These inherent difficulties makes NPV valuation and absolutely DCF methodologies impracticable. Therefore, valuations are tethered to that of peers and the sector as a whole, as it's hard to argue for the validity of 20 years DCF on FIVN, but much easier to point to FIVN's comps and identify that it's trading at a discount/premium to relevant names. If the entire sector over the next week/month see a decline and everything trades at a lower multiple, FIVN would stand on infirm grounds arguing for a higher bid because Zoom could essentially rebuttal with the argument that FIVN would be trading lower anyways - like comps - if it were a standalone company.

 

Complexity with the merger with Zoom. There are still unknowns at this point with the FIVN/ZM merger. New unforeseen developments emerge next week that could spook the market. If a revised merger is announced with peculiar conditions (such as lengthier regulatory reviews with DOJ, or Zoom consideration collars that puts more uncertainty on FIVN's final considerations), FIVN and Zoom could react negatively, out of trading/technical reasons, related to event-driven / merger arb concerns, neglecting of any FIVN fundamentals.

 

The present opportunity in FIVN exists only because it's in a deal to be acquired by Zoom shares and Zoom subsequently cratered, dragging down FIVN with it. FIVN is now in a bit of a twilight zone as it is weighed down by the uncertain and discounted Zoom bid but also pulled upwards by its own positive fundamentals. I'd realistically peg FIVN's fair value in a range of $150/sh to $220/sh. The stock last traded as high as $210/sh last then 2 months ago. A higher resolution fair value range for FIVN is between $180-$190/sh to $210/sh, putting FIVN currently in the undervalued range. Though this upside is small, I'd point out that the downside is also quite limited. Fundamentally, FIVN is indeed a good company that's riding on a consistently and unfadingly positive operating momentum. The company also said recently that it is confident that profit margin will increase from 65% to 70% in the upcoming years because of its ongoing investments in public cloud, so the company should also see boosts in operating margin in addition to strong topline growth. All of these factors points to a company on the rise. Valuation realization is quick here. Zoom has to the end of September 30, 2021 to either come up with a revised bid for FIVN or adjourn the vote on the deal. Either event should be positive for FIVN. If the deal breaks, FIVN should trade higher given that peers traded 10-20% higher since the FIVN/ZM was announced. Sell-side estimates for FIVN has been stale for 2 month since the company's been taken out, if the deal breaks, newly revised sell-side views should incorporate FIVN's great Q2/21 results, re-rating FIVN for the better.   

Admittedly, the upsides derived from the valuation methods above are quite limited... However, I think this could be still a good idea since the key catalyst should realize value within the next month or two - if not by the end of next week. FIVN shareholder vote for the Zoom deal is scheduled for Sep 30, 2021. Current Zoom consideration is $160/sh, so Zoom has to bump here or adjourn the meeting. I think it's likely that by the end of this week that Zoom will revise the bid or at least announce that it would negotiate for a new deal. This should drive up FIVN, which has been trading in somewhat of a limbo state, being pulled higher by standalone fundamentals but weighed down lower by Zoom's now discounted bid for the company.

 

Secondly, if the deal does break, FIVN should also trade higher to catch up with how peers have traded. Sell-side analysts have also withheld from re-rating the stock after a good Q2/21 because the company was already in a deal with Zoom. A break would allow sell-sides to update their views on FIVN, which should be positive for the company.

 

In any event, the name should trade higher on a deal or without a deal by the end of next week. If Zoom does bump its bid by next week or after a lengthier discussion, FIVN should also trade higher (or at least now lower).