UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2023
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
(State or Other Jurisdiction of Incorporation or Organization)
94-3394123
(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:
Trading Symbol(s)
FIVN
Name of each exchange on which registered
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Title of each class
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ☒ No: ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ☐ No: ☒
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 and post 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated filer
☒
☐ (Do not check if a smaller reporting Company)
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.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive- based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒
The aggregate market value of registrant’s common stock held by non-affiliates of the registrant based upon the closing sale price on
the NASDAQ Global Market on June 30, 2023, the last business day of the Registrant’s most recently completed second fiscal quarter, was
approximately $4,341.7 million. Shares held by each executive officer, director and their affiliated holders and by each other person (if any)
who owns 10% of the outstanding common stock or more have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 16, 2024, there were 73,326,608 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.
Portions of the registrant’s definitive Proxy Statement for the 2024 Annual Stockholders’ Meeting, which the registrant expects to file
with the Securities and Exchange Commission within 120 days of December 31, 2023, are incorporated by reference into Part III (Items 10,
11,12, 13 and 14) of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
FIVE9, INC.
FORM 10-K
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
ITEM 1. Business
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 1C. Cybersecurity
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Mine Safety Disclosures
PART I
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Key Operating and Financial Performance Metrics
Key Components of Our Results of Operations
Results of Operations For the Years Ended December 31, 2023 and 2022
Liquidity and Capital Resources
Contractual and Other Obligations
Critical Accounting Policies and Estimates
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
ITEM 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
PART III
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accountant Fees and Services
ITEM 15. Exhibits and Financial Statement Schedules
ITEM 16. Form 10–K Summary
Signatures
PART IV
2
4
15
48
48
50
50
50
51
52
52
53
54
56
58
60
62
63
64
66
107
107
108
108
109
109
109
109
109
110
112
113
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 future
events and our financial 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, including those set forth under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report. 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 set forth under the caption “Risk Factors” and elsewhere in this
report, 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;
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;
2
•
•
•
•
•
•
•
•
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 this report, including under the section titled “Risk Factors.” 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.
3
PART I
ITEM 1. Business
Overview
Five9 is a pioneer and leading provider of intelligent cloud software for contact centers. We were “born in the
cloud,” and since our inception, we have exclusively focused on delivering our platform in the cloud and are
disrupting a significantly large market by replacing legacy on-premise contact center systems. Contact centers are
vital hubs of interaction between organizations and their customers and, therefore, are essential to delivering
successful customer service, sales and marketing strategies. Our mission is to empower organizations to transform
their contact centers into customer engagement centers of excellence, while improving business agility and
significantly lowering the cost and complexity of their contact center operations. Our purpose-built, reliable,
scalable and secure Virtual Contact Center, or VCC, cloud platform delivers a comprehensive suite of easy-to-use
applications that enable the breadth of contact center-related customer service, sales and marketing functions. We
have become an established leader in the cloud contact center market with more than 3,000 clients. We believe our
ability to combine software and telephony into a single unified platform that is delivered in the cloud creates a
significant advantage.
We believe there are three key industry trends driving growth in the cloud contact center market.
First is the rapid increase in adoption of cloud contact center software solutions as a result of several distinct
factors. The increasing adoption of cloud computing, especially within customer relationship management, or CRM,
is creating strong demand for integrated cloud contact center software solutions. In addition, cloud contact center
software solutions now offer the functionality required by large, complex enterprise contact centers. Furthermore,
we believe organizations typically refresh their on-premise contact center systems every eight to 10 years, which
provides an opportunity for cloud solutions to replace legacy on-premise contact center systems when these
replacement decisions arise. On-premise systems require large up-front investments, long deployment cycles, and
are burdensome to maintain. These systems are also often inflexible, complex, and require significant duplication of
effort and integration across multiple sites. In addition, commencing during the COVID-19 pandemic, agents
increasingly work remotely, which presents a challenge to on-premise based systems that, by design, are focused on
a particular physical location. This creates substantial challenges for clients with on-premise contact center systems.
As a result, cloud contact center software solutions are continuing to replace legacy on-premise contact center
systems.
Second is digital transformation. Consumers have the ability to easily and quickly switch brands after
experiencing poor customer service. Therefore, it is more critical than ever to provide the tools and technologies to
meet consumer demands for a seamless experience across their engagement channels of choice. Cloud contact center
software solutions provide organizations with the agility to adapt to a rapidly evolving environment and innovative
functionalities to reimagine the way they engage with customers.
Third is advancements in artificial intelligence, or AI, which enable improved customer experience,
significant operational efficiencies and business insights. The recent advances in Generative AI, including Large
Language Models, or LLMs, enable new capabilities in contact centers that were not possible in prior generations.
Our AI Summaries feature uses Generative AI to automatically summarize a call at the end, reducing after-call work
time. Natural language voice and chat bots, using Generative AI, speech recognition, intent detection, and text-to-
speech technologies quickly and effectively handle mundane contact center tasks, allowing agents to focus on more
complex issues. Generative AI technologies are also used in our AI Insights product, which gives customers an
understanding of reasons for customer calls, customer sentiment, and call resolution status, with little up-front
configuration. AI technologies generally require cloud deployment and, therefore, provide additional incentives for
customers to move off their legacy on-premise solutions.
Our solution, comprised of our VCC cloud platform with native AI and automation capabilities, including
Interactive Virtual Agent, or IVA, Agent Assist, Workflow Automation, or WFA, Workforce Engagement
Management, or WEM, AI Insights and AI Summaries, allows simultaneous management and optimization of
customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through
our application programming interfaces, or APIs. Our VCC cloud platform matches each customer interaction with
an appropriate agent resource and delivers relevant customer data to the agent in real-time through integrations with
adjacent enterprise applications, such as CRM software, to optimize the customer experience and improve agent
productivity. Our solution ensures our clients always have the latest version of our software. Delivered on-demand,
our solution enables our clients to quickly deploy agent seats in any geographic location with only a computer,
4
headset and broadband internet connection, and rapidly adjust the number of contact center agent seats in response
to changing business requirements. Unlike legacy on-premise contact center systems, our solution requires limited
up-front investment, can be rapidly deployed and is maintained by us in the cloud.
Our sales model consists of a field sales team that sells our solution into larger opportunities and a telesales
team that sells our solution into smaller opportunities. We have developed a proven, high velocity, metrics-driven
sales and marketing strategy, designed to effectively identify, qualify and close sales opportunities. To complement
this go-to-market strategy, we have developed a strategically-built ecosystem of technology alliances, solution
providers and system integrator partners, which also provide sales leads, and independent software vendors to help
increase awareness of our solution in the market and drive additional sales opportunities with new and existing
clients. We have also established, and are continuing to increase, our network of technology solution distributors
who provide sales leads and resellers that integrate our solution into their service offerings to new clients. Our
partner ecosystem has helped us access new routes to market and increase our penetration in domestic and
international markets.
We provide our solution through a software-as-a-service, or SaaS, business model with recurring revenue
made up of subscription revenue, based primarily on the number of agent seats, and usage, based on minutes, as well
as the specific functionalities and applications our clients deploy such as virtual agents.
We have achieved significant growth in recent periods. For the years ended December 31, 2023, 2022 and
2021, our revenue was $910.5 million, $778.8 million and $609.6 million, respectively, representing year-over-year
growth of 17% and 28%, respectively. We incurred net losses of $81.8 million, $94.7 million and $53.0 million for
the years ended December 31, 2023, 2022 and 2021, respectively, primarily as a result of increased investment in
our growth, along with higher stock-based compensation. As of December 31, 2023, 2022 and 2021, our total assets
were $1,494.6 million, $1,244.5 million and $1,192.9 million, respectively. Our recurring revenue model combined
with our Annual Dollar-Based Retention Rate, which was 110% as of December 31, 2023, have enhanced our ability
to forecast our financial performance and plan future investments. For a description of how our Annual Dollar-
Based Retention Rate is calculated, please refer to ITEM 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II of this Annual Report on Form 10-K.
We operate in a single reportable segment. Please refer to the geographical information for each of the last
three years in Note 11 of the notes to our consolidated financial statements. Please refer to the discussion of risks
related to our foreign operations in the section entitled “ITEM 1A. Risk Factors.”
Our Solution
We deliver a comprehensive, end-to-end cloud software solution for contact centers. Our solution is designed
to enable our customers to increase and improve the efficiency of their operations, increase revenue opportunities
and business agility, and provide insights into the behaviors of their workforce and customers as it relates to
customer experience. Our platform facilitates this through key capabilities such as interaction routing and
prioritization across channels, automation and integration of back and front end systems and the ability to leverage
the power of AI through IVA and more. Our solution also empowers agents and supervisors through WEM.
Organizations of a broad variety of sizes use our solution to improve customer service and create customer loyalty.
These capabilities are offered across a wide variety of engagement channels from chat and SMS to e-mail and voice.
Consumers are able to engage using their channel of choice and clients are able to facilitate fluid experiences that
drive digital transformation.
Our agent interface is an intuitive modern browser-based design that provides easy visualization of customer
profiles, context and cross-channel history. Our solution is built on a modern SaaS architecture, leveraging both our
own global data centers and public cloud deployments in a scalable, secure, and redundant manner. Our VCC
platform is based on a modern micro services-based open enterprise architecture built with representational state
transfer, or REST, APIs and software development kits, or SDKs, that enable customers, partners and developers to
bridge any operational gaps within their unique systems. AI is an embedded part of our platform. We provide high
quality inbound and outbound voice services leveraging our global network infrastructure, key strategic carrier
partnerships, complex real time call routing, and wide range of customer connectivity options for secure, resilient
interconnectivity to our network. Our complete end-to-end capabilities include Computer-Telephony Integration, or
CTI, IVA, Interactive Voice Response, or IVR, WFA, Agent Assist, AI Insights, AI Summaries, Automatic Call/
Contact Distribution, or ACD, with skills-based routing, reporting, dashboards, agent and supervisor desktops,
outbound dialer, pre-built third-party integrations, quality management, speech and desktop analytics, customer
surveys and workforce management.
5
Our solution provides the following advantages:
• Rapid implementation, seamless updates and pre-built integrations. Our solution is designed to be
deployed quickly and seamlessly with minimal disruption to a client’s operations. The pre-built integrations
with leading CRM and other enterprise applications reduce the complexity and burden of integrating with
the client’s business applications. Our solution is designed to be seamlessly updated so that clients are
always operating on the latest version of the software, while maintaining their existing configurations,
ensuring minimal disruption to the client’s contact center operations.
• Highly flexible platform. Our solution provides easy administration, configuration and role-based
functionalities for agents, supervisors and administrators, enabling the rapid adjustment of contact center
resources to meet a changing mix of contact channels and peaks-and-troughs in contact center volumes.
•
•
Scalable, secure and reliable multi-tenant architecture. Our solution provides organizations of all sizes
with the robust contact center functionality, scalability, flexibility and security required in the most
sophisticated and distributed environments.
Our solution is designed to provide the following key benefits to clients:
Improved customer experience. Our intelligent contact routing and self-service IVA and IVR capabilities,
pre-built CRM and other integrations, and multichannel engagement ensure that customers receive an
omnichannel experience. Each new contact is quickly routed to an appropriate agent resource. Using the
rich contact history and additional context through integrations with CRM and other applications, agents
have immediate access to the most current, relevant and accurate information about the customer, resulting
in increased first contact resolutions and a more satisfying experience for the customer.
• Higher agent productivity. Our solution empowers agent productivity and effectiveness by allowing agents
to handle both inbound and outbound calls and interact with customers across multiple digital engagement
channels, including voice, chat, email, web, social media and mobile. Our solution gives agents the ability to
switch between media channels through an easy-to-use, unified interface that provides agents with all of the
relevant content and tools needed to complete the task at hand. Furthermore, our AI enabled automation
features are designed to enable agent efficiency and cost reductions, including through the utilization of
LLMs and natural language processing, or NLP.
• Enhanced end-to-end visibility. Our solution provides clients’ operations staff, quality team and leadership
with a complete view of contact center performance through a comprehensive set of historical reports, real-
time dashboards, and quality and performance management tools. Clients can also extract reporting data
from our solution for further analysis using a spreadsheet application or using the sophistication of an
enterprise business intelligence application. Our advanced reporting solution enables us to connect to
external data sources such as ACDs, WEM platforms, CRM solutions, and many more pre-built integrations.
This insight provides an organization-wide view of customer engagement performance and allows clients to
quickly address changing circumstances.
• Greater operational efficiency. Our solution provides contact center managers and supervisors with
significant visibility into their agents’ productivity and effectiveness and the performance of their inbound
queues and outbound campaigns. Our solution has robust intelligence and analytics capabilities to help
supervisors optimize operations and campaigns in real-time to drive increased efficiency. Our role-based
interfaces deliver specific functionality to both desktops and mobile devices to meet the unique needs of
agents, supervisors and administrators.
• Compelling value proposition. We provide a unified cloud-based software platform for contact center
operations, including software applications, technology infrastructure, maintenance, monitoring, storage,
security, client support and upgrades, which enables our clients to simplify their technology infrastructure
and streamline IT costs. We manage upgrades and deployments remotely, resulting in lower total cost of
operations relative to legacy on-premise contact center systems that often require in-house technical support
staff.
6
Our Competitive Strengths
We believe that our position as a leading provider of cloud contact center software results from several key
competitive strengths, including:
• Global Cloud-based, enterprise-grade platform and end-to-end application suite. We deliver a cloud-based
enterprise-grade platform and applications suite with multi-channel capabilities that allows our clients to
manage their entire contact center operation. Our highly scalable, secure and multi-tenant architecture
enables us to serve large multi-national enterprises with complex contact center requirements, as well as
smaller organizations, all from our platform comprised of globally distributed physical data centers and
public cloud deployments, all interconnected with a robust, redundant, private WAN and diverse
regionalized Internet connectivity. We have also commenced investments in a dedicated U.S.-based data
center deployment to support Federal Risk and Authorization Management Program, or FedRAMP,
customers.
• Rapid deployment and support of our comprehensive solution. Our high-touch engagement model for larger
implementations accelerates agent activation and targets desired business outcomes by leveraging a proven
lifecycle approach including detailed discovery, design, testing, training and optimization. Through the use
of tools and processes that have been refined over thousands of customers, we can also efficiently meet the
needs of our smaller clients. We offer flexibility and integrate with a number of leading CRM vendors,
including: Microsoft Corporation, or Microsoft, Oracle Corporation, or Oracle, Salesforce.com, Inc., or
Salesforce, ServiceNow, Inc., or ServiceNow, Zendesk, Inc., or Zendesk, and others. We also offer
integrations into UC partners such as Microsoft Teams, Nextiva, RingCentral, Zoom Video
Communications, or Zoom, and others. We combine these comprehensive integrations with out-of-the-box
application adapters that allow our customers to easily build workflow integrations without the need for
dedicated developers. Once operational, we offer a high touch premium support service where we assign a
technical account manager who has intimate knowledge of the customers’ operations so we can quickly
resolve issues and fine tune the solution. In addition, we assign customer success representatives to every
customer. These customer success representatives build deep relationships with our customers to help
maximize the value of our platform. As a result, our clients’ contact centers become fully operational faster
and they recognize time to value quicker than with legacy on-premise contact center systems.
• Reliable, secure, compliant and scalable platform. Our platform delivers what we believe is industry
leading reliability utilizing public and private cloud technology; cybersecurity using a defense-in-depth
approach; scalability to accommodate the requirements of larger clients; and legal and regulatory compliance
features designed to assist our clients in complying with applicable laws, regulations and industry standards.
• Proven, repeatable and scalable go-to-market model. We engage with our clients through a highly scalable
and metrics-driven sales and marketing organization that effectively identifies, qualifies and closes sales
opportunities. The deep domain expertise of our field sales team is instrumental in selling to larger
opportunities, and our highly efficient telesales model enables us to cost-effectively identify, qualify and
close a high volume of smaller opportunities. Our ecosystem of technology, system integrator and channel
partners increases awareness of our solution and helps generate new sales opportunities. We believe our go-
to-market model gives us an efficient and effective means of targeting organizations of all sizes.
• Established market presence and a large, diverse client base. We have a large, diverse client base of over
3,000 organizations across multiple industries. We believe our clients view us as a key strategic solution
provider. The performance, reliability, ease-of-use and comprehensive nature of our solution has resulted in
high client retention.
• Extensive partner ecosystem. We have cultivated a robust ecosystem of partners including a variety of
leading CRM software vendors such as Microsoft, Oracle, Salesforce, ServiceNow and Zendesk; WEM
vendors such as Calabrio, Inc., or Calabrio, and Verint Systems Inc., or Verint; unified communications
vendors such as Microsoft Teams, Nextiva, RingCentral and Zoom; system integrators such as Accenture
PLC, Deloitte Consulting LLP, IBM, Kyndryl, Inc., PwC LLP and Slalom Consulting, LLC; technology
solution distributors such as Avant, LLC, Intelysis and Telarus, value-added resellers such as British
Telecom, CDW Corporation, NWN Carousel, Presidio Networked Solutions Group, LLC, and Worldwide
Technologies; independent software vendors; and telephony providers. We believe this ecosystem has
enabled us to increase our brand awareness and enhance the functionality and value of our solution for our
clients.
7
• Focus on innovation and thought leadership. Since our inception, we have been an innovator of intelligent
cloud contact center software. Our investment in research and development has driven our growth and
enabled us to deliver a cloud contact center software solution with the features and functionality to power the
most complex contact centers. We strive to be a thought leader in our industry, identifying and developing
cloud capabilities to transform traditional contact center operations into customer engagement centers of
excellence. Contact centers are a rich source of the data that powers AI, from call detail records to full
recordings of calls and customer interactions. Recent advances in Generative AI enable us to deliver even
more innovation by integrating it deep into our VCC platform. We believe that AI, and Generative AI in
particular, will profoundly impact how businesses deliver services to their customers.
Clients
We have a large, diverse and global client base comprised of more than 3,000 organizations as of
December 31, 2023, with no single client representing more than 10% of our revenues in 2023, 2022 or 2021. Our
client base spans organizations of all sizes across multiple industries, including banking and financial services,
business process outsourcers, retail, healthcare, technology and education.
Sales and Marketing
Marketing. To build client awareness and adoption of our solution, our lead generation activities consist of a
mix of organic activities such as social, digital presence and search engine optimization, and paid for activations
such as search engine marketing, internet advertising, digital marketing campaigns, content syndication, trade
shows, industry events, co-marketing with strategic partners, account-based marketing, client referrals and other
promotional campaigns. In addition, our industry analyst, press and media outreach programs, and web site
marketing initiatives are designed to build brand awareness and preference for our solution. We offer online self-
service demos and instructional videos to help prospective clients learn about the features and functionality of our
cloud platform. We also offer proof of concept service packages and trial opportunities, which include return-on-
investment analyses conducted by third parties, to allow prospects to experience the quality and ease-of-use of our
cloud solution and quantify the potential benefits of our deployment model.
Direct Sales. Our sales model consists of a field sales team that sells our solution into larger opportunities
and a telesales team that sells our solution into smaller opportunities. Our field and telesales teams are also
responsible for selling to existing clients that may renew their subscriptions, increase the number of agents using our
cloud solution, add new applications from our solution and expand the deployment of our solution across their
contact centers.
Indirect Sales. We have cultivated strong partner relationships with technology solution distributors, global
system integrators and resellers to drive sales of our solution. We have established, and continue to increase, our
network of technology solution distributors, which provide sales leads, global system integrators, which also provide
sales leads and help integrate our solution with our client systems, and resellers, which sell our solution to new
clients. This network has helped us attract additional clients, and we continue to empower these partnerships to
participate in the delivery of our solution and extend the total customer value gained from unique integrated value
propositions.
Professional Services
We offer global comprehensive professional services to our clients to assist in the successful implementation
and optimization of our solution. Our professional services include application configuration, system integration,
and education and training. Our clients may use our professional services team for implementing our solution or, in
many cases, they may choose to perform these services themselves or engage with one of our certified
implementation partners to perform these services. Our cloud solution allows us to eliminate the need for lengthy
and complex technology integrations, such as deploying equipment or maintaining hardware infrastructure for
individual clients. As a result, we are typically able to deploy and optimize our solution in significantly less time
than required for deployments of legacy on-premise contact center systems.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development and
our ability to improve the functionality of, and add new features to, our VCC cloud platform. Our core research and
development center is based in our San Ramon, California headquarters, with additional engineers located in
Australia and Portugal, which allows us to benefit from relatively low-cost and highly skilled software developers.
In January 2023, we opened our new European Research and Development Hub in Porto, Portugal, which serves as
8
our European engineering headquarters. Our engineering team has deep software and telecommunications skills, and
works closely with our sales team to identify our clients’ product requirements. In addition, continuous interactions
with our partners enable our engineers to enhance the usability and performance of our platform and its integration
with best-in-class CRM and other business applications and telephony technologies.
Technology and Operations
Our highly scalable and flexible cloud platform is the result of our extensive research, development, client
engagement and operational experience. Our platform is comprised of in-house developed intellectual property,
open source products and commercially available hardware and software. Our platform is designed to be redundant.
We believe that all components can be upgraded, expanded or replaced with minimal or no interruption in service.
We currently deliver our services globally from third-party co-location data center facilities located in the
United States, the United Kingdom, Europe and Australia and from public cloud locations in Canada, the United
Kingdom and Europe. We also host some of our voice services on the public cloud in Europe, Asia, South America
and Australia as well as additional core services in Europe. Our infrastructure, including our third-party co-location
facilities, is designed to support real-time critical telecommunications, applications and operational support systems.
Our infrastructure is built with redundant, fault-tolerant components divided into distinct security zones forming
protective layers for our applications and customer data.
We have designed and maintain an operations, capacity and security program to monitor and maintain our
platform, ensure efficient utilization of our platform capacity and protect against security threats or data breaches.
Our global operations team monitors our data centers for potential performance issues, unauthorized attempts to
access secure data or applications and the overall integrity of the platform.
Competition
The market for contact center software is fragmented, highly competitive and evolving rapidly in response to
shifting consumer behavior, especially the transition to mobile devices and use of different channels of engagement,
such as social media. The proliferation of each is driving change in contact center technology, as customers expect
companies to give them the option of seamless communication across all channels without losing the overall context
of customer interactions according to their preferences and needs. Combined with the disruptive nature of the cloud
in the contact center, this has resulted in competitors who come from different market and product heritages, and
who vary in size, breadth and scope of products and services offered. We currently compete with large legacy
vendors that offer on-premise contact center systems, such as Avaya Inc., or Avaya, and Cisco Systems, Inc., or
Cisco. These legacy telephony vendors are increasingly supplementing their traditional on-premise contact center
systems with competing cloud offerings, through a combination of acquisitions, partnerships and in-house
development. Additionally, we compete with vendors that historically provided other contact center services and
technologies and expanded to offer cloud contact center software such as Genesys Telecommunications
Laboratories, Inc., or Genesys, and NICE Ltd., or NICE. We also face competition from many smaller contact center
service providers such as Content Guru and Talkdesk, as well as vendors offering both unified communications and
contact center solutions such as Zoom. In addition, Amazon.com, Inc., or Amazon, Twilio Inc., or Twilio, and most
recently, Microsoft, have introduced solutions aimed at companies who wish to build their own contact centers and/
or contact center components with developers. In addition, CRM vendors are increasingly offering features and
functionality that were traditionally provided by contact center service providers. CRM and customer experience
vendors also continue to partner with contact center service providers to provide integrated solutions and may, in the
future, acquire competitive contact center service providers. These factors could cause CRM vendors to reduce or
terminate their partnerships with us, and could result in increased competition. Because CRM integration and
partnerships are critical to the success of our solution, these factors could harm our revenue and results of
operations.
Our actual and potential competitors may enjoy competitive advantages over us, including greater name
recognition, longer operating histories, broader product offerings, larger marketing and product development
budgets, as well as greater financial and technical resources. With the introduction of new technologies and market
entrants, we expect competition to continue to intensify in the future. Our recent, and any future, acquisitions will
subject us to new competitors and cause us to face additional and different competition in the markets served by
these businesses. We believe the principal competitive factors in our market include:
•
breadth and depth of solution features;
9
•
•
•
•
•
•
•
•
•
•
•
•
•
•
reliability, scalability and quality of the platform;
ease and speed of deployment;
ease of application administration and use;
level of client satisfaction;
domain expertise in contact center operations;
integration with third-party applications;
ability to quickly adapt and upgrade to new and evolving technologies, including AI;
pricing;
ability to quickly adjust agent seats based on business requirements;
breadth and domain expertise of the sales, marketing and support organization;
ability to keep pace with client requirements;
extent and efficiency of professional services;
ability to offer multiple channels of engagement; and
size and financial stability.
We believe we currently compete effectively with respect to each of the factors identified above.
Intellectual Property
We rely on a combination of patent, copyright, and trade secret laws in the U.S. and other jurisdictions, as
well as license agreements, confidentiality agreements and other contractual protections, to protect our proprietary
technology. We also rely on a number of registered and unregistered trademarks to protect our brand. In addition, we
require our employees and independent contractors involved in development of intellectual property to enter into
agreements acknowledging that all works, or other intellectual property generated or conceived by them on our
behalf, are our property, and assigning to us any rights, including intellectual property rights, that they may claim or
otherwise have in those works or property, to the extent allowable under applicable law.
As of December 31, 2023, our intellectual property portfolio included three registered U.S. trademarks, two
pending U.S. trademark applications, 16 issued U.S. patents, one pending U.S. patent application and one registered
U.S. copyright. As of December 31, 2023, outside the U.S. we also had 10 trademark registrations, five issued
patents and three pending international Patent Cooperation Treaty, or PCT, patent applications. The expiration dates
of our issued patents range from 2030 to 2041. In general, our patents and patent applications apply to aspects of our
VCC cloud platform.
We are also a party to various license agreements with third parties that typically grant us the right to use
certain third-party technology in conjunction with our solution. We expect that software and other applications in
our industry may be subject to third-party infringement claims as the number of competitors grows and the
functionality of applications in different industry segments overlaps. Any of these third parties might make a claim
of infringement against us at any time.
Seasonality
We believe that there are seasonal factors that cause our revenues in the first half of a year to be lower than
our revenues in the second half of the year. During 2023, 2022 and 2021, 52%, 52%, and 54% of our total revenues
were generated in the second half of each year. We believe this is due to increased activities in retail, healthcare and
education in the second half of each year.
Employees and Human Capital Resources
Our employees and the culture we have established are the key to our success. As of December 31, 2023, we
had 2,684 full-time employees. 46% of our employees are in various cost of revenue functions, 19% in research and
development, 24% in sales and marketing and 11% in general and administrative. Our employee turnover for the last
three years has averaged 8.8%.
The key human capital measures and objectives that we focus on in managing our business are maintaining
our company values, promoting our diversity and inclusion, our total rewards philosophy, our talent development,
and our employees’ safety and wellness.
10
Five9 Values - Bringing Passion and Purpose
At Five9 we are focused on delivering success for our customers, partners and employees. Living our values
everyday results in a unique and powerful culture that we call “winning culture” in which every member on our
team is passionately committed to achieve collective success. This powerful team-first culture enables us to
overcome obstacles and win year after year, while enjoying the journey together.
Our values are woven throughout the entire employee lifecycle and used in the interview process to ensure we
hire candidates that have personal values that align with ours. Our values are instrumental in the semi-annual
employee performance self-reflection cycle, and we request that employees share how they have lived our values. In
addition, we regularly celebrate employees that live our values through recognition and rewards. We introduce new
employees to our values during new hire orientation and our values are visible in the offer package as well as
company employee resource pages. Our CEO also weaves these values into quarterly company meetings and
regular smaller meetings, where one of the values may be highlighted through a story and employee example.
We regularly collect feedback to better understand and improve the employee experience and identify
opportunities to continually strengthen our culture. 85% of our employees participated in our most recent employee
survey in 2023. Last year we maintained the highest level of employee engagement according to our vendor, Culture
Amp, as noted in its Engagement and Inclusion benchmark (top quartile) based upon responses from approximately
2,000 companies. Employees’ highest rated areas were the following: employee productivity (91%) and engagement
(90%).
Diversity & Inclusion at Five9
At Five9, we celebrate diversity and foster an inclusive environment by creating a culture where our
employees can be their authentic selves. We integrate our core values of honesty and respect and lead with
transparency and inclusivity. We are committed to building belonging in our workplace and society at large. Our
goal is to empower our employees to have a voice that’s heard and foster a community where they feel they belong.
Our recruiting programs support and encourage diversity. We recruit from various diversity organizations, including
historically black colleges and universities, the Professional Diversity Network, Military 2 Career, Ability Careers,
Asian Career Network, Women’s Career Channel, Black Career Network, LGBTQ+ Career Network, and Ihispano.
In addition, we have several Employee Resource Groups, or ERGs, that are committed to diversity and creating and
fostering a culture of inclusion. Our ERGs include Women In Tech, Blatinx, Veterans, Five9 Faith, APIDA and
Pride @ Five9. We have implemented an annual ERG leadership summit where our ERG leader’s share ideas and
the HR People team shares current Diversity and Inclusion initiatives for feedback and to foster partnership.
Women represented 31% of our worldwide employees and racial and ethnic minorities represented 31% of
our U.S. employees as of December 31, 2023. Women and ethnic minorities each represented 27% and 9%,
respectively, of our executive leadership team and 22% and 11%, respectively, of our Board of Directors, or Board,
as of December 31, 2023.
Total Rewards Philosophy
11
Our total rewards philosophy is a comprehensive approach designed to attract, engage, and retain the best
talent in our industry by providing a total rewards package that is at or above market rates and, in cases where
business demands are unique, we may lead the competitive market. This philosophy is rooted in our understanding
that our employees are the cornerstone of our success and that their well-being and satisfaction are paramount to our
sustained growth and market leadership.
Central to our philosophy is the principle of equity and inclusivity. We strive to ensure that our rewards
system is fair and transparent. This approach fosters a sense of belonging and commitment among our workforce,
driving engagement and productivity.
Our total rewards philosophy reflects our commitment to creating a supportive and empowering environment
for our employees, where they can thrive professionally and personally. By investing in our people in this way, we
not only enhance individual well-being but also drive organizational performance and stakeholder value, securing
our position as a leader in our industry.
Our total rewards system encompasses not just competitive cash compensation, but a holistic package that
addresses the diverse needs of our workforce. This includes healthcare benefits, mental health benefits to employees
and their dependents, financial and physical well-being programs, parental leave, fertility reimbursement, retirement
plans, performance bonuses, equity awards, and work-life balance initiatives.
Our total rewards strategy is dynamic and responsive to the changing marketplace and workforce
demographics. We regularly benchmark our offerings against prevailing industry practices to ensure we remain
competitive and appealing as an employer. Additionally, we embrace a culture of continuous feedback, allowing us
to adapt and refine our rewards in alignment with employee needs and business objectives.
Talent Development
Talent development is a pivotal element of our organizational strategy and is essential for maintaining our
competitive advantage in a dynamic global market. We are deeply committed to the growth of our employees, as
evidenced by our multifaceted talent development programs.
Our Leadership Principles guide the cultivation of a forward-thinking and agile leadership pipeline at all
levels within our organization. Leadership Principles inform our Talent Acquisition, Learning and Development and
Performance Management practices to ensure we identify, grow and develop the right leadership skills for the future.
Our talent review process focuses on identifying employees that are high potential and high performing.
We believe learning happens at every part of an employee’s tenure at our company. We continuously
strengthen our onboarding practices to ensure employees have the skillset to be successful in their jobs. To support
ongoing in-role development, we have semi-annual development conversations between employees and managers to
ensure employees have individualized career discussions that align both with organizational goals and the
employee’s professional development. We also make learning pathways available through a platform where all
employees can take courses to grow their skillsets.
By investing in our Leadership Principles, employee onboarding, ongoing development, and talent reviews,
we create a dynamic and resilient workforce, poised to drive innovation and growth.
Workplace Practices and Policies
We are committed to providing a workplace free of harassment or discrimination based on race, color,
religion, sex, sexual orientation, gender identity, national origin, disability, veteran status, caste or other legally
protected characteristic. We are an equal opportunity employer committed to inclusion and diversity.
Environmental Sustainability
We are committed to reducing workplace-related resource consumption through our site selection, facilities
design and energy procurement practices through our landlords, to ensure our corporate responsibility goals are
achieved. We participate in building sustainability by occupying LEED certified and 5-Star NABERS Energy Rated
multi-tenant buildings. Our corporate headquarters offers a transportation program to cut down on emissions. We
have made strides in reducing energy consumption by upgrading our lighting system and installing motion sensors
for lighting and convenience electrical outlets. To reduce waste, we use source compostable/recyclable kitchen
products, centralized waste collection with an emphasis on recycling, established an E-waste program, implemented
software tools to minimize printing waste and reduce equipment and toner purchases, and expanded our battery
recycling program to include work-related and personal battery recycling.
12
We are also committed to complying with California’s climate legislation, SB-253 and SB-261. This
commitment involves the reporting to Scope 1, 2, and 3 emissions within the mandated reporting period.
Regulatory
The following summarizes important, but not all, federal, state and foreign regulations that could impact our
operations. Federal and state regulations are subject to judicial review, administrative revision and statutory changes
through legislation that could materially affect how we and others in this industry operate.
The Telecommunications Act of 1996 vests the Federal Communications Commission, or FCC, with
jurisdiction over interstate telecommunications services, while preserving state and local jurisdiction over many
aspects of these services. As a result, telecommunications services are regulated at both the federal and state levels
in the United States.
We are classified as a telecommunications service provider for federal regulatory purposes. Since our
business is regulated by the FCC, we are subject to existing or potential FCC regulations relating to privacy,
disability access, Enhanced 911 access, access to and porting of numbers, automatic number dialing, contributions to
the federal Universal Service Fund and related funds, or USF, and other requirements. If we do not comply with
FCC rules and regulations, we could be subject to FCC enforcement actions, fines and possibly restrictions on our
ability to operate or offer certain of our services. Any enforcement action by the FCC, which may be a public
process, would hurt our reputation in the industry, possibly impair our ability to sell our services to clients and could
harm our business and results of operations. The Federal Trade Commission, or FTC, also has jurisdiction over some
of our business practices, including advertising, trade practices, privacy and telemarketing. If we do not comply with
FTC rules and regulations, we could be subject to an FTC enforcement action, fines or restrictions on our business
practices.
We must comply with numerous federal regulations, including:
• Telephone Consumer Protection Act of 1991, or TCPA, which regulates the use of automatic dialing
•
equipment and pre-recorded messages to contact consumers, and the Telemarketing Sales Rule, which has
similar obligations as to telemarketing activities;
the TRACED Act and corresponding regulations from the FCC, which require carriers to authenticate
incoming calls using the STIR/SHAKEN caller ID framework and correspondingly compels providers of
telecommunications services to implement capabilities to certify as authentic the traffic they provide to those
carriers and to block transmission of certain calls;
• CALEA, which requires telecommunications service providers to assist law enforcement in undertaking
•
•
•
•
electronic surveillance;
enhanced 911 rules, KARI’s Law and RAY BAUM’s Act, which, in certain circumstances, require
telecommunications service providers to ensure their users can directly dial 911 emergency services and, if
technically feasible, automatically convey dispatchable location information with the call;
contributions to the USF, which requires that we pay a percentage of our revenues resulting from the
provision of interstate and some international telecommunications services to support certain federal
programs;
payment of annual FCC regulatory fees based on our interstate and international revenues;
rules pertaining to access to our services by people with disabilities and contributions to the
Telecommunications Relay Services fund;
• FCC rules regarding Customer Proprietary Network Information, or CPNI, which require that we limit
disclosure of certain information received from customers as a result of a service provider/customer
relationship without customer approval, subject to certain exceptions;
• Federal Trade Commission Act and rules promulgated thereunder, which generally relate to avoiding unfair
and deceptive trade practices, our advertising, use and deployment of certain AI-based services, and privacy
practices; and
state privacy laws require compliance with privacy frameworks and include disclosure obligations to
consumers for whom we hold or process personal data including, but not limited to:
•
◦ California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act of
2020, or the CCPA, which took effect on January 1, 2023;
◦ Virginia Consumer Data Protection Act, or the VCDPA, which took effect on January 1, 2023;
13
◦ Colorado Privacy Act, or the CPA, which took effect on July 1, 2023;
◦ Connecticut Data Privacy Act, or CDPA, which took effect on July 1, 2023; and
◦ Utah Consumer Privacy Act, or the UCPA, which took effect on December 31, 2023.
In addition, we must make contributions and other payments on our usage-based fees to state and local
governmental entities. The tax and fee structure for communications services such as ours is complex, ambiguous
and subject to interpretation. If taxing and regulatory authorities enact new rules or regulations or expand their
interpretations of existing rules and regulations, we could incur additional liabilities. The amount that we are
required to pay under certain of these tax and regulatory structures also continues to increase as a percentage of our
telecommunications revenues. The collection of additional taxes, fees or surcharges in the future could increase our
prices or reduce our profit margins. Compliance with these regulations may also make us less competitive with those
competitors who are not subject to, or choose not to comply with, these regulations. See Note 10 of the notes to the
consolidated financial statements under ITEM 8 of this Form 10-K for a discussion of our potential liability related
to USF matters.
As we expand internationally, we will be subject to laws and regulations in the countries in which we offer
our services. Regulation of the solutions we provide outside the U.S. varies from country to country, is often
unclear, and may be more onerous than those imposed on our services in the U.S. For example, in the European
Union, the General Data Protection Regulation, or the GDPR, requires companies to meet new and extended
requirements regarding the processing of personal data. Non-compliance with the GDPR can trigger steep fines of
up to €20 million or 4% of total worldwide annual turnover, whichever is higher. In addition, among other
comprehensive privacy laws around the world, we are subject to the UK’s Data Protection Act, Canada’s Personal
Information Protection and Electronic Documents Act, or PIPEDA, and analogous provincial laws, and emerging
U.S. state privacy laws, which collectively impose similar data privacy and security obligations on our processing of
personal data. Our regulatory obligations in foreign jurisdictions could impact the use or cost of our solution in
international locations as data protection and privacy laws and regulations around the world continue to evolve, and
which may also address the use of certain types of AI-based systems and solutions within their scope.
Furthermore, we have defined and implemented a layered information governance program comprising a
defined framework of policies, operational processes and controls. Our framework was developed using
international, sector or "data type" specific standards including, but not limited to:
•
•
International Organization for Standardization - ISO 27001:2013 Information Security Management
Systems Standard;
Payment Card Industry Data Security Standard. PCI DSS 3.2;
• AICPA - System and Organization Controls SOC 2, Type 2 Security and Availability criteria;
• Health Insurance Portability and Accountability Act (HIPAA) that is designed to protect the privacy and
security of protected health information (PHI);
•
•
ISO 27017 - Information technology – Security techniques – Code of practice for information security
controls based on ISO/IEC 27002 for cloud services;
ISO 27018 - Information technology — Security techniques — Code of practice for protection of
personally identifiable information (PII) in public clouds acting as PII processors; and
• NIST 800-53 Rev 5 - Security and Privacy Controls for Information Systems and Organizations.
A key component of our framework is that it evolves based on the changing needs of our business, customer
and regulatory framework requirements. Additionally, our framework is subject to annual independent verification
audits performed by qualified and experienced external third parties who issue to us SOC 2 Type 2, PCI AOC, and
HIPAA HiTech attestation reports, and who certify us to the ISO 27001:2013 Information Security Management
System standard.
The legislative and regulatory scheme, as well as the information governance programs, relevant to
telecommunications service providers and other solutions we provide will continue to evolve and can be expected to
change the competitive environment for these services. It is not possible to predict how such evolution and changes
will affect our business or our industry. If we do not comply with current or future rules or regulations that apply to
our business, we could be subject to substantial fines and penalties, we may have to restructure our service offerings,
14
exit certain markets, accept lower margins or raise the price of our services, any of which could harm our business
and results of operations. See “Risk Factors — Risks Related to Regulatory Matters” under ITEM 1A of this Form
10-K for more information.
Company Information
We were incorporated in Delaware in 2001. We operate in a single reportable segment. Our principal
executive office is located at 3001 Bishop Drive, Suite 350, San Ramon, CA 94583 and our telephone number is
(925) 201-2000. Our website address is www.five9.com. Our website and the information contained therein or
connected thereto shall not be deemed to be incorporated into this annual report on Form 10-K. We own or have
rights to trademarks or trade names that we use in connection with the operation of our business, including our
corporate names, logos and domain names. In addition, we own or have the rights to copyrights, trade secrets and
other proprietary rights that protect the content of our solution. Solely for convenience, some of the copyrights,
trademarks and trade names referred to in this annual report on Form 10-K are listed without ©, ® and ™ symbols,
but we own and will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks and
trade names.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and
information statements and amendments to reports are filed with, or furnished to, the United States Securities and
Exchange Commission, or SEC, pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act.
The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements and
other information regarding Five9 and other companies that file materials with the SEC electronically. Copies of our
reports on Form 10-K, Forms 10-Q and Forms 8-K, and amendments thereto, may be obtained, free of charge,
electronically through our internet website, http://investors.five9.com/sec.cfm as soon as reasonably practicable after
such material is filed electronically with, or furnished to, the SEC. The information on our website is not a part of, or
incorporated by reference into, this Annual Report on Form 10-K.
ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties. You should consider
carefully the risks and uncertainties described below, together with all of the other information in this report. If any
of the following risks or other risks actually occur, our business, financial condition, results of operations, and
future prospects could be materially harmed, and the price of our common stock could decline.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, financial condition,
results of operations, and future prospects.
•
•
•
•
•
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.
15
•
•
•
•
•
•
•
•
•
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.
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.
•
• We may not have sufficient cash to service our convertible senior notes and repay such notes, if required.
Risks Related to Our Financial Results
Our quarterly and annual results may fluctuate significantly, may not fully reflect the underlying performance of
our business and may result in decreases in the price of our common stock.
Our quarterly and annual results of operations, including our revenues, profitability and cash flow have varied,
and may vary significantly in the future, and period-to-period comparisons of our operating results may not be
meaningful. Accordingly, the results of any one quarter or period, or series of quarters or periods, should not be
relied upon as an indication of future performance. Our quarterly and annual financial results may fluctuate as a
result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the
underlying performance of our business. Fluctuation in quarterly and annual results may harm the value of our
common stock. Factors that may cause fluctuations in our quarterly and annual results include, without limitation:
16
• market acceptance of our solution, including new features and AI components that are added to our
solution;
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 expect;
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, or other
factors;
our ability to attract new clients and grow our business with existing clients;
client renewal rates;
client attrition rates;
network outages or security incidents, which may result in additional expenses or losses, legal or regulatory
actions, the loss of clients, the provision of client credits, and harm to our reputation;
our ability to make technological advancements, add more features to our solution, and integrate those
features within our client’s technology infrastructure;
our ability to adequately expand our sales and service team;
our ability to acquire and maintain strategic and client relationships;
the timing and success of new product and feature introductions by us or our competitors or any other
change in the competitive dynamics of our industry, including consolidation, partnership or collaboration
among competitors, clients or strategic partners;
our ability to successfully integrate companies, businesses and technology that we acquire and achieve a
positive return on our investment;
the amount and timing of costs and expenses related to the maintenance and expansion of our business,
operations and infrastructure;
seasonal factors that tend to cause our revenues in the first half of a year to be relatively lower than our
revenues in the second half of a year;
inaccessibility or failure of our cloud contact center software due to failures in the products or services
provided by third parties;
the amount and timing of costs and expenses related to our research and development efforts or in the
acquisition of technologies or businesses and potential future charges for impairment of goodwill from
acquired companies;
our ability to expand, and effectively utilize, our network of technology solution distributors, resellers and
systems integrators;
the timing of recognition of revenues under current and future GAAP;
changes in our pricing policies or those of our competitors;
increases or decreases in the costs to provide our solution or pricing changes upon any renewals of client
agreements;
the level of professional services and support we provide our clients;
the addition or loss of key clients, including through acquisitions or consolidations;
compliance with, or changes in, the current and future domestic and international regulatory environment;
the hiring, training and retention of key employees;
the outcome of litigation or other claims against us;
the ability to expand internationally, and to do so profitability;
our ability to obtain additional financing on acceptable terms if and when needed;
the timing of expenses related to any future acquisition transactions; and
advances and trends in new technologies and industry standards.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
17
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.
We generally recognize subscription revenue from clients monthly as services are delivered. As a result, the
vast majority of the subscription revenue we report in each quarter is derived from existing clients. Consequently, a
decline in new subscriptions in any single quarter will likely have only a small impact on our revenue results for that
quarter. However, the cumulative impact of such declines could negatively impact our business and results of
operations in future quarters. Accordingly, the effect of potential changes in our pricing policies or renewal rates,
and significant downturns in sales, number of agent seats, market acceptance and implementation of our solution,
within our installed base or from new clients, including as a result of the impact of macroeconomic deterioration,
continued inflation, increased interest rates, decreased economic output and fluctuations in currency exchange rates,
will typically not be reflected in our results of operations until future periods. For example, our installed base
business, which typically contributes approximately half of our annual revenue growth, continues to experience
macroeconomic headwinds. We also may be unable to adjust our cost structure to reflect the changes in revenue,
resulting in lower margins and earnings. In addition, our subscription model makes it difficult for us to rapidly
increase our revenue through additional sales in any period, as revenue from new clients will be recognized over
time as services are delivered. Moreover, many of our clients initially deploy our solution to support only a portion
of their contact center agents and, therefore, we may not generate significant revenue from these new clients at the
outset of our relationship, if at all. Any increase to our revenue and the value of these existing client relationships
will only be reflected in our results of operations as subscription revenue is recognized, and if and when these clients
increase the number of agent seats and the number of components of our solution they deploy over time.
Shifts over time or from quarter-to-quarter in the mix of sizes or types of organizations that purchase our
solution could affect our gross margins and operating results.
Our strategy is to sell our solution to both smaller and larger organizations. Our gross margins can vary
depending on numerous factors related to the implementation and use of our solution, including the features and
number of agent seats purchased by our clients, the increasing reliance on public cloud providers, and the level of
usage and professional services and support required by our clients. For example, our larger clients typically require
more professional services, and because our professional services offerings typically have lower margins, any
increase in sales of professional services could harm our gross margins and operating results. We also have lower
margins on our usage revenues. Sales to larger organizations may also entail longer sales cycles and more significant
selling efforts and expense. Selling to smaller clients may involve smaller contract sizes, fewer opportunities to sell
additional services, a higher likelihood of contract terminations, lower returns on sales and marketing expense, fewer
potential agent seats and greater credit risk and uncertainty. If the mix of organizations that purchase our solution
changes, our revenues and gross margins could decrease, and our operating results could be harmed.
We have a history of losses and we may be unable to achieve or sustain profitability.
We have incurred losses in each annual period since our inception in 2001. We incurred net losses of
$81.8 million, $94.7 million and $53.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.
As of December 31, 2023, we had an accumulated deficit of $404.9 million. These losses and our accumulated
deficit reflect the substantial investments we have made, and continue to make, to develop our solution and acquire
new clients, among other expenses. We expect the dollar amount of our costs and expenses to increase in the future
as revenue increases, although at a slower rate. We expect our losses to continue for the foreseeable future as we
continue to invest in sales and marketing and research and development and expand our business. In addition, as a
public company, we incur significant legal, accounting and other expenses. Our historical or recent growth in
revenues is not necessarily indicative of our future performance. Accordingly, there is no assurance that we will
achieve profitability in the future or that, if we do become profitable, we will sustain profitability.
Risks Related to Our Growth
Our historical growth may not be indicative of our future growth, and if we continue to grow rapidly, we may fail
to manage our growth effectively.
For the years ended December 31, 2023, 2022 and 2021, our revenues were $910.5 million, $778.8 million
and $609.6 million, respectively, representing year-over-year growth of 17% and 28%, respectively. In the future, as
our revenue increases, our annual revenue growth rate may decline. We believe our revenue growth will depend on a
number of factors, including our ability to:
18
•
compete with other vendors of cloud-based enterprise contact center systems, including recent market
entrants, and with providers of legacy on-premise systems;
•
increase our existing clients’ use of our solution, including additional and new features of our solution;
• maintain our existing clients and their level of subscriptions and related usage, and grow subscriptions
•
within our existing client base;
respond to 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,
or other factors;
• respond to general macro economic factors and industry and market conditions;
•
further develop our partner ecosystem;
•
•
•
strengthen and improve our solution through significant investments in research and development and the
introduction of new and enhanced features and functionality, such as our AI enabled automation features;
introduce our solution to new markets outside the United States and increase global awareness of our brand;
and
selectively pursue acquisitions that enhance our solution offerings.
If we are not successful in achieving these objectives, our ability to grow our revenue may be harmed. In
addition, we plan to continue to invest in future growth, including expending substantial financial and other
resources on:
•
•
•
•
•
sales and marketing, including a significant expansion of our sales and professional services organization;
our technology infrastructure, including systems architecture, management tools, scalability, availability,
performance and security, as well as disaster recovery measures;
solution development, including investments in our solution development team, the development of new
solutions and in the acquisition of companies and technologies to enhance our solution, as well as new
applications and features for our existing solution;
international expansion; and
general administration, including legal, regulatory compliance and accounting expenses.
Moreover, we continue to expand our headcount and operations. We grew from 1,549 employees as of
December 31, 2020, to 2,138 employees as of December 31, 2021, to 2,380 employees as of December 31, 2022,
and to 2,684 employees as of December 31, 2023. We anticipate that we will continue to expand our operations and
headcount in the near term and beyond in accordance with our overall strategy and taking into consideration
macroeconomic conditions. This growth has placed, and future growth will place, a significant strain on our
management, administrative, operational and financial resources, company culture and infrastructure. For example,
we have continued to expand our international operations, including the formation of new legal entities, which will
increase the complexity of our operations, administration and infrastructure. Our success will depend in part on our
ability to manage this growth effectively while retaining personnel. To manage the expected growth of our
operations and personnel, we will need to continue to improve our operational, financial and management controls
and our reporting systems and procedures. Failure to effectively manage growth could result in difficulties or delays
in adding new clients, declines in quality or client satisfaction, increases in costs, system failures, difficulties in
introducing new features or solutions, the need for more capital than we anticipate or other operational difficulties,
and any of these difficulties could harm our business performance and results of operations.
The expected addition of new employees, particularly outside the United States, and the capital investments
that we anticipate will be necessary to help us grow and to manage that growth will make it more difficult for us to
generate earnings or offset any future revenue shortfalls by reducing costs and expenses in the short term. If we fail
to manage our anticipated growth, we will be unable to execute our business plan successfully.
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.
We leverage strategic relationships with third parties, such as CRM providers, WEM providers, systems
integrators, telephony and other technology providers. For example, our relationship with CRM providers and
systems integrators provide significant lead generation for new client opportunities. These relationships are typically
not exclusive and our partners often also offer products of our competitors. As we grow our business, we will
19
continue to depend on both existing and new strategic relationships. Our competitors may be more successful than
we are in establishing or expanding relationships with third parties or may provide incentives to third parties to favor
their products over our solution. Our competitors may also have deeper or broader relationships with third parties,
including a broader suite of products that are outside our core markets, that could give these competitors an
advantage in establishing and maintaining relationships with these third parties. These strategic partners may cease
to recommend our solution to prospective clients due to actual or perceived lack of features, technological or
security issues or failures, reputational concerns, economic incentives, or other factors, which would harm our
business, financial condition and operations. Furthermore, there has and continues to be a significant amount of
consolidation in our industry and adjacent industries, and if our partners are acquired, fail to work effectively with us
or go out of business, they may no longer support or promote our solution, or may be less effective in doing so,
which could harm our business, financial condition and operations. If we are unsuccessful in establishing or
maintaining our strategic relationships with third parties, or these partners fail to recommend our solution, our ability
to compete in the marketplace or to grow our revenues could be impaired and our operating results may suffer. Even
if we are successful, we cannot assure you that these relationships will result in increased client usage of our solution
or increased revenue.
In addition, identifying new partners, and negotiating and documenting relationships with them, requires
significant time and resources. As the complexity of our solution and our third-party relationships increases, the
management of those relationships and the negotiation of contractual terms sufficient to protect our rights and
promote our interests and limit our potential liabilities will become more complicated. We also license technology
from certain third parties, including through OEM relationships. Certain of these agreements permit either party to
terminate all or a portion of the relationship without cause at any time and for any reason. If one of these agreements
is terminated by the other party, we would have to find an alternative source or develop new technology ourselves,
which preclude, limit or delay our ability to offer our solution or certain product features to our clients, result in
increased expense and harm our business. Our inability to successfully manage and maintain these complex
relationships or negotiate sufficient and favorable contractual terms could harm our business.
Our historical growth and recent adverse economic conditions make it difficult to evaluate and predict our
current business and future prospects.
While we have been in existence since 2001, much of our employee, revenue and operations growth has
occurred in recent years. Our historical growth may make it difficult for investors to evaluate our current business
and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently
experienced by growing companies in rapidly changing industries, including increasing and unforeseen expenses as
we continue to grow our business.
Our ability to forecast our future operating results is limited and subject to a number of uncertainties,
including our ability to predict revenue and expense levels, and plan for and model future growth. These
uncertainties are exacerbated by the effects of recent adverse economic conditions, including macroeconomic
deterioration, including continued inflation, increased interest rates, supply chain disruptions, decreased economic
output and fluctuations in currency rates, the Russia-Ukraine conflict, the impact of the conflict in Israel, or other
factors. We have encountered and will continue to encounter risks and uncertainties frequently experienced by
growing companies in rapidly changing industries, such as the risks and uncertainties described in this annual report.
If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or
change due to adjustments in our markets or our competitors and their product offerings, or if we do not address
these risks successfully, our operating and financial results could differ materially from our expectations and our
business could suffer.
Risks Related to Our Clients
If we are unable to attract new clients or sell additional seats, functionality and services to our existing clients,
our revenue and revenue growth will be harmed.
To increase our revenue, we must add new clients, add additional agent seats and sell additional seats,
functionality and services to existing clients, and successfully get existing clients to renew their subscriptions on
terms favorable to us. As our industry matures, as our clients experience macroeconomic issues or seasonal trends in
their business, or as competitors introduce lower cost or differentiated products or services that are perceived to
compete favorably with ours, our ability to add new clients and renew, maintain or sell additional services to
existing clients could be harmed. As a result, our existing clients may not renew our agreements or may decrease
20
their number of agent seats, and we may be unable to attract new clients or grow or maintain our business with
existing clients, which could harm our revenue and growth. For example, our installed base business, which
typically contributes approximately half of our annual revenue growth, continues to experience macroeconomic
headwinds.
To grow our business, we plan to add new clients that are government entities. We have made, and plan to
continue to make, investments to support future client opportunities in the government sector. Some U.S.
government customers require that we be authorized under the FedRAMP to help satisfy their own legal and
regulatory compliance requirements, which may require us to undertake additional actions and expense to ensure
compliance. We are currently undergoing processes and procedures to obtain FedRAMP authorization, which
processes and procedures are costly and time consuming. There are no assurances that we will be able to obtain such
authorizations or that if obtained, this authorization will result in increased revenue or a sufficient return on our
investment.
Furthermore, a portion of our revenue is generated by acquiring domestic and international
telecommunications minutes from wholesale telecommunication service providers and reselling those minutes to our
clients. As telecommunications rates continue to decrease, we may not be able to resell more minutes to maintain
our level of usage revenue.
If our existing clients terminate their subscriptions or reduce their subscriptions and related usage, our revenues
and gross margins will be harmed and we will be required to spend more money to grow our client base.
We expect to continue to derive a significant portion of our revenues from existing clients. As a result,
retaining our existing clients is critical to our future operating results. We offer monthly, annual and multiple-year
contracts to our clients, generally with 30 days’ notice required for reductions in the number of agent seats. Increases
in the number of agent seats can be provisioned almost immediately. Our clients, therefore, are able to adjust the
number of agent seats used to meet their changing contact center volume needs. Subscriptions and related usage by
our existing clients may decrease if:
•
•
•
•
•
•
•
•
our clients’ business or demand for our services slows or declines due to industry cycles, seasonality,
business difficulties or other reasons, including the impact of macroeconomic deterioration, including
continued inflation, increased interest rates, supply chain disruptions, decreased economic output and
fluctuations in currency rates, the Russia-Ukraine conflict, the impact of the conflict in Israel, or other
factors;
clients are not satisfied with our services, prices or the functionality of our solution;
the stability, performance or security of our solution are not satisfactory;
the U.S. or global economy declines;
clients favor products offered by other contact center providers, particularly as competition continues to
increase;
fewer clients purchase usage from us;
alternative technologies, products or features emerge or gain popularity that we do not provide; or
our clients or potential clients experience financial difficulties, including as a result of macroeconomic
deterioration.
If our existing clients’ subscriptions and related usage decrease or are terminated, we will need to spend more
money to acquire new clients and still may not be able to maintain, or increase, our existing level of revenues. We
incur significant costs and expenses, including sales and marketing expenses, to acquire new clients, and those costs
and expenses are an important factor in determining our profitability. There can be no assurance that our efforts to
acquire new clients will be successful.
The loss of one or more of our key clients, or a failure to renew our subscription agreements with one or more of
our key clients, could harm our ability to market our solution.
We rely on our reputation and recommendations from key clients in order to market and sell our solution. The
loss of any of our key clients, or a failure of some of them to renew or to continue to recommend our solution, could
have a significant impact on our revenues, reputation and our ability to obtain new clients. In addition, acquisitions
of our clients could lead to cancellation of our contracts with those clients, thereby reducing the number of our
existing and potential clients and key reference clients.
21
Our clients may fail to comply with the terms of their agreements, necessitating action by us to collect payment,
or may terminate their subscriptions for our solution.
If clients fail to pay us under the terms of our agreements or fail to comply with the terms of our agreements,
including compliance with regulatory requirements and intellectual property terms, we may terminate clients, lose
revenue, be unable to collect amounts due to us, be subject to legal or regulatory action and incur costs in enforcing
the terms of our contracts, including litigation. Some of our clients may seek bankruptcy protection or other similar
relief and fail to pay amounts due to us, seek reimbursement for amounts already paid, or pay those amounts more
slowly, all of which risks may be exacerbated by the effects of macroeconomic deterioration, including increased
inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency
rates, the Russia-Ukraine conflict, the impact of the conflict in Israel, or other factors, any of which could harm our
operating results, financial position and cash flow.
Our business could be harmed if our clients are not satisfied with the professional services and technical support
provided by us or our partners.
Our business depends on our ability to satisfy our clients, not only with respect to our solution, but also with
the professional services and technical support that are required for our clients to implement and use our solution to
address their business needs. Professional services and technical support may be performed by our own staff or, in a
select subset of cases, by third parties. Our professional services offerings currently have negative margins.
Accordingly, any increase in sales of professional services could harm our gross margins and operating results. We
will need to continue to considerably expand our professional services and technical support in order to implement
and support new and larger global client installations. Identifying and recruiting qualified service personnel and
training them in our solution is difficult and competitive and requires significant time, expense and attention. We
may be unable to respond quickly enough to accommodate short-term increases in client demand for support
services. We also may be unable to modify the format of our support services or change our pricing to compete with
changes in support services provided by our competitors. Increased client demand for these services, without
corresponding revenues, would increase our costs and harm our operating results. If a client is not satisfied with the
deployment and ongoing services performed by us or a third party, we could lose clients, miss opportunities to
expand our business with these clients, incur additional costs, or suffer reduced (including negative) margins on our
service revenue, any of which could damage our ability to grow our business. In addition, negative publicity related
to our professional services and technical support, regardless of its accuracy, may damage our business by affecting
our ability to compete for new business with current and prospective clients.
Risks Related to the Sale of our Solution
Failure to adequately retain and expand our direct sales force will impede our growth.
Key to our success is the continuity and growth of our direct sales force. We need to continue to retain key
members of our direct sales force while expanding and optimizing our sales infrastructure and headcount in order to
grow our client base and business. We plan to continue to expand our direct sales force, both domestically and
internationally. Identifying and recruiting qualified personnel and training them in the use and sale of our solution
requires significant time, expense and attention. It can take several months before our sales representatives are fully
trained and productive. Our business may be harmed if we fail to retain key members of our direct sales force or if
our efforts, and the expense incurred, to expand and train our direct sales force do not generate a corresponding
increase in revenues. In particular, if we are unable to hire, develop and retain talented sales personnel or if new
sales personnel, including those joining our company as a result of an acquisition, are unable to achieve desired
productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this
investment or increase our revenues.
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.
We have established, and are continuing to increase, our network of technology solution distributors, which
provide sales leads, and resellers. This network has helped us attract additional clients. Our resellers have assisted us
in expanding in both domestic and international markets. These technology solution distributors and resellers sell, or
may in the future decide to sell, solutions for our competitors. Our competitors may be able to cause our current or
potential technology solution distributors or resellers to favor their services over ours, either through financial
22
incentives, technological innovation, solution features or performance, by offering a broader array of products to
these service providers or otherwise, which could reduce the effectiveness of our use of these third parties. If we fail
to maintain relationships with current technology solution distributors and resellers, fail to develop relationships
with new technology solution distributors and resellers in new and existing markets, if we fail to manage, train,
enable, or provide appropriate incentives to our existing technology solution distributors and resellers, or if our
technology solution distributors and resellers are not successful in their sales efforts, sales of our subscriptions may
decrease or not grow at an appropriate rate and our operating results could be harmed. Additionally, in order to
effectively utilize our resellers, we must enhance our systems, develop specialized marketing materials and invest in
educating resellers regarding our systems, product offerings and services. Our failure to accomplish these objectives
could limit our success in marketing and selling our solution.
In addition, identifying new resellers, and negotiating and documenting relationships with them, requires
significant time and resources. As the complexity of our solution and our reseller relationships increases, the
management of those relationships and the negotiation of contractual terms sufficient to protect our rights and limit
our potential liabilities will become more complicated. Our inability to successfully manage these complex
relationships or negotiate sufficient contractual terms could harm our business.
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.
As we continue to target our sales efforts at larger organizations, we face greater costs, longer sales and
implementation cycles and less predictability in closing sales. These larger organizations typically require more
configuration and integration services, which increases our upfront investment in sales and deployment efforts, with
no guarantee that these clients will subscribe to our solution or increase the scope of their subscription. Furthermore,
with larger organizations, we must provide greater levels of education regarding the use and benefits of our solution
to a broader group of people in order to generate a sale. As a result of these factors, we must devote a significant
amount of sales support and professional services resources to individual clients and prospective clients, thereby
increasing the cost and time required to complete sales. Our typical sales cycle for larger organizations is four to six
months, but can be significantly longer, and we expect that our average sales cycle may increase as sales to larger
organizations continue to grow as a percentage of our business. Longer sales cycles could cause our operating and
financial results to be less predictable and to fluctuate from period to period. In addition, many of our clients that are
larger organizations initially deploy our solution to support only a portion of their contact center agents. Our success
depends on our ability to increase the number of agent seats and the number of applications utilized by these larger
organizations over time and requires the expenditure of additional sales and marketing expenses in these efforts.
There is no guarantee that these clients will increase their subscriptions for our solution. If we do not expand our
initial relationships with larger organizations, the return on our investments in sales and deployment efforts for these
clients will decrease and our business may suffer.
Furthermore, we may not be able to provide the configuration and integration services that larger
organizations typically require. For example, our solution does not currently permit clients to modify our software
code, but instead requires them to use our set of APIs. If prospective clients require customized features or functions
that we do not offer, and that would be difficult for them to deploy themselves, they will need to use our
professional services or third-party service providers or we may lose sales opportunities with larger organizations
and our business could suffer.
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.
The market for contact center solutions is highly competitive. Generally, we do not have long-term contracts
with our clients and our clients can terminate our service and switch to competitors’ offerings on short notice.
We currently compete with large legacy technology vendors that offer on-premise contact center systems,
such as Avaya and Cisco. These legacy technology and software companies are increasingly supplementing their
traditional on-premise contact center systems with competing cloud offerings, through a combination of
acquisitions, partnerships and in-house development. Additionally, we compete with vendors that historically
provided other contact center services and technologies and expanded to offer cloud contact center software such as
Genesys and NICE. We also face competition from many smaller contact center service providers such as Content
Guru and Talkdesk, as well as vendors offering unified communications and contact center solutions such as Zoom.
23
In addition, Amazon, Twilio and, most recently, Microsoft, have introduced solutions aimed at companies who wish
to build their own contact centers and/or contact center components with developers. In addition, CRM vendors are
increasingly offering features and functionality that were traditionally provided by contact center providers. CRM
vendors also continue to partner with contact center service providers to provide integrated solutions and may, in the
future, acquire competitive contact center service providers. These factors could cause CRM vendors to reduce or
terminate their partnerships with us, and could result in increased competition. Because CRM integration and
partnerships are critical to the success of our solution, these factors could harm our revenue and results of
operations.
Some of our competitors can devote significantly greater resources than we can to the development,
promotion and sale of their products and services and many have the ability to initiate or withstand substantial price
competition. Current or potential competitors may also be acquired by third parties with significantly greater
resources. Many of our competitors have stronger name recognition, longer operating histories, larger marketing
budgets, greater financial or technical resources, better established relationships with clients, more comprehensive
product offerings, larger installed bases and major distribution agreements with consultants, system integrators and
resellers. Our competitors may also establish cooperative relationships among themselves or with third parties that
may further enhance their product offerings or resources and ability to compete. With the introduction of new
technologies and market entrants, we expect competition to continue to intensify in the future. Our recent, and any
future, acquisitions will subject us to new competitors and cause us to face additional and different competition in
the markets served by these businesses. If our competitors’ products, services or technologies become more accepted
than our solution, if they are successful in bringing their products or services to market earlier than ours, or if their
products or services are less expensive or more technologically capable than ours, our revenues could be harmed.
Pricing pressures and increased competition could result in reduced sales and revenues, reduced margins and loss of,
or a failure to maintain or improve, our competitive market position, any of which could harm our business.
If we fail to grow our marketing capabilities and develop widespread brand awareness cost effectively, our
business may suffer.
Our ability to increase our client base and achieve broader market acceptance of our cloud contact center
software solution will depend to a significant extent on our ability to expand our marketing operations. We plan to
continue to dedicate significant resources to our marketing programs, including internet advertising, digital
marketing campaigns, social media, trade shows, industry events, co-marketing with strategic partners,
telemarketing and out of home campaigns. The effectiveness of our internet advertising and the overall cost of
internet advertising has varied over time and may vary in the future due to competition for key search terms, changes
in search engine use, changes in the manner in which the leading internet advertising companies approach internet
advertising, including through their policies, and changes in the search algorithms used by major search engines,
any of which could result in an increase in the time spent and other financial expenditures associated with our
internet advertising and a decrease in the effectiveness of our internet advertising. All of these efforts will continue
to require us to invest significant financial and other resources in our marketing efforts. Our business will be
seriously harmed if our efforts and expenditures do not generate a proportionate increase in revenue.
In addition, we believe that developing and maintaining widespread awareness of our brand in a cost-effective
manner, both in the United States and internationally, is critical to achieving widespread acceptance of our solution,
expanding our business with existing clients and attracting new clients. Brand promotion activities may not generate
client awareness or increase revenues, and even if they do, any increase in revenues typically occurs after the
expense has been incurred, and may not offset the costs and expenses of building our brand. If we fail to
successfully promote, maintain and protect our brand, or incur substantial costs and expenses, we may fail to attract
or retain clients necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread
brand awareness that is critical to increasing client adoption of our solution.
Risks Related to Our Solution
If we fail to manage our technical operations infrastructure, our existing clients may experience service outages,
our new clients may delay or decide against deployment of our solution, existing clients may decide to move to
another vendor, and we could be subject to claims for credits, damages or other actions.
Our success depends in large part upon the capacity, stability, security and performance of our technical
operations infrastructure, which currently relies upon a mix of external data centers and, increasingly, public cloud
providers. From time-to-time, we have experienced interruptions in service, and may experience such interruptions
24
in the future. These service interruptions may be caused by a variety of factors, including infrastructure changes,
human or software errors, telecom network outages, viruses, security attacks, fraud, spikes in client usage and denial
of service issues. In some instances, we may not be able to identify the cause or causes of these performance
problems, or remediate them within an acceptable period of time. Our failure to achieve or maintain expected
performance levels, stability and security, particularly as we increase our number of larger clients and attract
increasingly larger clients than in the past, the number of users of our service and the product applications that run
on our system, could harm our relationships with our clients, result in claims for credits or damages or other actions,
damage our reputation, significantly reduce client demand for our solution, cause us to incur significant expense and
personnel time replacing and upgrading our infrastructure, cause customer attrition, and harm our business.
We have experienced significant growth in the number of our larger clients, as well as the number of agent
seats and interactions that our infrastructure supports. As the number of agent seats within our client base grows and
our clients’ use of our service increases, we need to continue to make additional investments in our capacity to
maintain adequate and reliable availability, stability and performance, the availability of which may be limited or
the cost of which may be prohibitive, and any failure may cause interruptions in service that may harm our business.
In addition, we need to properly manage our operations infrastructure in order to support version control, changes in
hardware and software parameters and the evolution of our solution. If we do not accurately predict our
infrastructure requirements or efficiently improve our infrastructure, our business could be harmed.
We host our solution at geographically redundant data centers in the United States, the United Kingdom,
Europe and Australia and from public cloud locations in Canada, the United Kingdom and Europe. Any failure or
downtime in one of our data center facilities could affect a significant percentage of our clients. While we control
and have access to our servers and all of the components of our network that are located in our external data centers,
we do not control the operation of these facilities. The owners of our data center facilities have no obligation to
renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these
agreements on commercially reasonable terms, or if one of our data center operators is acquired, closes, suffers
financial difficulty or is unable to meet our growing capacity needs, we may be required to transfer our servers and
other infrastructure to new data center facilities, and we may incur significant costs and service interruptions in
connection with doing so. While our data centers have redundant power, cooling and infrastructure, they are subject
to various points of failure. Problems with cooling equipment, generators, uninterruptible power supply, routers,
switches, or other equipment, most of which is under the control of our data center operators, could result in service
interruptions for our clients as well as equipment damage. Our data centers are subject to disasters such as
earthquakes, floods, fires, hurricanes, cyber attacks, acts of terrorism, sabotage, break-ins, acts of vandalism and
other events, which could cause service interruptions or the operators of these data centers to close their facilities for
an extended period of time or permanently. The destruction or impairment of any of our data center facilities could
result in significant downtime for our solution and the loss of client data. Because our ability to attract and retain
clients depends on our providing clients with highly reliable service, even minor interruptions in our service could
harm our business, revenues and reputation. Additionally, in connection with the continuing expansion of our
existing data center facilities, there is a risk that service interruptions may occur as a result of server addition,
relocation or other issues.
We also host some of our voice services on the public cloud in Europe, Asia, South America and Australia as
well as additional core services in Europe. We are also establishing new public cloud deployments of our platform in
certain additional international markets. Our public cloud-based platform offering is critical to developing and
providing our solution to our clients, scaling our business for future growth, accurately maintaining data and
otherwise operating our business. We have little or no control over public cloud providers. Any disruption of the
public cloud, deficiencies in the design, implementation, maintenance, or migration from one public cloud provider
to another, or any failure of our public cloud providers to effectively design and implement sufficient security
systems or plan for increases in capacity could, in turn, cause delays or disruptions in our services. In addition, using
the public cloud presents a variety of additional risks, including risks related to sharing the same computing
resources with others, reliance on public cloud providers’ authentication, security, authorization and access control
mechanisms, a lack of control over the public cloud’s redundancy and security systems and fault tolerances, a
reduced ability to control data security and privacy, and future unpredictable costs of these services.
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.
We plan to continue to further develop and enhance our AI-powered features, including integration of
Generative AI technologies. While we aim for our AI-powered features to make agents more efficient and improve
25
customer experience, our AI features may not achieve sufficient levels of accuracy or may not otherwise meet the
needs of our clients. In addition, we may not be able to incorporate sufficient customer data and such data may
contain biased or otherwise inaccurate information, resulting in unacceptable user experiences. Furthermore, our
competitors or other organizations may incorporate AI features into their products more quickly or more
successfully and their AI features may achieve higher market acceptance than ours, which may result in us failing to
recoup our investments in developing AI-powered features and result in lost business. Should any of these factors or
others occur, our ability to compete, our reputation and operating results may be materially and adversely affected.
The AI technology and features incorporated into our solution include new and evolving technologies that may
present both legal and business risks.
We have incorporated a number of AI-powered features into our solution, and are making investments in
expanding our AI capabilities with Generative AI. Generative AI technologies are complex and rapidly evolving,
and we face significant competition from other companies as well as an evolving legal and regulatory landscape.
The incorporation of Generative AI-powered features into our solution may subject us to new or enhanced
governmental or regulatory scrutiny, litigation, confidentiality or security risks, ethical concerns, or other
complications that could harm our business, reputation, financial condition or results of operations. Intellectual
property ownership and license rights, including copyright, surrounding AI and Generative AI technologies has not
been fully addressed by federal or state laws or by U.S. courts, and the manner in which we configure and use these
technologies may expose us to claims of copyright infringement or other intellectual property misappropriation.
New laws have been adopted in the EU, and it is possible that new laws and regulations will be adopted in the
United States and in other countries, or that existing laws and regulations will be interpreted in ways that would
affect the operation of our solution and the way in which we use AI. Further, the cost to comply with such laws or
regulations could be significant and would increase our operating expenses, which could harm our business,
reputation, financial condition and results of operations.
Uncertainty around and rapid evolution of Generative AI technologies may require additional investment,
including research and development of new approaches and processes, which will be costly and increase our
expenses. AI can generate written content which contains bias, factual errors, misrepresentations, offensive
language, or inappropriate statements. While we seek to use Generative AI in a way that is designed to minimize
these risks, there are still risks of such events occurring. Our failure to address these risks could harm our business,
reputation, financial condition and results of operations. In addition, the use of AI, including Generative AI,
involves significant technical complexity and requires specialized expertise, and competition for specialized
personnel in the AI industry is intense. Any disruption or failure in our AI systems or infrastructure could result in
delays or errors in our operations, which could harm our business, reputation, financial condition and results of
operations.
The use of AI by our workforce may present risks to our business.
Our workforce is exposed to and uses AI technologies for certain tasks related to our business. We have
guidelines specifically directed at the use of AI tools in the workplace, including our code of conduct, confidentiality
obligations, IT internal use policies and other corporate policies. Nevertheless, our workforce may use these
authorized or unauthorized tools, which poses potential risks relating to the protection of data, including
cybersecurity risk, exposure of our proprietary confidential information to unauthorized recipients and the misuse of
our or third-party intellectual property. Use of AI technology by our workforce even when used consistent with our
guidelines, may result in allegations or claims against us related to violation of third-party intellectual property
rights, unauthorized access to or use of proprietary information and failure to comply with open source software
requirements. AI technology may also produce inaccurate responses that could lead to errors in our decision-making,
solution development or other business activities, which could have a negative impact on our business, operating
results and financial condition. Our ability to mitigate these risks will depend on our continued effective training,
monitoring and enforcement of appropriate policies, guidelines and procedures governing the use of AI technology,
and compliance by our workforce.
If our solution fails, or is perceived to fail, to perform properly or if it contains technical defects, our reputation
could be harmed, our market share may decline and we could be subject to product liability claims.
Our solution may contain undetected errors or defects that may result in failures or otherwise cause our
solution to fail to perform in accordance with client expectations and contractual obligations. Moreover, our clients
could incorrectly implement or inadvertently misuse our solution, which could result in client dissatisfaction and
26
harm the perceived utility of our solution and our brand. Because our clients use our solution for critical aspects of
their business, any real or perceived errors or defects in, or other performance problems with, our solution may
damage our clients’ businesses and could significantly harm our reputation. If that occurs, we could lose future sales,
or our existing clients could cancel or reduce the use of our solution, seek payment credits or damages against us, or
delay or withhold payment to us, which could result in reduced revenues, an increase in our provision for
uncollectible accounts and service credits, an increase in collection cycles for accounts receivable, and harm our
financial results. In addition, since telecommunications billing and associated telecom taxes and the related
calculations and billing of telecom taxes are inherently complex and require highly sophisticated information
systems to administer, our billing system may experience errors or we may improperly operate the system, which
could result in the system incorrectly calculating the fees owed by our clients or related taxes and administrative
fees. Clients also may make indemnification or warranty claims against us, which could result in significant expense
and risk of litigation. Product performance problems could result in loss of market share, reputational harm, failure
to achieve market acceptance and the diversion of development resources.
Any product liability, intellectual property, warranty or other claims against us could damage our reputation
and relationships with our clients, and could require us to spend significant time and money in litigation or pay
significant settlements or damages. Although we maintain general liability insurance, including coverage for errors
and omissions, this coverage may not be available or sufficient to cover liabilities resulting from such claims. Also,
our insurers may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable
terms, in sufficient amounts, or at all. Any contract or product liability claims successfully brought against us would
harm our business.
The contact center software solutions market is subject to rapid technological change, and we must develop and
sell incremental and new features and components of our solution in order to maintain and grow our business.
The contact center software solutions market is characterized by rapid changes in client requirements, frequent
introductions of new and enhanced products and features and continuing and rapid technological advancement. To
compete successfully, we must continue to devote significant resources to design, develop, deploy and sell new and
enhanced contact center solutions, applications and features that provide increasingly higher capabilities,
performance and stability at lower cost. If we are unable to develop or acquire new features for our existing solution
or new applications that achieve market acceptance or that keep pace with technological developments, our business
would be harmed. We are focused on enhancing the reliability, features and functionality of our contact center
solution to enhance its utility to our clients, particularly larger clients, with complex, dynamic and global operations.
In addition, cloud-based technology advancements in areas such as AI are designed to enable improved customer
experience, significant operational efficiencies and business insights. The success of these enhancements depends on
many factors, including timely development, introduction and market acceptance, as well as our ability to transition
our existing clients to these new solutions, applications and features. To the extent that these enhancements are made
as a result of acquisitions, our success also depends on our ability to integrate the acquired technology with our
existing solution. Any failure may significantly impair our revenue growth. In addition, because our solution is
designed to operate on a variety of systems, we need to continuously modify and enhance our solution to keep pace
with changes in hardware, operating systems, the increasing trend toward multi-channel communications and other
changes to software technologies. We may not be successful in developing, acquiring or integrating these
modifications and enhancements or bringing them to market in a timely fashion. Furthermore, uncertainties about
the timing and nature of new network platforms or technologies, or modifications to existing platforms or
technologies, could delay introduction of changes and updates to our solution and increase our research and
development expenses. Any failure of our solution to operate effectively, including with future network platforms
and technologies, could reduce the demand for our solution, result in client dissatisfaction and harm our business.
Our ability to continue to enhance our solution is dependent on adequate research and development resources. If
we are not able to adequately fund our research and development efforts, we may not be able to compete
effectively and our business and operating results may be harmed.
In order to remain competitive, we must devote significant and increasing resources to develop new solution
offerings, features and enhancements to our existing cloud contact center software, which will increase our research
and development and operating expenses. Our research and development expenses totaled $156.6 million, $141.8
million and $106.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Maintaining
adequate research and development personnel and resources to meet the demands of the market is essential. If we are
unable to develop products, applications or features internally due to constraints, such as high employee turnover,
insufficient cash, other cash needs of our business, inability to hire sufficient research and development personnel or
27
a lack of other research and development resources, we may miss market opportunities. Furthermore, many of our
competitors have greater financial resources and expend greater amounts on their research and development
programs than we do, and those that do not may be acquired by larger companies that would allocate greater
resources to our competitors’ research and development programs. Our failure to devote adequate research and
development resources or compete effectively with the research and development programs of our competitors could
harm our business.
If we are unable to maintain the compatibility of our software with other solutions and technologies, our business
could be harmed.
Our clients often integrate our solution with their business applications, particularly third-party CRM
solutions. These third-party providers or their partners could alter their products so that our solution no longer
integrates well with them, or they could delay or deny our access to technology releases that allow us to adapt our
solution to integrate with their products in a timely fashion. In addition, to the extent that third-party providers are
adversely impacted by macroeconomic deterioration, their development of software that is integrated with our
solution may be delayed, which could have an adverse impact on the implementation of, or demand for, our solution
by our clients. Such third-party providers could also favor integration of our competitors’ products over our solution,
making our solution less attractive to our clients. If we cannot adapt our solution to changes in complementary
technology deployed by our clients, it may significantly impair our ability to compete effectively.
We are subject to many hazards and operational risks that can disrupt our business, some of which may not be
insured or fully covered by insurance.
Our operations are subject to many hazards inherent in the cloud contact center software business, including:
• damage to third-party and our infrastructure and data centers, related equipment and surrounding properties
caused by earthquakes, hurricanes, tornadoes, floods, fires and other natural disasters, explosions, cyber
attacks and acts of terrorism;
• security breaches resulting in loss or disclosure of confidential client and customer data and potential liability
to clients and non-client third parties for such losses on disclosures; and
• other hazards that could also result in suspension of operations, personal injury and even loss of life.
These risks could result in substantial losses and the curtailment or suspension of our operations. For example,
in the event of a major earthquake or flooding on the West Coast of the United States (where our corporate
headquarters and one of our data centers are located), hurricane, tropical storm, flooding or severe weather in the
southeastern United States (where our other U.S. data center is located) or catastrophic events such as fire, power
loss, telecommunications failure, cyber-attack, global pandemic, war or terrorist attack, we may be unable to
continue our operations and may endure system and service interruptions, reputational harm, delays in product
development, breaches of data security and loss of critical data, any of which could harm our business and operating
results.
We are not insured against all claims, events or accidents that might occur. If a significant accident or event
occurs that is not fully insured, if we fail to recover all anticipated insurance proceeds for significant accidents or
events for which we are insured, or if we or our data center providers fail to reopen facilities damaged by such
accidents or events, our operations and financial condition could be harmed. We may also incur significant expense
in enforcing our rights against our insurance providers, whether or not successful. In addition to being denied
coverage under existing insurance policies, we may not be able to maintain or obtain insurance of the type and
amount we desire at reasonable rates.
Risks Related to Third-Party Technology Providers
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 rely on third-party telecommunication service providers to provide our clients and their customers with
telecommunication services. These telephony services include the public switched telephone network, or PSTN,
telephone numbers, call termination and origination services, and local number portability for our clients. In
addition, we depend on our internet bandwidth suppliers to provide uninterrupted and error-free service through their
28
telecommunications networks. Some of our services may require that users of our service obtain their own internet
bandwidth. We exercise little control over these third-party providers, which increases our vulnerability to problems
with the services they provide.
When problems occur, it may be difficult to identify the source of the problem. Service disruption or outages,
whether caused by our service, the products or services of our third party service providers, or our clients’ or their
customers’ equipment and systems, may result in loss of market acceptance of our solution and harm to our
reputation and any necessary repairs or other remedial actions may force us to incur significant costs and expenses.
If any of these service providers fail to provide reliable services, suffer outages, degrade, disrupt, increase the
cost of or terminate the services that we and our clients depend on, we may be required to switch to another service
provider. Delays caused by switching our technology to another service provider, if available, and qualifying this
new service provider could materially increase our costs, as well as harm our client relationships, business, financial
condition and operating results. Further, any failure on the part of third party service providers to achieve or
maintain expected performance levels, stability and security could harm our relationships with our clients, cause us
to lose clients, result in claims for credits or damages, increase our costs or the costs incurred by our customers,
damage our reputation, significantly reduce client demand for our solution and seriously harm our financial
condition and operating results.
Our clients and their customers rely on internet service providers to provide them with access and connectivity to
our cloud contact center software and changes in how internet service providers handle and charge for access to
the internet could materially harm our client relationships, business, financial condition and operations results.
In 2015, the FCC released an order, commonly referred to as network neutrality, that, among other things,
prohibited (i) the impairment or degradation of lawful internet traffic on the basis of content, application or service
and (ii) the practice of favoring some internet traffic over other internet traffic based on the payment of higher fees.
In June 2018, the FCC repealed the network neutrality regulations imposed by the 2015 order. Internet service
providers in the U.S. may now be able to impair or degrade the use of, or increase the cost of using, our solution.
The FCC’s 2018 repeal was largely upheld by the D.C. Circuit Court of Appeals in a decision issued in October
2019. That same court rejected the FCC’s attempt to preempt states from adopting their own network neutrality
requirements. As a result, network neutrality regulations vary widely among both the domestic and international
jurisdictions in which we operate. While certain jurisdictions have strong protections for services such as ours,
others either lack a network neutrality framework or otherwise do not enforce network neutrality regulations. The
impairment, degradation or prioritization of lawful internet traffic by internet service providers could materially
harm the performance of our solution, our client relationships, business, financial condition and operating results.
Risks Related to Our International Operations
We continue to expand our international operations, which exposes us to significant risks.
To date, we have not generated significant revenues outside of the U.S., Canada, the U.K., Latin America and
Australia. However, we already have significant operations outside these countries and regions, and we expect to
grow our international presence in the future. Our international employees are primarily located in the Philippines,
where technical support, training and other professional services are performed, Portugal, where we continue to
increase our engineering and operations previously performed in Russia, and Australia, where additional portions of
engineering and operations are now performed. In March 2022, we made a decision to close our Russia office and to
establish a new European development center in Portugal. While approximately half of our Russian-citizen
employees have received visas and have moved to Portugal, it was not feasible to move and retain all of the Russian-
citizen employees in connection with growing our overall operations presence in Portugal, we have expanded
recruiting and employment-related efforts in Portugal to further enhance our operations. We have and will continue
to incur costs in connection with this transition, and during the transition we have and may continue to experience
operational disruptions. There can be no assurance that our new Portuguese operations will be as effective or as
efficient as our prior Russian operations, which could harm our business and results of operations. The future
success of our business will depend, in part, on our ability to expand our operations and customer base to other
countries, including our new location in Portugal.
Operating in international markets requires significant resources and management attention and will subject us
to regulatory, economic, and political risks that are different from those in the U.S. In addition, in order to
effectively market and sell our solution in international markets, we often must localize our solution, including the
language in which our solution is offered, which increases our costs, could result in delays in offering our solution in
29
these markets and may decrease the effectiveness of our sales efforts. Due to our limited experience with
international operations and developing and managing sales and distribution channels in international markets, our
international expansion efforts may not be successful.
We also will continue to incur additional compliance costs associated with our international operations,
including costs associated with expanding and rapidly changing sanctions and other trade controls. In addition, we
may be unaware or unable to keep current with changes in foreign government requirements and laws as they
change from time to time, which often occurs with minimal or no advance notice. Failure to comply with these
regulations could harm our business. In many countries outside the United States, it is common for others to engage
in business practices that are prohibited by our internal policies and procedures or United States or international laws
and regulations applicable to us. Although we have implemented policies and procedures designed to ensure
compliance with these laws and policies, there can be no assurance that all of our employees, contractors, strategic
partners and agents will comply with these laws and policies. Violations of laws or key control policies by our
employees, contractors, strategic partners or agents could result in delays in revenue recognition, financial reporting
misstatements, fines, delays in filing financial reports required as a public company, penalties, prohibitions on
selling our solution or harm to our reputation, any of which could harm our business.
While we have worked to avoid and mitigate any effects of the Russia-Ukraine conflict on our business,
employees and clients, the conflict is ongoing, and its ultimate scope and broader impacts cannot be predicted with
certainty. While the conflict has not yet had a negative impact on our employees, business, or operations outside of
Russia, it could, and if the conflict or related geopolitical tensions extend to other countries, negative impacts could
also expand. Our business and operations could be harmed and our costs could increase if our or our clients’ or
other partners’ manufacturing, logistics or other operations, costs or financial performance are disrupted or adversely
affected. The Russia-Ukraine conflict has also had an adverse impact on the global economy, including on the
inflation rate, and has contributed to significant fluctuation in global stock markets, including The NASDAQ Stock
Market, on which our common stock is listed. All of these risks and conditions could harm our future sales,
business and operating results.
Sales to clients outside the United States or with international operations and our international sales efforts and
operations support expose us to risks inherent in international sales and operations.
A key element of our growth strategy is to expand our international sales efforts and develop a worldwide
client base. Because of our limited experience with international sales, our international expansion may not be
successful and may not produce the return on investment we expect. To date, we have realized only a small portion
of our revenues from clients outside the United States, with approximately 89% of our revenue for the year ended
December 31, 2023 derived from clients with billing addresses in the United States.
We have increased and are continuing to increase our sales, marketing and support personnel in both the U.K.
and the European Union. We have enlarged our data centers in the U.K. and Amsterdam and are increasing our use
of public cloud solutions in the European Union as well. Operating in international markets requires significant
resources and management attention and subjects us to intellectual property, regulatory, economic and political risks
that are different from those in the United States. As we increase our international sales efforts and continue and
increase our other international operations, we will face increased risks in doing business internationally that could
harm our business, including:
•
•
•
•
•
•
•
•
•
the need to establish and protect our brand in international markets;
the need to localize and adapt our solution for specific countries, including translation into foreign
languages and associated costs and expenses;
difficulties in staffing and managing foreign operations, particularly hiring and training qualified sales and
service personnel;
the need to implement and offer customer care, in various languages;
different pricing environments, longer sales and accounts receivable payment cycles and collections issues;
weaker protection for intellectual property and other legal rights than in the U.S. and practical difficulties in
enforcing intellectual property and other rights outside of the U.S.;
privacy and data protection laws and regulations that are complex, expensive to comply with and may
require that client data be stored and processed in a designated territory;
increased risk of piracy, counterfeiting and other misappropriation of our intellectual property in our
locations outside the U.S.;
new and different sources of competition;
30
•
•
•
•
•
•
•
•
•
•
general economic conditions in international markets;
fluctuations in the value of the U.S. dollar and foreign currencies, which may make our solution more
expensive in other countries or may increase our costs, impacting our operating results when translated into
U.S. dollars;
compliance challenges related to the complexity of multiple, conflicting and changing governmental laws
and regulations, including employment, tax, telecommunications and telemarketing laws and regulations;
increased risk of international telecom fraud;
laws and business practices favoring local competitors;
compliance with laws and regulations applicable to foreign operations and cross border transactions,
including the Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption laws, supply
chain restrictions, import and export control laws, tariffs, trade barriers, economic sanctions and other
regulatory or contractual limitations on our ability to sell our solution in certain foreign markets, and the
risks and costs of non-compliance;
increased financial accounting and reporting burdens and complexities;
restrictions or taxes on the transfer of funds;
adverse tax consequences; and
unstable economic and political conditions and potential accompanying shifts in laws and regulations.
These risks could harm our international operations, increase our operating costs and hinder our ability to
grow our international business and, consequently, our overall business and results of operations.
Other Operational Risks
Adverse economic conditions may harm our business.
Our business depends on the overall demand for cloud contact center software solutions, the economic health
of our current and prospective clients and worldwide economic conditions. In addition to the United States, Canada,
Europe, Latin America and Australia, we plan in the future to market and sell our solution in Asia and other
international markets. Adverse economic conditions in these markets, including the impact of macroeconomic
deterioration, continued inflation, increased interest rates, supply chain disruptions, decreased economic output and
fluctuations in currency exchange rates, the impact of the Russia-Ukraine conflict, the impact of the conflict in
Israel, has and will likely continue to reduce overall demand for our solution, particularly in our installed base.
These factors could also delay our clients' implementation of our solution, delay or lengthen sales cycles, delay
international expansion, lower prices for our solution, and may also lead to longer collection cycles for payments
due from our clients, as well as result in an increase in client bad debt. While the implications of macroeconomic
events on our business, results of operations and overall financial position remain uncertain over the long term, we
expect that adverse economic conditions will continue to have an adverse impact on our revenue in future periods.
For example, our installed base business, which typically contributes approximately half of our annual revenue
growth, continues to experience macroeconomic headwinds. All of these potential circumstances could lead to
slower growth, or even a decline in, our revenues, operating results and cash flows.
Security breaches and improper access to, use of, or disclosure of our data or our clients’ data, or other cyber
attacks on our systems, or those of third parties on which we rely, could result in litigation and regulatory risk,
harm our reputation and our business.
Our solution involves the storage and transmission of our clients’ information, including information about
our clients’ customers or other information treated by our clients as confidential. Unauthorized access, unauthorized
use of our systems or those of third parties on which we rely or the data stored within those systems, security
breaches or other cyber attacks could result in the loss of confidentiality, integrity and availability of such
information or systems, leading to litigation, governmental investigations and enforcements actions, indemnity
obligations, increased expense, and other liability. Such incidents could also cause interruptions to the solutions we
provide, degrade the user experience, harm our reputation or cause clients to lose confidence in our solution.
We are required to comply with laws and regulations that require us to protect personal data and we may have
contractual and other legal obligations to notify customers or other relevant stakeholders of security breaches or
other security events. While we have implemented security measures to protect client and other confidential
information and minimize the risk of security breaches and other cyber attacks, if these measures fail as a result of a
31
cyber-attack, software vulnerability, other third-party action, employee error, malfeasance or otherwise, and
someone unlawfully or without authorization obtains access to our clients’ information, including personal data, our
reputation could be damaged, our business may suffer and we could incur significant liability. Because the
techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not
identified until they are launched against a target, we or our third party service providers may be unable to anticipate
these techniques or implement adequate preventative measures. In addition, third parties may attempt to fraudulently
induce employees or users to disclose information in order to gain access to our data or our users’ data or the
systems on which our data is stored or hosted. Such security breaches could lead to negative publicity, may cause
our customers to lose confidence in the effectiveness of our security measures and require us to respond to and/or
mitigate the security breach. Accordingly, if our cybersecurity measures fail to protect against unauthorized access,
attacks, compromise or the mishandling of data by our employees, then our reputation, business, results of
operations and financial condition could be adversely affected. Moreover, any failure on the part of third parties,
including our clients or other hosting or service providers, to maintain appropriate security measures for their own
systems could harm our relationships with our clients, result in claims against us for credits or damages, damage our
reputation and significantly reduce client demand for our solution. Any or all of these issues could harm our ability
to attract new clients, cause existing clients to cancel, reduce or not renew their subscriptions, result in reputational
damage or subject us to third-party lawsuits (including class actions), governmental investigations and enforcement
actions, regulatory fines or other action or liability, including orders or consent decrees forcing us to modify our
business practices, all of which could materially harm our business, reputation or financial results.
If we are unable to attract and retain highly skilled leaders and other employees, our business and results of
operations may be adversely affected.
To execute our growth plan, we must attract and retain highly qualified personnel, including key executives,
senior management or other key employees, and we may incur significant costs, including stock-based compensation
expense, to do so. Competition for these personnel is intense, especially for senior executives, engineers highly
experienced in designing and developing cloud software and for senior sales personnel. We have, from time to time,
experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate
qualifications, and this difficulty could be further exacerbated by any senior leadership or other key employee
transitions we experience. We invest significant time and expense in training our employees, which increases their
value to competitors who may seek to recruit them and increases our costs.
We believe that our corporate culture is a critical component to our ability to attract and retain employees. As
we grow, we will need to continually enhance our efforts to maintain our corporate culture, which is more difficult
due to our policies that continue to allow limited work from home flexibility stemming from the COVID-19
pandemic. We may experience increased attrition of employees to other opportunities, as certain employees may
seek more flexible work alternatives than we offer, may seek positions with companies outside of the geographic
area in which they live that offer remote work opportunities, or may decide to scale back their work life for personal
reasons. Many of the companies with which we compete for experienced personnel have greater resources than we
have and may offer more flexible work alternatives such as permanent remote work or work from home. If we fail to
attract new personnel or fail to retain and motivate our current personnel, particularly our senior leadership team and
our other key employees, our business and future growth prospects would be harmed. In addition, if we hire
employees from competitors or other companies, their former employers may attempt to assert that these employees
or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages.
Volatility or lack of performance in the trading price of our common stock, including the declines in our
trading price over the recent past, may also affect our ability to attract and retain qualified personnel because job
candidates and existing employees often emphasize the value of stock awards when considering whether to accept or
continue employment. If the perceived value of our stock awards is low or declines, it may harm our ability to
recruit and retain highly skilled employees.
32
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 may acquire or invest in businesses, applications or technologies that we believe could complement or
expand our solution, enhance our technical capabilities or otherwise offer growth opportunities. For instance, in
2019, we acquired substantially all of the assets of Whendu LLC, or Whendu, including its iPaaS platform, in 2020,
we acquired both Virtual Observer and Inference, and in 2023, we acquired Aceyus, Inc., or Aceyus. The pursuit of
potential acquisitions may divert the attention of management, and cause us to incur various costs and expenses in
identifying, investigating and pursuing acquisitions, whether or not they are consummated. We may not be able to
identify desirable acquisition targets or be successful in entering into an agreement with any particular target. In
addition, there has been a number of recent transactions in our industry and adjacent industries, which could have a
negative impact on us.
To date, the growth in our business has been primarily organic, and we have limited experience in acquiring
other businesses. With respect to our recent acquisitions and any future acquisitions, we may not be able to
successfully integrate acquired personnel, operations, product features and technologies, or effectively manage the
combined business following the acquisition. We also may not achieve the anticipated benefits from these or any
future acquisitions due to a number of factors, including:
•
•
•
•
•
•
•
•
•
•
•
inability to integrate or benefit from acquisitions in a profitable manner;
unanticipated costs or liabilities associated with the acquisition, including legal claims to enforce our rights
under the acquisition agreements or arising from the activities of the companies or businesses we acquire;
acquisition-related costs;
difficulty converting the clients of the acquired business to our solution and contract terms, including due to
disparities in the revenue, licensing, support or professional services model of the acquired company;
difficulty integrating the accounting systems, operations and personnel of the acquired business;
difficulties and additional costs and expenses associated with supporting legacy products and the hosting
infrastructure of the acquired business;
diversion of management’s attention from other business concerns;
harm to our existing relationships with our partners and clients as a result of the acquisition;
the loss of our or the acquired business’s key employees;
diversion of resources that could have been more effectively deployed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition.
In addition, a significant portion of the purchase price of companies and businesses we acquire may be
allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually.
If our acquisitions do not yield expected returns, we may be required to take charges to our operating results based
on this impairment assessment process, which could harm our results of operations.
Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the
incurrence of additional debt to fund such acquisitions, which could harm our operating results. To the extent that
we intend to issue stock in any acquisitions, volatility in our stock price could make it more difficult or dilutive to
make these acquisitions. If an acquired business fails to meet our expectations, our operating results, business and
financial condition could suffer.
In addition, third parties may be interested in acquiring us. We will continue to consider, evaluate and
negotiate any such transactions as we deem appropriate. Such potential transactions may divert the attention of
management, and cause us to incur various costs and expenses in investigating, evaluating and negotiating such
transactions, whether or not they are consummated.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
To date, we have financed our operations, primarily through sales of our solution, lease facilities and the net
proceeds from our equity and debt financings, including the sale of our convertible senior notes. We do not know
when or if our operations will generate sufficient cash to fund our ongoing operations. We may require additional
33
capital to respond to business opportunities, challenges, acquisitions, a decline in sales, increased regulatory
obligations or unforeseen circumstances and may engage in equity or debt financings or enter into credit facilities.
We have a substantial amount of debt. As of December 31, 2023, we had approximately $747.5 million in
principal outstanding under our convertible senior notes issued in May and June 2020 that mature on June 1, 2025.
See Note 6 to the consolidated financial statements.
Any debt financing obtained by us in the future would cause us to incur additional debt service expenses and
could include restrictive covenants relating to our capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities and
future debt could be secured by all of our assets. If we raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership
of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those
of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to
us when we require it, our ability to continue to grow and support our business and to respond to business challenges
could be significantly harmed.
If we are unable to maintain and further develop effective internal control over financial reporting, investors may
lose confidence in the accuracy and completeness of our financial reports and the market price of our common
stock may decrease.
As a public company, we are required to maintain internal control over financial reporting and to report any
material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404,
requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide
a management report and attestation from our independent registered public accountant on our internal control over
financial reporting. This attestation has and will continue to increase our independent public accountant costs and
expenses.
If we identify one or more material weaknesses in our internal control over financial reporting, we will be
unable to assert that our internal controls are effective, which could cause our stock price to decline. A “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a
timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our
internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely
manner, if we are unable to assert that our internal control over financial reporting is effective or if our independent
registered public accounting firm is unable to attest that our internal control over financial reporting is effective,
investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our
common stock could decrease. We could also become subject to stockholder or other third-party litigation as well as
investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities,
which could require additional financial and management resources and could result in fines, penalties, trading
suspensions or other remedies.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting
fluctuations and affect our reported operating results.
U.S. GAAP is subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and
interpret appropriate accounting principles. A change in accounting standards or practices can have a significant
effect on our reported results and may even affect our financial statements issued before the change is effective. New
accounting pronouncements and varying interpretations of accounting pronouncements have occurred and will occur
in the future. Changes to existing rules or the questioning of current practices may harm our reported financial
results, result in restatements of prior periods, or the way we account for or conduct our business.
The application of any new accounting guidance is, and will be, based on all information available to us as of
the date of adoption and up through subsequent interim reporting, including transition guidance published by the
standard setters. However, the interpretation of these new standards may continue to evolve as other public
companies adopt the new guidance and the standard setters issue new interpretative guidance related to these rules.
As a result, changes in the interpretation of these rules could result in material adjustments to our application of the
34
new guidance, which could have a material effect on our results of operations and financial condition. Additionally,
any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting
obligations, which could result in regulatory discipline, cessation or disruption of trading in our common stock and
harm investors’ confidence in us.
In addition, certain factors have in the past and may in the future cause us to defer recognition of revenues.
For example, the inclusion in our client contracts of non-standard terms, such as acceptance criteria, could require
the deferral of revenue. To the extent that such contracts become more prevalent in the future our revenue may be
harmed.
Because of these factors and other specific requirements under U.S. GAAP for revenue recognition, we must
have precise terms and conditions in our arrangements in order to recognize revenue when we deliver our solution or
perform our professional services. Negotiation of mutually acceptable terms and conditions can extend our sales
cycle, and we may accept terms and conditions that do not permit revenue recognition at the time of delivery.
Risks Related to Our Intellectual Property
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary
technology and our brand.
Our success and ability to compete depend in part upon our intellectual property. As of December 31, 2023,
our intellectual property portfolio included three registered U.S. trademarks, two pending U.S. trademark
applications, 16 issued U.S. patents, one pending U.S. patent application and one registered U.S. copyright. As
of December 31, 2023, outside the U.S. we also had 10 trademark registrations, five issued patents, and three
pending international PCT patent applications. The expiration dates of our issued patents range from 2030 to 2041.
We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or
license agreements with our employees, clients, partners and others to protect our intellectual property rights.
However, the steps we take to secure, protect and enforce our intellectual property rights may be inadequate. We
may not be able to obtain any further patents or trademarks, our current patents could be invalidated or our
competitors could design their products around our patented technology, and our pending applications may not result
in the issuance of patents or trademarks. We have pending patent applications and trademark registrations outside
the U.S., and we may have to expend significant additional resources to obtain additional protection and maintain
current registrations as we expand our international operations. Furthermore, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford
little or no effective protection of our proprietary technology, and the risk of intellectual property misappropriation
may be higher in these countries. As we expand into additional countries, these risks will be further enhanced.
Consequently, we may be unable to prevent our proprietary technology from being infringed or exploited abroad,
which could affect our ability to expand into international markets or require costly efforts to protect our technology.
In order to protect our intellectual property rights, we may be required to spend significant resources to
monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights will be
costly, time consuming and distracting to our management and could result in the impairment or loss of our
intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses,
counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which
could weaken our intellectual property protection. Accordingly, we may not be able to prevent third parties from
infringing upon or misappropriating our intellectual property. Our failure to secure, protect and enforce our
intellectual property rights could substantially harm the value of our technology, solutions, brand and business.
We will likely continue to be subject to third-party intellectual property infringement claims.
There is considerable patent and other intellectual property development activity and litigation in our industry.
Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well
as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry.
From time to time, third parties have claimed that we are infringing upon their intellectual property rights.
Certain technology necessary for us to provide our solution may be patented, copyrighted or otherwise
protected by other parties either now or in the future. In such case, we would have to negotiate a license for the use
of that technology. We may not be able to negotiate such a license at a price that is acceptable, or at all. The
existence of such a patent, copyright or other protections, or our inability to negotiate a license for any such
technology on acceptable terms, could force us to cease using such technology and offering solutions incorporating
such technology.
35
Others have claimed, or in the future may claim, that our solution and underlying technology infringe or
violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others
may claim cover some or all of our technology or solution. Any claims or litigation could cause us to incur
significant costs and expenses and, if successfully asserted against us, could require that we pay substantial damages
or ongoing royalty payments, require that we refrain from using, manufacturing or selling certain offerings or
features or using certain processes, prevent us from offering our solution or certain features thereof, or require that
we comply with other unfavorable terms, any of which could harm our business and operating results. We may also
be obligated to indemnify our clients or business partners and pay substantial settlement costs, including royalty
payments, in connection with any such claim or litigation and to obtain licenses, which could be costly. Even if we
were to prevail in any such dispute, any litigation regarding our intellectual property could be costly and time
consuming and divert the attention of our management and key personnel from our business operations.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property
infringement and other losses.
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we
agree to indemnify clients, vendors, lessors, business partners and other parties for third party claims with respect to
certain matters, including, but not limited to, losses arising out of breach of such agreements, certain claims related
to third-party privacy or cyber security breaches or from intellectual property infringement claims made by third
parties. In addition, we have entered into indemnification agreements with our directors, officers and certain
employees that will require us, among other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors, officers or employees. Large indemnity payments or damage claims
from contractual breach could harm our business, results of operations and financial condition. Although we
typically contractually limit our liability with respect to such obligations, we may still incur substantial liability
related to them. Any dispute with a client with respect to such obligations could be expensive, even if we ultimately
prevail, and could harm our relationship with that client and other current and prospective clients, reduce demand for
our solution and harm our business, results of operations and financial condition.
We employ third-party licensed software for use in or with our solution, and the inability to maintain these
licenses or errors in the software we license could result in increased costs, or reduced service levels, which could
harm our business.
Our solution incorporates certain third-party software obtained under licenses from other companies. We
anticipate that we will continue to rely on current and new software from third parties in the future. Although we
believe that there are commercially reasonable alternatives to the third-party software we currently license, this may
not be the case, or may not be the case for new software that we license, or it may be difficult or costly to transition
to other providers. In addition, integration of the software used in our solution with new third-party software may
require significant work and require substantial investment of our time and resources. To the extent that our solution
depends upon the successful operation of third-party software in conjunction with our software, any undetected
errors or defects in this third-party software could prevent the deployment or impair the functionality of our solution,
delay new product or solution introductions, result in increased costs, or a failure of our solution and injure our
reputation. Our use of additional or alternative third-party software would require us to enter into license agreements
with third parties and to integrate such software to our solution.
There can be no assurance that the technology licensed by us will continue to provide competitive features and
functionality or that licenses for technology currently utilized by us or other technology that we may seek to license
in the future, including to replace current third-party software, will be available to us at a reasonable cost or on
commercially reasonable terms, or at all. Third-party licensors may also be acquired or go out of business, which
could preclude us from continuing to use such technology. The loss of, or inability to maintain, existing licenses
could result in lost product features and litigation. The loss of existing licenses could also result in implementation
delays or reductions until equivalent technology or suitable alternative solutions could be developed or identified,
and licensed and these replacements integrated, and could increase our costs and harm our business.
Our solution utilizes open source software, and any failure to comply with the terms of one or more of these open
source licenses could negatively affect our business.
Our solution includes software covered by open source licenses, which may include, for example, free general
public use licenses, open source front-end libraries and open source applications. The terms of various open source
36
licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in
a manner that imposes unanticipated conditions or restrictions on our ability to market our solution. By the terms of
certain open source licenses, we could be required to release the source code of our proprietary software, and to
make our proprietary software available under open source licenses, if we combine our proprietary software with
open source software in a certain manner. In the event that portions of our proprietary software are determined to be
subject to an open source license, we could be required to publicly release the affected portions of our source code,
re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of
which could reduce or eliminate the value of our intellectual property, technologies and solutions. In addition to
risks related to license requirements, usage of open source software can lead to greater risks than use of third-party
commercial software, as open source licensors generally do not provide warranties or controls on the origin of the
software. Given the nature of open source software, there is also a risk that third parties may assert copyright and
other intellectual property infringement claims against us based on our use of certain open source software. Many of
the risks associated with the usage of open source software cannot be eliminated and could harm our business.
Risks Related to Regulatory and Tax Matters
Failure to comply with laws and regulations could harm our business and our reputation.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies,
including agencies responsible for monitoring and enforcing laws and regulations related to employment and labor
laws, workplace safety, environmental protection, privacy or data security, consumer protection,
telecommunications services, anti-bribery, import/export controls, federal securities and taxes. In certain
jurisdictions, these regulatory requirements may be more stringent than those in the United States and in other
circumstances these requirements may be more stringent in the United States. Noncompliance with applicable
regulations or requirements could subject us to investigations, sanctions, mandatory recalls, notification obligations,
enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any
governmental sanctions, fines or penalties are imposed, or if we do not prevail in any civil or criminal litigation, our
business, operating results, financial condition and reputation could be harmed. In addition, responding to any action
will likely result in a significant diversion of management’s attention and resources and an increase in professional
fees. Enforcement actions and sanctions could further harm our business, operating results, financial condition and
reputation.
Alleged or actual failure to comply with the constantly evolving legal and contractual environment surrounding
calling consumers and wireless phone numbers by other companies or our competitors or governmental or
private enforcement actions related thereto, could harm our business, financial condition, results of operations
and cash flows.
The legal and contractual environment surrounding contacting consumers using voice calls or text messages to
their wireless phones is constantly evolving. In the United States, two federal agencies, the Federal Trade
Commission, or the FTC, and the FCC, and various states have laws including, at the federal level, the TCPA that
restrict the placing of certain telephone calls and texts to residential and wireless telephone subscribers by means of
automatic telephone dialing systems, prerecorded or artificial voice messages and fax machines, or placing non-
autodialed telemarketing calls to individuals who do not wish to receive such calls. These laws require companies to
institute processes and safeguards to comply with these restrictions. The legal interpretation of certain of the
requirements of these laws continue to be in dispute before the courts and federal agencies, and it is possible that
legal decisions and agency actions may further alter the legal requirements involved. Some of these laws, where a
violation is established, can be enforced by the FTC, FCC, State Attorneys General, or private party litigants. In
these types of actions, the plaintiff may seek damages, statutory penalties, costs and/or attorneys’ fees.
We have designed our solution to comply with these laws. To the extent that our solution is viewed by clients
or potential clients as less functional, or more difficult to deploy or use, because of our solution’s compliance
features, we may lose market share to competitors that do not include similar compliance safeguards. Our
contractual arrangements with our clients who use our solution to place calls also expressly require them to comply
with all such laws and to indemnify us for any failure to do so. We take numerous steps to reasonably confirm that
the use of our services complies with applicable laws. Even with these efforts, it is possible that the FTC, FCC,
private litigants or others may attempt to hold our clients, or us as a software solution provider, responsible for
alleged violations of these laws. To the extent any court finds that the software solution violated a controlling legal
standard, we could face indemnification demands from our clients for costs, fees and damages with respect to calls
37
placed using that solution. It also is possible that we may not successfully enforce or collect upon our contractual
indemnities from our clients. Defending such suits can be costly and time-consuming and could result in fines,
damages, expenses and losses. Additionally, these laws, and any changes to them or the interpretation thereof, that
further restrict calling consumers, including to wireless phone numbers, adverse publicity regarding the alleged or
actual failure by companies, including our clients and competitors, to comply with such laws or governmental or
private enforcement actions related thereto, could result in a reduction in the use of our solution by our clients and
potential clients, which could harm our business, financial condition, results of operations and cash flows.
On December 12, 2018, the FCC issued an order concluding that the Short Message Service, or SMS, or text
messages, is an information service under federal law and not a telecommunications service. The regulatory
significance to us is that the FCC’s decision gives wireless carriers the flexibility to block SMS messages if the
carriers identify the messages as unwanted by their wireless customers. More recent FCC decisions also require
wireless carriers to block certain calls and text messages. Such blocking efforts by carriers may make it more
difficult for our clients to use SMS messages that are provided by us as a part of our overall communications and
outreach solution for our clients. Further, on December 18, 2023, the FCC revised its mandate that a consumer’s
prior written consent must be secured prior to initiating SMS messages to them that are telemarketing in nature. The
revised rules require that such consent cannot be shared between multiple sellers or between different product and
service lines. Thus, although SMS comprises only a very small portion of our revenue base, its future availability as
an effective tool for communication and outreach for our clients and their customers is uncertain and could cause our
solution to be less valuable to clients and potential clients.
Increased taxes on our service may increase our clients’ cost of using our service and/or increase our costs and
reduce our profit margins to the extent the costs are not passed through to our clients, and we may be subject to
liabilities for past sales and other taxes, surcharges and fees.
Based on analysis of our activities, we have determined that we are obligated to collect and remit U.S. state or
local sales, use, gross receipts, excise and utility user taxes, as well as fees or surcharges as a communications
service provider in certain U.S. states, municipalities or local tax jurisdictions. We are registered for collecting and
remitting applicable taxes where such a determination has been made. Prior to our making such determination, we
neither collected nor remitted these taxes, fees or surcharges to applicable local, municipal or state jurisdictions. We
continue to analyze our activities to determine if we are subject to these taxes in additional jurisdictions and based
on our ongoing assessment of our U.S. state and local tax collection and remittance obligations, we register for tax
and regulatory purposes in such jurisdictions and commence collecting and remitting applicable state and local taxes
and surcharges to these jurisdictions.
We have accrued a contingent liability of $1.7 million for our best estimate of the probable amount of taxes
and surcharges that may be imposed by various states and municipalities on our activities, including our usage-based
and subscription services, prior to registration. This contingent liability is based on our analysis of a number of
factors, including the source location of our usage-based fees, the taxability of our subscription services and the
rules and regulations in each state. The actual amount of state and local taxes and surcharges paid may differ from
our estimates. See Note 10 to the consolidated financial statements.
While we have accrued for these potential liabilities in each period, such accruals are based on analyses of our
business activities, the operation of our solution, applicable statutes, regulations and rules in each state and locality
and estimates of sales subject to sales tax or other charges. State and local taxing and regulatory authorities may
challenge our position and may decide to audit our business and operations with respect to state or local sales, use,
gross receipts, excise and utility user taxes, fees or surcharges, which could result in our being liable for taxes, fees,
or surcharges, as well as related penalties and interest, above our recorded accrued liability or additional liability for
taxes, fees, or surcharges, as well as penalties and interest for our clients, which could harm our results of operations
and our relationships with our clients. In addition, if our international sales grow, additional foreign countries may
seek to impose sales or other tax collection obligations on us, which would increase our exposure to liability.
The applicability of state or local taxes, fees or surcharges relative to services such as ours is complex,
ambiguous and subject to interpretation and change. If states enact new legislation or if taxing and regulatory
authorities promulgate new rules or regulations or expand or otherwise alter their interpretations of existing rules
and regulations, we could incur additional liabilities. The amount that we are required to pay under certain of these
tax and regulatory structures also continues to increase as a percentage of our telecommunications revenues. The
collection of additional taxes, fees or surcharges in the future could increase our prices or reduce our profit margins.
Compliance with new or existing legislation, rules or regulations may also make us less competitive with those
competitors who are not subject to, or choose not to comply with, such legislation, rules or regulations. We have
38
incurred, and will continue to incur, substantial ongoing costs associated with complying with state or local tax, fee
or surcharge requirements in the numerous markets in which we conduct or will conduct business.
Our ability to maintain compliance with complex rules and technological requirements intended to prevent
robocalls and caller ID spoofing poses a significant business risk due to possible blocking of client voice traffic.
The FCC has adopted rules based on federal statute that require all providers of voice communications
services, with limited exceptions, to implement the STIR/SHAKEN caller identification authentication framework
designed to reduce fraudulent robocalls and illegal phone number identification, or ID, spoofing. STIR stands for
Secure Telephony Identity Revisited. SHAKEN stands for Secure Handling of Asserted information using toKENs.
We have completed our implementation of STIR/SHAKEN technology, but the implementation process was
complex and involved compliance with a number of related regulatory regimes.
STIR/SHAKEN is a series of protocols and a governance framework in which the originating voice service
provider attests to the calling party’s identity and is intended to ensure the caller’s ID has not been spoofed in order
to reduce the number of illegal robocalls. The STIR/SHAKEN regulatory framework creates a significant business
risk for companies such as ours that include clients that originate large volumes of telephone calls to consumers
because, if an intermediate or terminating carrier is unable to verify the authenticity of an incoming call from one of
our clients, they may, or may be required to block the call, preventing it from reaching the intended party, which
would damage our relationship with our clients, and make our solution less attractive to our clients and potential
clients.
In addition, the FCC required voice service providers to implement other robocall prevention measures,
including registering with the FCC’s Robocall Mitigation Database and maintaining a robocall mitigation plan that
includes conducting due diligence on customers to ensure they do not engage, or appear to engage, in robocalling or
caller ID spoofing. Third party complaints and unusual calling patterns on end user bills must be investigated and
the services of non-compliant clients terminated. Voice service providers must also participate in an Industry
Traceback Group program to further demonstrate their commitment to preventing robocalls and caller ID spoofing.
We have implemented these remedial measures to ensure that other carriers do not misidentify or block voice traffic
originated by our clients. Although we believe we have achieved full compliance, the regulatory measures to
prevent robocalling and caller ID spoofing are relatively new, complex and continue to change and therefore pose a
risk to all voice service providers with respect to the possible misidentification and blocking of voice calls originated
by their clients. These new compliance measures have and will increase our regulatory compliance and other costs,
could make our solution less attractive to our clients, and any non-compliance could subject us to fines, damages and
penalties, or injunctions precluding the use of our solutions or certain features thereof.
Our ability to offer services outside the United States is subject to different regulatory and taxation requirements,
which may be complicated and uncertain.
As we continue to expand the sale and implementation of our solution internationally, we will be subject to
additional regulations, taxes, surcharges and fees. Compliance with these new complex regulatory requirements
differ from country to country, and are frequently changing and may impose substantial compliance burdens on our
business. At times, it may be difficult to determine which laws and regulations apply and we may discover that we
are required to comply with certain laws and regulations after having provided services for some time in that
jurisdiction, which could subject us to retroactive taxes, fees and penalties, and we may be subject to conflicting
requirements. Additionally, as we expand internationally, the risk that governments will regulate or impose new or
increased taxes or fees on our services increases. Any such additional regulation or taxes could increase our costs
and our tax payments, decrease the value of our international expansion, or impede our ability to expand
internationally, and therefore harm our results of operations.
The Organization for Economic Co-operation and Development (“OECD”) Pillar 2 guidelines address the
increasing digitalization of the global economy, re-allocating taxing rights among countries. The European Union
and many other member states have committed to adopting Pillar 2 which calls for a global minimum tax of 15% to
be effective for tax years beginning in 2024. The OECD guidelines published to date include transition and safe
harbor rules around the implementation of the Pillar 2 global minimum tax. We are monitoring developments and
evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor
rules.
We are subject to assessments for unpaid USF contributions, as well as interest thereon and civil penalties, due to
our prior position that we were not subject to regulation as a USF contributor and as an international carrier.
39
We are classified as a telecommunications service provider for regulatory purposes and we are required to
make direct contributions to the USF based on revenue we receive from the resale of interstate and certain
international telecommunications services. In order to comply with the obligation to make direct contributions, we
are registered with the Universal Service Administrative Company, or USAC, which is charged by the FCC with
administering the USF, and have been remitting the required contributions to USAC since our registration with
USAC in April 2013.
We also made retroactive USF contributions based on our revenues for the period from 2008 to 2012. We
have an unresolved and arguably dormant dispute with the FCC, however, regarding whether we are liable for USF
contributions related to the period from 2003 through 2007. As of December 31, 2023, we had accrued $0.1 million
in interest related to the disputed assessments for the period of 2003 through 2007. See Note 10 to the consolidated
financial statements.
Our ongoing obligations to pay federal, state and local telecommunications contributions and taxes may
decrease our price advantage over, and ability to compete with our competitors who are not subject to, or choose not
to comply with, those requirements. In addition, if we are unable to continue to pass some or all of the cost of these
contributions and taxes to our clients, our profit margins on the telecommunication service minutes we resell will
decrease. Our federal contributions and tax obligations may significantly increase in the future, due to new
interpretations by governing authorities, governmental budget pressures, changes in our business model or solutions
or other factors.
If we do not comply with FCC rules and regulations, we could be subject to further FCC enforcement actions,
fines, loss of licenses and possibly restrictions on our ability to operate or offer certain of our services.
Since our business is regulated by the FCC, we are subject to existing or potential FCC regulations relating to
privacy, disability access, access to and porting of numbers, USF contributions and other requirements. If we do not
comply with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses and
possibly restrictions on our ability to operate or offer certain of our services. Any enforcement action by the FCC,
which may be a public process, would hurt our reputation in the industry, could impair our ability to sell our services
to clients and could harm our business and results of operations.
The regulations to which we are subject (in whole or in part) include:
•
•
•
•
•
•
•
the TRACED Act and corresponding regulations from the FCC, which requires carriers to authenticate
incoming calls using the STIR/SHAKEN caller ID framework and correspondingly compels providers of
telecommunications services to implement capabilities to certify as authentic the traffic they provide to
those carriers, and to block transmission of certain calls;
the Communications Assistance for Law Enforcement Act, or CALEA, which requires covered entities to
assist law enforcement in undertaking electronic surveillance;
enhanced 911 rules, KARI’s Law and RAY BAUM’s Act, which, in some circumstances, require
telecommunications service providers to ensure their users can directly dial 911 emergency services and, if
technically feasible, automatically convey dispatchable location information with the call;
contributions to the USF which requires that we pay a percentage of our revenues resulting from the
provision of interstate and some international telecommunications services to support certain federal
programs;
payment of annual FCC regulatory fees based on our interstate and international revenues;
rules pertaining to access to our services by people with disabilities and contributions to the
Telecommunications Relay Services fund; and
FCC rules regarding CPNI which requires that we limit disclosure of certain information received from
customers without client approval, subject to certain exceptions.
If we do not comply with any current or future rules or regulations that apply to our business, we could be
subject to additional and substantial fines and penalties, we may have to restructure our solution, exit certain
markets, accept lower margins or raise the price of our solution, any of which could harm our business and results of
operations.
40
We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards,
which could harm our profitability and financial condition.
As of December 31, 2023, we had federal, state and foreign net operating loss carryforwards due to prior
period losses of $403.4 million, $298.6 million and $14.0 million, respectively, available to reduce future income
subject to income taxes. If not utilized, $69.5 million of federal and various amounts of significant state net
operating loss carryforwards will begin to expire in 2027 and 2028, respectively, $339.9 million of federal net
operating losses, as well as the foreign net operating losses, do not expire. As of December 31, 2023, we also had
gross research credit carryforwards for federal and California state tax purposes of $12.9 million and $7.5 million,
respectively. The federal research credit carryforwards will expire between 2024 and 2043. The California research
credit carryforwards do not expire. If we are unable to generate sufficient taxable income to utilize our net operating
loss and research tax credit carryforwards, these carryforwards could expire unused and be unavailable to offset
future income tax liabilities, which could harm our profitability and financial condition in future periods.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or IRC Section 382, our
ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable
year may be limited if we experience an “ownership change.” The events that may cause ownership changes include,
but are not limited to, a cumulative stock ownership change of greater than 50 percentage points over a three-year
period. Similar rules may apply under state tax laws. We experienced ownership changes prior to 2015 and the
disclosed amounts of our net operating losses and research credit carryforwards have been reduced for the resulting
effect of the IRC Section 382 limitations, as necessary. Subsequent or future issuances or sales of our stock
(including certain transactions involving our stock that are outside of our control) could cause an “ownership
change” again, which would impose an annual limit on the amount of pre-ownership change net operating loss
carryforwards and other tax attributes we can use to reduce our taxable income. This could potentially cause those
tax attributes to expire unused or to be reduced, which would increase and accelerate our liability for income taxes.
It is possible that such an ownership change could materially reduce our ability to use our net operating loss
carryforwards or other tax attributes to offset taxable income, which could require us to pay more income taxes than
if we were able to fully utilize our net operating loss carryforwards and harm our profitability.
Privacy concerns and domestic or foreign laws and regulations may reduce the demand for our solution, increase
our costs and harm our business.
Our clients use our solution to collect, transfer, use, and otherwise process, collectively, Process or Processing,
personal data regarding their customers and potential customers. The Processing of personal data and other types of
protected data subjects us and our customers to a number of domestic and international laws that govern and regulate
the Processing of personal data and other types of protected data. These laws regulate and address a range of issues
including data privacy (e.g., restrictions or technological or process requirements regarding the Processing of data),
cybersecurity (e.g., requirements for the protection of personal data against compromise of the confidentiality,
integrity, or availability of personal data), breach notification, data governance, and risk management and reporting
including as relevant to use of certain AI-based systems and solutions. These laws can vary substantially from
jurisdiction to jurisdiction, and are rapidly evolving. Domestic and international government authorities are
considering adopting, or may adopt, laws and regulations in the future, regarding the Processing of personal data
obtained from consumers and individuals. Government authorities and, in some cases, private party litigants could
pursue claims against us or our customers. In these types of actions, the plaintiff may seek damages, statutory
penalties, costs and/or attorneys’ fees.
In the U.S., there are numerous federal and state laws governing the privacy and security of personal data. For
instance, we may be subject to FTC enforcement actions if the FTC has reason to believe we have engaged in unfair
or deceptive privacy or data security practices in violation of the FTC Act. There are also state privacy laws,
including the California Consumer Privacy Act, or CCPA, the California Privacy Rights Act, or CPRA, the
Colorado Privacy Act, or CPA, the Connecticut Data Privacy Act, or CDPA, the Utah Consumer Privacy Act, or
UCPA, and the Virginia Consumer Data Protection Act, or VCDPA, that set forth comprehensive privacy
obligations regarding the Processing of personal data, which relevant State Attorney General or other state
regulatory bodies can enforce. Other states have recently enacted their own versions of data privacy laws, and we
expect this trend to continue. Some states also have enacted privacy laws focusing on particular types of
information, such as health or biometric information, including Connecticut, Illinois, Nevada, and Washington, and
private party litigants are exploring whether state wiretap laws, statutory invasion of privacy, and common law
claims may be used to pursue privacy causes of action.
41
Moreover, data protection laws and regulations outside the United States, including Brazil, Canada, China,
Japan, Russia, Singapore, the United Kingdom and particularly in the EU, often are more restrictive than those in the
United States. Such laws and regulations may have more stringent compliance obligations in regards to data
protection. While some aspects of these laws are similar to the new U.S. state privacy laws in terms of providing for
data subject privacy rights of access, deletion, correction, and portability, the EU laws often require affirmative
consent for some types of data processing, and broader requirements for informing data protection authorities and
individuals of security breaches that affect their personal data. We also may be bound by additional, more stringent
contractual obligations relating to our collection, use, disclosure and data transfers of personal, financial, and other
data outside the EU. It is possible that a governmental authority may implement a new law or interpret an existing
law in a manner that limits our customers’ ability to use our solution or that requires us to make costly or detrimental
changes in our solution and services, whether on a one-time basis or as an ongoing increase in our operating costs
and expenses. Further, some laws might require us to disclose proprietary or confidential aspects of our solution in a
manner that compromises the effectiveness of our solution or that enables our competitors or bad actors to gain
insight into the operation of our technology, enabling them to copy or circumvent our solution and thereby reducing
the value of our technology.
The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to
us and the businesses of our clients may limit the use and adoption of our solution and reduce overall demand for
our solution. Also, failure to comply with such laws may lead to significant fines, penalties or other regulatory
liabilities, such as orders or consent decrees forcing us or our clients to modify business practices, and reputational
damage or third-party lawsuits for any noncompliance with such laws. Our business could be harmed if legislation
or regulations are adopted, interpreted or implemented in a manner that is inconsistent from country to country and
inconsistent with our current policies and practices, or those of our clients.
Furthermore, data privacy and protection concerns may cause consumers to resist providing personal data or
other types of protected data that may be subject to laws and regulations that is necessary to allow our clients to use
our solution effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption
of our solution in certain industries or countries.
The European Union’s GDPR may continue to increase our costs and the costs of our clients to operate, limit the
use of our solution or change the way we operate, exposes us to substantial fines and penalties if we fail to
comply, and has led to similar laws being enacted in other jurisdictions.
We and many of our customers are subject to the GDPR based upon our processing of personal data collected
from EU data subjects, such as our processing of personal data of our customers in the EU and our processing of our
EU employees’ personal data.
The GDPR enhances data protection obligations for processors and controllers of personal data, including, for
example, expanded disclosures about how personal information is to be used, limitations on retention of information,
mandatory data breach notification requirements and onerous new obligations on services providers. Non-
compliance with the GDPR can trigger steep fines of up to €20 million or 4% of total worldwide annual turnover,
whichever is higher. The member states of the EU were tasked under the GDPR to enact certain implementing
legislation that would add to or further interpret the GDPR requirements and this additional implementing legislation
potentially extends our obligations and potential liability for failing to meet such obligations.
Given the breadth and depth of changes in data protection obligations, our compliance with the GDPR’s
requirements will continue to require time, resources and review of the technology and systems we use to satisfy the
GDPR’s requirements. We have ongoing procedures to maintain GDPR compliance. We continue to deliver product
features that enhance our data management and security in support of GDPR compliance.
Among the compliance obligations the GDPR raises for us and our customers are requirements regarding the
transfer of personal data from the EU to other jurisdictions, including the United States. We continue to rely on
Standard Contractual Clauses, or SCCs, and have updated our use of use of SCCs to the EU’s latest versions, as well
as separate U.K. versions of the SCCs. Even still, there continue to be EU legal decisions and certain regulatory
guidance that cast doubt on the legality of EU-U.S. data flows in general. Any inability to transfer personal data
from the EU to the U.S. in compliance with data protection laws may impede our ability to attract and retain
customers and adversely affect our business and financial position. As a result, it may be necessary to establish
additional systems and business operations in the EU to avoid the transfer of personal data out of the EU. Should a
change in the conduct of our business be required, it may involve substantial expense and the diversion of resources
from other aspects of our business, all of which may harm our business and results of operations.
42
Jurisdictions outside of the EU are also considering and/or enacting comprehensive data protection legislation.
For example, on July 8, 2019, Brazil enacted the General Data Protection Law, or the LGPD, and on June 5, 2020,
Japan passed amendments to its Act on the Protection of Personal Information, or the APPI. Both laws broadly
regulate the processing of personal information in a manner comparable to the GDPR, and violators of the LGPD
and APPI face substantial penalties. Most recently, India enacted the Digital Personal Data Protection Act, 2023,
which establishes a legal framework regulating the processing of personal data in India and processing outside of
India if it is related to offering goods or services to individuals in India. The law is comparable to GDPR in many
ways, but also has some distinct elements, which forthcoming regulations may further clarify. We also continue to
see jurisdictions, such as Russia, imposing data localization laws, which under Russian laws require personal
information of Russian citizens to be, among other data processing operations, initially collected, stored, and
modified in Russia. Similarly, on November 1, 2021, China’s Personal Information Protection law came into effect,
which places restrictions on the transfer of personal information to third parties within China or overseas. These
regulations may deter customers from using services such as ours, and may inhibit our ability to expand into those
markets or prohibit us from continuing to offer services in those markets without significant financial burden.
The GDPR and other laws or regulations associated with the enhanced protection of certain types of personal
data, could greatly increase our cost of providing our solutions and services, require significant changes to our
operations or even prevent us from offering certain services in jurisdictions in which we operate. Failure to comply
with data protection regulations may result in data protection authorities and other privacy regimes imposing
additional obligations to obtain consent from data subjects by or on behalf of our customers. Additionally, the
inability to guarantee compliance or otherwise provide acceptable privacy assurances may inhibit the sale and use of
our software in the EU and certain other markets, which could, were it to occur, harm our business and operating
results.
Because the interpretation and application of many privacy and data protection laws (including the GDPR),
commercial frameworks, and standards are uncertain, it is possible that these laws, frameworks, and standards may
be interpreted and applied in a manner that is inconsistent with our existing data protection practices. If so, we and
our customers are at risk of enforcement actions taken by data protection authorities or litigation from consumer
advocacy groups acting on behalf of data subjects. In addition to the possibility of fines, lawsuits, breach of contract
claims, and other claims and penalties, we could be required to fundamentally change our business activities and
practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately
address privacy and security concerns, even if unfounded, or comply with applicable privacy and security or data
security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation,
inhibit sales, and adversely affect our business.
U.S. state privacy laws, including the CCPA, CPA, CTDPA, UCPA and VCDPA could increase our costs and the
costs of our clients to operate, limit the use of our solution or change the way we operate, and expose us to
substantial fines and class action risk if we fail to comply, and lead to similar laws being enacted in other states.
The CCPA, CPA, CTDPA, UCPA, VCDPA, and other privacy laws in the United States apply to certain
entities doing business in such states, and we and our qualifying customers were required to comply with applicable
requirements as of the effective dates of the applicable state laws or corresponding regulations.
The U.S. state privacy laws establish a privacy framework for covered businesses by creating an expanded
definition of personal data and creating new data privacy rights for eligible residents in those states, including the
right to the right to access, delete or correct such data, the right to opt out of sales or use of their personal data for
targeted advertising or profiling purposes, the right to limit the use and disclosure of their sensitive personal data and
the right to be free from discrimination for exercising their rights. Eligible residents of those states may also appeal
any decision or indecision related to the exercise of any of their data privacy rights. As required by the statutes,
covered entities also have disclosure obligations to consumers for whom they collect or process personal data.
Complying with these obligations involves continued expenditures that could increase as more consumers exercise
their privacy law rights.
The U.S. state privacy laws create new and potentially severe statutory damages frameworks for violations of
their provisions. Additionally, the CCPA creates a private right of action for consumers whose personal data is
subject to a data breach. This private right of action has the potential to create significant class action liability for
businesses, like ours, that operate in California. To protect against these new risks, it may be necessary to change
our insurance programs.
43
The effects of the U.S. state privacy laws are potentially significant and may require us to modify our data
collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and
increase our potential exposure to regulatory enforcement and/or litigation. We anticipate that more states may enact
their own comprehensive or subject matter specific privacy legislation and provide consumers with new privacy
rights and increases the privacy and security obligations of entities handling certain personal data of such
consumers. These laws have prompted a number of proposals for new federal and state-level privacy legislation, and
related legislation affecting the use of certain types of AI-based systems and services. Such proposed legislation, if
enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require
additional investment of resources in compliance programs, impact strategies and the availability of previously
useful data and could result in increased compliance costs and/or changes in business practices and policies.
Risks Related to Ownership of Our Convertible Senior Notes
Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our
business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle
conversions of the convertible senior notes in cash or to repurchase the convertible senior notes for cash upon a
fundamental change, which could adversely affect our business and results of operations.
In May and June 2020, we issued $747.5 million in aggregate principal amount of the 2025 convertible senior
notes in a private offering, all of which were outstanding as of December 31, 2023. The 2025 convertible senior
notes mature on June 1, 2025, and the interest rate of the 2025 convertible senior notes is fixed at 0.500% per
annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020.
Our ability to make scheduled payments of principal and interest, or to refinance our indebtedness, including
the 2025 convertible senior notes, depends on our future performance, which is subject to economic, financial,
competitive and other factors beyond our control, including those described in this report. Our business may not
generate cash flows from operations in the future that are sufficient to service our debt and make necessary capital
expenditures. If we are unable to generate sufficient cash flows, we may be required to pursue one or more
alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on
terms that may be onerous or highly dilutive to existing holders of our common stock. Our ability to obtain
additional financing or refinance the 2025 convertible senior notes, or any future indebtedness, will depend on
conditions in the capital markets and our financial condition at such time, among other factors. We may not be able
to engage in any of these activities on favorable terms or at all, which could result in a default on our debt
obligations or other material adverse effects on our business and financial condition.
Subject to certain conditions, holders of the 2025 convertible senior notes have the right to require us to
repurchase for cash all or any portion of their 2025 convertible senior notes upon the occurrence of a fundamental
change (as defined in the indenture governing the 2025 convertible senior notes) 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 applicable fundamental change repurchase date.
Upon conversion of the 2025 convertible senior notes in accordance with their terms, unless we elect to
deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any
fractional share), we will be required to settle a portion or all of our conversion obligation through the payment of
cash. We may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases in connection with such conversion and our ability to pay may be further limited by law, regulatory
authority or agreements governing our future indebtedness. Our failure to repurchase any 2025 convertible senior
notes at a time when the repurchase is required by the indenture or to pay any cash payable on any future
conversions as required by the indenture would constitute a default under the indenture. A default under the
indenture would lead to, and the occurrence of the fundamental change itself may also lead to, a default under
agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated
after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness or
repurchase the 2025 convertible senior notes when required, or to make cash payments upon conversions thereof.
If triggered, the conditional conversion feature of the 2025 convertible senior notes may adversely affect our
financial condition and operating results.
If and to the extent the conditional conversion feature of our 2025 convertible senior notes is triggered,
holders of the 2025 convertible senior notes will be entitled to convert their 2025 convertible senior notes at any
time during specified periods at their option. During the three months ended December 31, 2023, the conversion
44
features of the 2025 convertible senior notes were not triggered. Accordingly, holders of the 2025 convertible senior
notes are not entitled to convert their convertible senior notes from January 1, 2024 to March 31, 2024. Whether the
2025 convertible senior notes will be convertible after March 31, 2024 will depend on the satisfaction of the
conversion conditions.
To the extent that the conditional conversion features of the 2025 convertible senior notes are triggered in
the future, holders of the 2025 convertible senior notes will be entitled to convert their 2025 convertible senior notes
at any time during the specified periods at their option. If one or more holders elect to convert their 2025 convertible
senior notes during any such specified period, we have the option to pay or deliver, as the case may be, cash, shares
of our common stock or a combination of cash and shares of our common stock, at our election. Any election to
settle conversions of 2025 convertible senior notes with cash could adversely affect our liquidity.
Transactions relating to the 2025 convertible senior notes may dilute the ownership interests of our existing
stockholders or adversely affect the market price of our common stock; the trading price of our 2025 convertible
senior notes may be affected by volatility in the price of our common stock.
The conversion of some or all of the 2025 convertible senior notes would dilute the ownership interests of
our existing stockholders to the extent we satisfy our conversion obligation by delivering shares of our common
stock. In this regard, if holders of the 2025 convertible senior notes elect to convert their notes, we may settle our
conversion obligations by delivering to them cash, shares of our common stock or a combination thereof. In
addition, we may issue shares of our common stock in connection with repurchases, exchanges or other transactions
involving the convertible senior notes. Historically, we have elected to satisfy our convertible senior note conversion
obligations through the payment of cash in certain circumstances, the issuance of shares of common stock in other
circumstances, or a combination thereof, to such convertible senior note holders. See Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources, for
further discussion of our elections to satisfy our conversion obligations.
In addition, in connection with the issuance of the 2025 convertible senior notes, we entered into capped
call transactions with certain financial institutions, or the Option Counterparties. The capped call transactions are
expected generally to reduce the potential dilution to holders of our common stock upon any conversion or
settlement of the 2025 convertible notes and/or offset any cash payments we are required to make in excess of the
principal amount of such 2025 convertible senior notes, as the case may be, with such reduction and/or offset subject
to a cap under the terms of the capped call transactions. We expect that the Option Counterparties or their respective
affiliates may from time to time purchase shares of our common stock and/or enter into various derivative
transactions with respect to our common stock in connection with their hedging activities relating to the capped call
transactions. The Option Counterparties or their respective affiliates also may modify their hedge positions by
entering into or unwinding such derivative transactions and/or purchasing or selling our common stock or other
securities of ours in secondary market transactions prior to the applicable maturity of the 2025 convertible senior
notes. These activities could negatively affect the market price of our common stock.
Volatility and declines in the trading price of our common stock may result in decreases in the trading
prices of our 2025 convertible senior notes. Our 2025 convertible senior notes do not trade in a liquid market and are
thus subject to increased volatility, particularly when our common stock price is volatile.
General Risk Factors
Our stock price has been volatile, may continue to be volatile and may decline, including due to factors beyond
our control.
The market price of our common stock has been volatile in the past and may fluctuate significantly in the
future in response to numerous factors, many of which are beyond our control. During the twelve months ended
December 31, 2023, the sale price per share of our common stock ranged from a low of $51.50 to a high of $87.94.
Factors that may contribute to continuing volatility in the price of our common stock include:
•
•
•
actual or anticipated fluctuations or declines in our operating results;
the impact of 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,
or other factors;
loss of clients or a reduction, or slower growth, in subscriptions or features subscribed to by our existing
clients;
45
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
any major change in our board of directors or management;
the financial projections we provide to the public, any changes in these projections, our failure to meet
these projections, or our failure to exceed these projections by amounts or percentages expected by our
investors and analysts;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates
by any securities analysts who follow our company, or our failure to meet these estimates or the
expectations of investors;
ratings changes by any securities analysts who follow our company;
sales of our common stock (or securities that convert into our common stock) by us or sales by our
significant stockholders, or the public announcement of same;
the assessment of our business or position in our market published in research and other reports;
announcements by us or our competitors of significant product or technical innovations, financings,
acquisitions, strategic partnerships, joint ventures or capital commitments;
entry into the market by new competitors, or the introduction of new products or the generation of new
sales by us or our competitors;
changes in operating performance and stock market valuations of other technology companies generally, or
those in the software as a service industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the U.S. or
global economy;
lawsuits threatened or filed against us;
security breaches or incidents impacting our clients or their customers and security breaches of companies
that provide solutions similar to our solution, which could negatively impact our industry as a whole;
legislation or regulation of our business, the business of our clients, the internet and/or contact centers;
new entrants into and consolidations of the contact center market, including the transition by providers of
legacy on-premise contact center systems to cloud solutions;
acquisitions by us or our competitors, and our ability to effectively integrate and achieve the desired
benefits from acquisitions by us;
the perceived or real impact of events that harm our competitors;
loss of key personnel;
developments with respect to patents or proprietary rights; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these
events, which would be unrelated to our business and industry, and outside of our control.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many technology companies, particularly in connection
with the continued macroeconomic deterioration, including continued inflation, increased interest rates, supply chain
disruptions, decreased economic output and fluctuations in currency rates, the Russia-Ukraine conflict and the
conflict in Israel. Stock prices of many technology companies have recently declined, including in some cases in a
manner unrelated or disproportionate to the operating performance of those companies. These and other factors may
disproportionately impact the trading price of our common stock. In the past, stockholders have instituted securities
class action litigation following periods of volatility. If we were to become involved in such securities litigation, it
could subject us to substantial costs, divert resources and the attention of management from our business and harm
our business, results of operations, financial condition, reputation and cash flows.
If securities or industry analysts discontinue publishing research or reports about our business, or publish
negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or
industry analysts publish about us or our business, our industry, our market and our competitors. We do not have any
control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their
opinion of our shares or our business, our share price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in financial markets or
our industry market, which could cause our share price or trading volume to decline.
Substantial future sales of shares of our common stock could cause the market price of our common stock and
our convertible senior notes to decline.
The market price of shares of our common stock and our convertible senior notes could decline as a result of
substantial sales of our common stock, particularly sales by our directors, executive officers and significant
stockholders or the perception in the market that holders of a large number of shares intend to sell their shares.
46
The future registration of shares of our common stock may cause our stock price and the price of our
convertible senior notes to decline, even before such shares are actually sold in the market. We have registered
shares of common stock that we may issue under our employee equity incentive plans. These shares can be sold
freely in the public market upon issuance.
We are unable to predict the effect that sales, or the perception that our shares may be available for sale, will
have on the prevailing market price of our common stock.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our
company more difficult, limit attempts by our stockholders to replace or remove our current management and
limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may
have the effect of delaying or preventing a change in control or changes in our management. Our amended and
restated certificate of incorporation and amended and restated bylaws:
•
•
•
•
•
•
•
•
•
•
•
provide that our board of directors is classified into three classes of directors;
provide that stockholders may remove directors only for cause;
provide that the authorized number of directors may be changed only by resolution of the board of
directors;
provide that all vacancies, including newly created directorships, may, except as otherwise required by law,
be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
provide that our stockholders may not take action by written consent, and may only take action at annual or
special meetings of our stockholders;
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate
candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely
manner, and also specify requirements as to the form and content of a stockholder’s notice;
restrict the forum for certain litigation against us to Delaware;
restrict the forum for complaints asserting a cause of action under the Securities Act to the federal district
courts;
do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of
common stock entitled to vote in any election of directors to elect all of the directors standing for election);
provide that special meetings of our stockholders may be called only by the chairman of the board, our
chief executive officer or the board of directors pursuant to a resolution adopted by a majority of the total
number of authorized directors; and
provide that stockholders will be permitted to amend our amended and restated bylaws and certain parts of
our amended and restated certificate of incorporation only upon receiving at least 662/3% of the votes
entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of
directors, voting together as a single class.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management. In addition, because we are incorporated in Delaware,
we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally
prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any
“interested” stockholder for a period of three years following the date on which the stockholder became an
“interested” stockholder.
The existence of these provisions could negatively affect the price of our common stock and limit
opportunities for you to realize value in a corporate transaction.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the sole and exclusive forum for certain disputes between us and our stockholders, and our Bylaws
provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of
action under the Securities Act, each of which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers, employees, or agents.
47
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an
alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (1) any
derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of fiduciary duty
owed by any of our directors, officers or other employees to us or to our stockholders, (3) any action asserting a
claim arising pursuant to the Delaware General Corporation Law or (4) any action asserting a claim governed by the
internal affairs doctrine. Furthermore, our Bylaws provide that, unless we consent in writing to an alternative forum,
the federal district courts of the United States are the sole and exclusive forum for the resolution of any complaint
asserting a cause of action under the Securities Act.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such
lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might
benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation
costs in pursuing any such claim, particularly if they do not reside in or near the State of Delaware. The Court of
Chancery or federal district courts may also reach different judgments or results than would other courts, including
courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and
such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to
find either of these choice of forum provisions to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving such action in other jurisdictions, which could harm our business,
operating results and financial condition.
We have never paid cash dividends and do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any
future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare
cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend
on a number of factors, including our financial condition, results of operations, capital requirements, contractual
restrictions, including under any future loan facilities, general business conditions and other factors that our board of
directors may deem relevant. While our convertible senior notes do not prohibit payment of dividends, any
dividends declared and paid by our board of directors would result in an adjustment to the conversion rate of such
notes such that additional shares would be issuable upon conversion. Accordingly, holders of our common stock
must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize
any future gains on their investments.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 1C. Cybersecurity
Information Security Management Strategy
We have developed, implemented and maintain a formal “risk based" Information Security Management
System, or ISMS, that is designed to protect the confidentiality, integrity, and availability of the information
contained within our systems. ISMS complies with a number of internationally recognized standards for
information security, including the ISO 27001:2013 Standard for Information Security, AICPA System and
Organization Controls (SOC) for the criteria of Security and Availability; the Payment Card Industry Data Security
Standard 3.2.1, or PCI DSS 3.2.1, the global standard for the payment card industry. In accordance with these
international standards, and included in the ISMS, is our cybersecurity incident response process and plan.
In the event of a potential cybersecurity incident, our Chief Information Security Officer, or CISO, is notified
of the incident and assembles an Incident Response Team, which is comprised of individuals who have the
necessary technical, operational, and regulatory knowledge to assist the CISO. Typically, senior members of our
engineering, operations, security, compliance/data protection office, and legal functions comprise the Incident
Response Team. The Incident Response Team will conduct an assessment to determine the nature and scope of the
incident and manages the incident in accordance with our incident response procedures until the incident is
contained and resolved. The Incident Response Team will document findings and make them available to the
Incident Classification Team, which is comprised of our CISO, Executive Vice President of Production Engineering,
Chief Information Officer, Chief Legal & Compliance Officer, or CLO, Chief Operating Officer, Chief Financial
Officer, and their respective delegates. The Incident Classification Team is responsible for assessing the incident and
48
notifying members of our management and our Board. Our Chief Executive Officer, CLO and CISO, in conjunction
with third party experts, including outside legal counsel and our internal disclosure committee, are responsible for
coordinating external communications and disclosures, including with the Securities and Exchange Commission.
Our ISMS has a risk based formulation. The cybersecurity risk process within the ISMS is an integral
component of our enterprise risk management program, and shares common methodologies, reporting channels and
governance processes that apply across the enterprise risk management program to other legal, compliance, strategic,
operational, and financial risk areas. Cybersecurity incidents and their associated risks are integrated into the
enterprise risk management program, where appropriate mitigating strategies are determined and acted upon to
mitigate cyber security risks.
Our ISMS and cybersecurity risk management program includes:
•
•
•
•
•
•
•
•
risk assessments designed to help identify material cybersecurity risks to our critical systems, information,
products, services, and our broader enterprise IT environment;
a security team principally responsible for (1) recommending and implementing appropriate technologies to
mitigate the cyber security risks; (2) monitoring internal systems and taking appropriate action in the event
of alerts; (3) monitoring the threat landscape; and (4) our response to cybersecurity incidents and
management of the incident response process and the Incident Response Team;
the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of
our security controls, including but not limited to outside legal counsel, reputable third-party firms for 24/7
threat monitoring, detection and response, and third-party experts for conducting periodic process
assessments to help us evaluate and enhance our cybersecurity practices;
cybersecurity awareness training of our employees, incident response personnel, and senior management,
which covers a variety of topics designed to educate our employees about the importance of cybersecurity
awareness, highlight typical cybersecurity-related risks and issues, such as phishing attacks and other
methods used to attempt to infiltrate our systems, and test that awareness using knowledge assessments and
simulations;
external cybersecurity consultants, including Palo Alto Networks Unit 42 Incident Response team,
supervised by our Incident Response Team and Incident Classification Team;
a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents;
a third-party risk management process for service providers, suppliers, and vendors, pursuant to which we
require such third parties to maintain certain security controls and assess their compliance with these
requirements; and
independent third party assessments and audits of our ISMS to determine if it meets the requirements of
international information security standards such as ISO 27001:2013, PCI DSS 3.2.1, HIPAA HiTech,
AICPA SOC criteria for Security and Availability requirements.
We have not identified risks from known cybersecurity incidents, including as a result of any prior
cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our
operations, business strategy, results of operations, or financial condition.
Governance
Our Board considers cybersecurity risk as part of its risk oversight function and the full Board has direct
oversight of cybersecurity and other information technology risks as well as oversees management’s implementation
of our cybersecurity risk management program. Several of our Board members have substantial cybersecurity
experience and have experience in the field, including Ms. Julie Iskow, Ms. Sue Barsamian, Mr. David Welsh and
Mr. David DeWalt.
Our Board receives quarterly reports from management on our cybersecurity processes and risks. In addition,
management updates the Board, as necessary, regarding cybersecurity incidents, including those that are immaterial.
Our Board also receives briefings from management on our cyber risk management program. Board members
receive presentations on cybersecurity topics from our CISO and internal security staff as part of the Board’s
continuing education on topics that impact public companies.
Our management, including our CISO, oversees cybersecurity threats using our Incident Response Team and
Incident Classification Team. Our management is responsible for assessing and managing our material risks from
cybersecurity threats and incidents and has the primary responsibility for our overall cybersecurity risk management
49
program and supervise both our internal cybersecurity personnel and our retained external cybersecurity consultants.
Our management, including our CISO, brings a wealth of knowledge and expertise to our company. Our CISO has
experience in roles including VP Product Security at Palo Alto Networks, VP Product Security at SAP Ariba as well
as CISO for SAP Sales Cloud, which demonstrates a proven track record in developing and implementing robust
cybersecurity strategies, managing large-scale security operations, and leading incident response initiatives. Our
CISO has a deep understanding of emerging cyber threats and technological advancements and is adept at ensuring
compliance with regulatory requirements and industry standards, while fostering a culture of security awareness
throughout the organization.
Our management, through and in conjunction with the Incident Response Team and Incident Classification
Team, supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various
means, which may include briefings from internal security personnel; threat intelligence and other information
obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and
reports produced by security tools deployed in the IT environment.
ITEM 2. Properties
We currently lease approximately 180,000 square feet of office space worldwide. Information concerning our
principal leased properties as of December 31, 2023 is set forth below:
Location
San Ramon, California
The Philippines
Portugal
Australia
Principal Use
Corporate headquarters, sales, marketing,
product design, professional services, research
and development
Technical support, training and other
professional services
Portions of engineering and operations
Square
Footage
104,000
Lease Expiration
Date
January 2031
26,600
July 2026
20,600
August 2025
Research and development, sales, marketing and
client support services
14,000
October 2027
The hosting of our equipment and software at co-located third-party facilities is also significant to our
business. We have entered into rental agreements with third-party facilities in Santa Clara, California; Atlanta,
Georgia; and Slough, England, which require monthly payments for a fixed period of time in exchange for certain
guarantees of space, and network and telecommunication availability. These agreements expire at various dates
through 2028.
We believe our facilities are sufficient for our current needs.
ITEM 3. Legal Proceedings
Information with respect to this item may be found under the heading “Legal Matters” in Note 10 of the Notes
to Consolidated Financial Statements in this Annual Report on Form 10-K, which information is incorporated herein
by reference.
ITEM 4. Mine Safety Disclosures
Not applicable.
50
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information for Common Stock
Our common stock trades on The NASDAQ Global Market, or NASDAQ, under the symbol “FIVN.”
Number of Common Stock Holders
On February 16, 2024, there were 12 stockholders of record of our common stock who held an aggregate
of 73,326,608 shares of our common stock. We believe that there are a substantially greater number of beneficial
owners of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any
future earnings and do not expect to pay any dividends in the foreseeable future. In addition, while our convertible
senior notes do not prohibit payment of dividends, any dividends declared and paid by our board of directors would
result in an adjustment to the conversion rate of such notes such that additional shares would be issuable upon
conversion. Any future determination to declare cash dividends will be made at the discretion of our board of
directors, subject to applicable laws, and will depend on a number of factors, including our financial condition,
results of operations, capital requirements, contractual restrictions, including under any future loan facilities, general
business conditions and other factors that our board of directors may deem relevant.
Stock-Based Compensation
For information on securities authorized for issuance under our equity compensation plans, see ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
51
Stock Performance Graph
The graph below compares the cumulative total return on our common stock with that of the Russell 2000
Index, the NASDAQ Computer Index, and the NASDAQ Computer and Data Processing Index. The period shown
commences on December 31, 2018 and ends on December 31, 2023. The graph assumes $100 was invested at the
close of market on December 31, 2018 in the common stock of Five9, the Russell 2000 Index, the NASDAQ
Computer Index, and the NASDAQ Computer and Data Processing Index, and assumes the reinvestment of any
dividends. Commencing this year, we have started to compare our common stock to the NASDAQ Computer Index
and will cease using the NASDAQ Computer and Data Processing Index as that index is no longer available. The
stock price performance on the following graph is not intended to forecast or be indicative of future stock price
performance of our common stock.
500
400
300
200
100
0
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
Five9, Inc.
Russell 2000 Index
NASDAQ Computer Index
NASDAQ Computer and Data Processing Index
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes
of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed
to be incorporated by reference into any filing of Five9, Inc. under the Securities Act of 1933, as amended, or the
Securities Act of 1934 Exchange, as amended.
ITEM 6. [Reserved]
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this report.
52
Comparison of 5 years Cumulative Total ReturnAssumes Initial Investment of $100 Overview
We are a pioneer and leading provider of intelligent cloud contact centers with more than 3,000 clients. 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-premise contact center systems to our cloud solution. Our
solution, comprised of our VCC cloud platform and applications, allows simultaneous management and optimization
of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through
our APIs. Our VCC cloud platform matches each customer interaction with an appropriate agent resource and
delivers relevant customer data to the agent in real-time through integrations with adjacent enterprise applications,
such as CRM software, to optimize the customer experience and improve agent productivity. Unlike legacy on-
premise contact center systems, our solution requires minimal up-front investment, can be rapidly deployed and
adjusted depending on our client’s requirements.
Since founding our business in 2001, we have focused exclusively on delivering cloud contact center software.
We initially targeted smaller contact center opportunities with our telesales team and, over time, invested in
expanding the breadth and depth of the functionality of our cloud platform to meet the evolving requirements of our
clients. In 2009, we made a strategic decision to expand our market opportunity to include larger contact centers.
This decision drove further investments in research and development and the establishment of our field sales team to
meet the requirements of these larger contact centers. We believe this shift has helped us diversify our client base,
while significantly enhancing our opportunity for future revenue growth. To complement these efforts, we have also
focused on building client awareness and driving adoption of our solution through marketing activities, which
include internet advertising, digital marketing campaigns, social media, trade shows, industry events, telemarketing
and out of home campaigns.
We provide our solution through a SaaS business model with recurring subscriptions. We offer a
comprehensive suite of applications delivered on our VCC cloud platform that are designed to enable our clients to
manage and optimize interactions across inbound and outbound contact centers. We primarily generate revenue by
selling subscriptions and related usage of our VCC cloud platform. We charge our clients monthly subscription fees
for access to our solution, primarily based on the number of agent seats, as well as the specific functionalities and
applications our clients deploy. We define agent seats as the maximum number of named agents allowed to
concurrently access our solution. Our clients typically have more named agents than agent seats, and multiple named
agents may use an agent seat, though not simultaneously. Substantially all of our clients purchase both subscriptions
and related telephony usage from us. A small percentage of our clients subscribe to our platform but purchase
telephony usage directly from wholesale telecommunications service providers. We do not sell telephony usage on a
stand-alone basis to any client. The related usage fees are based on the volume of minutes for inbound and outbound
interactions. We also offer bundled plans, generally for smaller deployments, where the client is charged a single
monthly fixed fee per agent seat that includes both subscription and unlimited usage in the contiguous 48 states and,
in some cases, Canada. We offer monthly, annual and multiple-year contracts to our clients, generally with 30 days’
notice required for reductions in the number of agent seats. Increases in the number of agent seats can be
provisioned almost immediately. Our clients, therefore, are able to adjust the number of agent seats used to meet
their changing contact center volume needs. Our larger clients typically choose annual contracts, which generally
include an implementation and ramp period of several months. Fixed subscription fees, including bundled plans, are
generally billed monthly in advance, while related usage fees are billed in arrears. For the years ended December 31,
2023, 2022 and 2021, subscription and related usage fees accounted for 92%, 91% and 92% of our revenue,
respectively. The remainder was comprised of professional services revenue from the implementation and
optimization of our solution.
Macroeconomic and Other Factors
We are subject to risks and exposures, including those caused by adverse economic conditions, including
macroeconomic deterioration, the Russia-Ukraine conflict and the conflict in Israel.
Macroeconomic factors include the global economic slowdown, continued inflation, increased interest rates,
supply chain disruptions, decreased economic output and fluctuations in currency exchange rates. We continuously
monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the
overall global economy and geopolitical landscape. While the implications of macroeconomic events on our
business, results of operations and overall financial position remain uncertain over the long term, we expect that
adverse economic conditions will continue to have an adverse impact on our revenue in future periods. For example,
53
our installed base business, which typically contributes approximately half of our annual revenue growth, continues
to experience macroeconomic headwinds.
In March 2022, we decided to close our Russia office and to establish a new European development center in
Portugal, in part due to the growing uncertainty arising from the Russia-Ukraine conflict. During the years ended
December 31, 2023 and 2022, we incurred approximately $2.8 million and $7.9 million in costs related to the
closure and relocation of our Russian operations, of which $0.1 million and $0.7 million was recorded in cost of
revenue, $1.7 million and $5.9 million was recorded in research and development expense, $0.5 million and $1.4
million was recorded in general and administrative expense and $0.5 million and $(0.1) million was recorded in
interest income and other in our consolidated statements of operations and comprehensive loss. Going forward, we
do not expect to incur additional material costs related to the closure and relocation of our Russia operations. We
currently do not believe that this decision will have a material effect on our business, results of operations or
financial condition.
Key GAAP Operating Results
Our revenue increased to $910.5 million for the year ended December 31, 2023, from $778.8 million and
$609.6 million for the years ended December 31, 2022 and 2021, respectively. Revenue growth was primarily
attributable to our larger clients, driven by an increase in our sales and marketing activities and our improved brand
awareness. For each of the years ended December 31, 2023, 2022 and 2021, no single client accounted for more than
10% of our total revenue. As of December 31, 2023, we had over 3,000 clients across multiple industries with a
wide range of seat sizes. We had a net loss of $81.8 million, $94.7 million and $53.0 million for the years ended
December 31, 2023, 2022 and 2021, respectively.
We have continued to make significant expenditures and investments, including in sales and marketing,
research and development and infrastructure. 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 clients, grow revenue from
our existing clients, innovate and expand internationally. While these areas represent significant opportunities for us,
they also pose risks and challenges that we must successfully address, including the impact of macroeconomic
deterioration, the Russia-Ukraine conflict and the conflict in Israel, in order to successfully grow our business and
improve our operating results.
Key Operating and Non-GAAP Financial Performance Metrics
In addition to measures of financial performance presented in our consolidated financial statements, we
monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the
effectiveness of our sales and marketing efforts and assess operational efficiencies.
Annual Dollar-Based Retention Rate
We believe that our Annual Dollar-Based Retention Rate provides insight into our ability to retain and grow
revenue from our clients, and is a measure of the long-term value of our client relationships. Our Annual Dollar-
Based Retention Rate is calculated by dividing our Retained Net Revenue by our Retention Base Net Revenue on a
monthly basis, which we then average using the rates for the trailing twelve months for the period presented. We
define Retention Base Net Revenue as recurring net revenue from all clients in the comparable prior year period, and
we define Retained Net Revenue as recurring net revenue from that same group of clients in the current period. We
define recurring net revenue as net subscription and related usage revenue.
The following table shows our Annual Dollar-Based Retention Rate based on Net Revenue for the periods
presented:
Annual Dollar-Based Retention Rate
Twelve Months Ended December 31,
2023
110%
2022
115%
Our Dollar-Based Retention Rate decreased year-over-year primarily due to macroeconomic headwinds we
started experiencing in 2022 and continued to experience throughout 2023.
54
Adjusted EBITDA
We monitor adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe
that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational
performance and enhancing an overall understanding of our past financial performance. We believe that adjusted
EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the
income or expenses that we exclude from adjusted EBITDA. Furthermore, we use this measure to establish budgets
and operational goals for managing our business and evaluating our performance. We also believe that adjusted
EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results
over multiple periods with other companies in our industry.
Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information
prepared in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may differ from that of other
companies in our industry. We compensate for the inherent limitations associated with using adjusted EBITDA
through disclosure of these limitations, presentation of our financial statements in accordance with U.S. GAAP and
reconciliation of adjusted EBITDA to the most directly comparable U.S. GAAP measure, net loss. We calculate
adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest
expense, (4) interest (income) and other, (5) exit costs related to the closure and relocation of our Russian
operations, (6) acquisition and related transaction costs and one-time integration costs, (7) contingent consideration
expense, (8) lease amortization for finance leases, (9) refund for prior year overpayment of USF fees, (10) provision
for income taxes, and (11) other items that do not directly affect what we consider to be our core operating
performance.
55
The following table shows a reconciliation of net loss to adjusted EBITDA for the periods presented (in
thousands):
Net loss
Non-GAAP adjustments:
Depreciation and amortization (1)
Stock-based compensation (2)
Interest expense
Interest (income) and other
Exit costs related to closure and relocation of Russian
operations (3)
Acquisition and related transaction costs and one-time
integration costs
Contingent consideration expense
Lease amortization for finance leases
Refund for prior year overpayment of USF fees
Provision for income taxes
Adjusted EBITDA
Year Ended December 31,
2023
2022
$
(81,764)
$
(94,650)
48,515
206,292
7,646
(26,799)
2,313
6,780
—
941
—
2,341
44,671
172,507
7,493
(4,813)
7,190
6,901
260
—
(3,511)
4,388
$
166,265
$
140,436
(1) Depreciation and amortization expenses included in our results of operations for the periods presented are as follows (in thousands):
Cost of revenue
Research and development
Sales and marketing
General and administrative
Year Ended December 31,
2023
2022
$
38,559
$
34,955
3,583
65
6,308
3,164
4
6,548
Total depreciation and amortization
$
48,515
$
44,671
(2) See Note 7 to the consolidated financial statements for stock-based compensation expense included in our results of operations for the
periods presented.
(3) Exit costs related to the closure and relocation of our Russian operations were $2.8 million during the year ended December 31, 2023. The
$2.3 million adjustment presented above was net of $0.5 million included in “Interest (income) and other.” Exit costs related to the closure
and relocation of our Russian operations were $7.9 million during the year ended December 31, 2022. The $7.2 million adjustment
presented above was net of $0.8 million included in “Depreciation and amortization” and $(0.1) million included in “Interest (income) and
other.”
Key Components of Our Results of Operations
Revenue
Our revenue consists of subscription and related usage as well as professional services. We consider our
subscription and related usage to be recurring revenue. This recurring revenue includes fixed subscription fees for
the delivery and support of our VCC cloud platform, as well as related usage fees. The related usage fees are
generally based on the volume of minutes for inbound and outbound client interactions. We also offer bundled plans,
generally for smaller deployments, where the client is charged a single monthly fixed fee per agent seat that includes
both subscription and unlimited usage in the contiguous 48 states and, in some cases, Canada. We offer monthly,
annual and multiple-year contracts for our clients, generally with 30 days’ notice required for reductions in the
number of agent seats. Increases in the number of agent seats can be provisioned almost immediately. Our clients,
therefore, are able to adjust the number of agent seats used to meet their changing contact center volume needs. Our
larger clients typically choose annual contracts, which generally include an implementation and ramp period of
several months.
56
Fixed subscription fees, including plans with bundled usage, are generally billed monthly in advance, while
variable usage fees are billed in arrears. Fixed subscription fees are recognized on a straight-line basis over the
applicable term, which is predominantly the monthly contractual billing period. Support activities include technical
assistance for our solution and upgrades and enhancements on a when and if available basis, which are not billed
separately. Variable subscription related usage fees for non-bundled plans are billed in arrears based on client-
specific per minute rate plans and are recognized as actual usage occurs. We generally require advance deposits
from clients based on estimated usage. All fees, except usage deposits, are non-refundable.
In addition, we generate professional services revenue from assisting clients in implementing our solution and
optimizing use. These services include application configuration, system integration and education and training
services. Professional services are primarily billed on a fixed-fee basis and are typically performed by us directly. In
limited cases, our clients choose to perform these services themselves or engage their own third-party service
providers to perform such services. Professional services are recognized as the services are performed using the
proportional performance method, with performance measured based on labor hours, provided all other criteria for
revenue recognition are met.
While the implications of macroeconomic events on our business, results of operations and overall financial
position remain uncertain over the long term, we expect that adverse economic conditions will continue to have an
adverse impact on our revenue in future periods. For example, our installed base business, which typically
contributes approximately half of our annual revenue growth, continues to experience macroeconomic headwinds.
Cost of Revenue
Our cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that we
pay to telecommunications providers for usage, USF contributions and other regulatory costs, depreciation and
related expenses of our servers and equipment, costs to build out and maintain co-location data centers, costs of
public cloud-based data centers, allocated office and facility costs, amortization of acquired technology and
amortization of internal-use software development costs. Cost of revenue can fluctuate based on a number of factors,
including the fees we pay to telecommunications providers, which vary depending on our clients’ usage of our VCC
cloud platform, the timing of capital expenditures and related depreciation charges and changes in headcount. We
expect to continue investing in professional services, public cloud, cloud operations, client support and network
infrastructure to maintain high quality and availability of services, which we believe will result in absolute dollar
increases in cost of revenue but percentage of revenue declines in the long-term through economies of scale.
Operating Expenses
We classify our operating expenses as research and development, sales and marketing, and general and
administrative expenses.
Research and Development. Our research and development expenses consist primarily of salary and related
expenses, including stock-based compensation, for personnel related to the development of improvements and
expanded features for our services, as well as quality assurance, testing, product management and allocated
overhead. We expense research and development expenses as they are incurred except for internal use software
development costs that qualify for capitalization. We believe that continued investment in our solution is important
for our future growth, and we expect our research and development expenses to increase in absolute dollars and
fluctuate as a percentage of revenue in the near and longer term.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related expenses,
including stock-based compensation, for personnel in sales and marketing, sales commissions, as well as advertising,
marketing, corporate communications, travel costs and allocated overhead. We believe it is important to continue
investing in sales and marketing to continue to generate revenue growth, and we expect sales and marketing
expenses to increase in absolute dollars and fluctuate as a percentage of revenue in the near and longer term as we
continue to support our growth initiatives.
General and Administrative. General and administrative expenses consist primarily of salary and related
expenses, including stock-based compensation, for management, finance and accounting, legal, information systems
and human resources personnel, professional fees, compliance costs, other corporate expenses and allocated
overhead. We expect that general and administrative expenses will fluctuate in absolute dollars and as a percentage
of revenue in the near term, but to increase in absolute dollars and decline as a percentage of revenue in the longer
term.
57
Results of Operations for the Years Ended December 31, 2023 and 2022
Based on the consolidated statements of operations and comprehensive loss set forth in this annual report, the
following table sets forth our operating results as a percentage of revenue for the periods indicated:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income (expense), net:
Interest expense
Interest income and other
Total other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Year Ended December 31,
2023
2022
100 %
48 %
52 %
17 %
32 %
14 %
63 %
(11) %
(1) %
3 %
2 %
(9) %
— %
(9) %
100 %
47 %
53 %
18 %
34 %
12 %
64 %
(11) %
(1) %
1 %
— %
(11) %
1 %
(12) %
Year-to-year comparisons between 2022 and 2021 have been omitted from this Form 10-K but may be found
in “Management's Discussion and Analysis of Financial Condition” in Part II, Item 7 of our Form 10-K for the fiscal
year ended December 31, 2022, which specific discussion is incorporated herein by reference.
Comparison of the Years Ended December 31, 2023 and 2022
Revenue
Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$910,488
(in thousands, except percentages)
$131,642
$778,846
17%
The increase in revenue for 2023 compared to 2022 was primarily attributable to our larger clients, driven by
an increase in our sales and marketing activities and our improved brand awareness.
Cost of Revenue
Cost of revenue
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$432,690
48%
(in thousands, except percentages)
$367,501
$65,189
47%
18%
The increase in cost of revenue for 2023 compared to 2022 was primarily due to a $19.1 million increase in
depreciation, data center and public cloud costs to support our growing capacity needs, an $18.4 million increase in
personnel costs driven mainly by increased headcount, higher salaries and increased stock-based compensation
costs, an $18.0 million increase in third-party hosted software costs driven by increased client activities, an $8.4
million increase in USF contributions and other federal telecommunication service fees due to increased client usage
and a change in methodology in the prior year, which resulted in a $3.5 million refund for 2020 that was received in
58
2022, a $2.0 million increase in office, facilities and related costs, and a $1.0 million increase in amortization of
capitalized internal-use software development costs, partially offset by a $1.6 million decrease in usage and carrier
costs due to a rate reduction and a $1.5 million decrease in staff augmentation costs related to implementation of our
solutions.
Gross Profit
Gross profit
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$477,798
52%
(in thousands, except percentages)
$411,345
$66,453
53%
16%
The increase in gross profit for 2023 compared to 2022 was primarily due to increases in subscription and
related revenues. We expect gross margin to increase in the long term despite continued investments in professional
services, public cloud, cloud operations, client support and network infrastructure, as we expect revenue growth in
the long term to more than offset these increases.
Operating Expenses
Research and Development
Research and development
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$156,582
17%
(in thousands, except percentages)
$141,794
$14,788
18%
10%
The increase in research and development expenses for 2023 compared to 2022 was primarily due to a $20.0
million increase in personnel-related costs driven mainly by an increase in stock-based compensation costs,
increased headcount and higher salaries, and a $1.4 million increase in office, facilities and related costs, offset in
part by a $8.0 million increase in research and development costs that qualified for capitalization.
Sales and Marketing
Sales and marketing
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$296,713
32%
(in thousands, except percentages)
$261,990
$34,723
34%
13%
The increase in sales and marketing expenses for 2023 compared to 2022 was primarily due to a $14.9 million
increase in personnel costs driven by increased stock-based compensation costs, increased headcount and higher
salaries, a $14.2 million increase in amortization of deferred contract acquisition costs driven by the growth in sales
and bookings of our solution, a $1.9 million increase in travel costs as a result of an increase in business travel, and a
$1.2 million increase in office, facilities and related costs. The increases in sales and marketing expenses were
primarily due to the execution of our growth strategy to acquire new clients, increase the number of agent seats
within our existing client base, and increased advertising and other marketing expenses to increase our brand
awareness.
59
General and Administrative
General and administrative
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
$123,079
14%
(in thousands, except percentages)
$27,936
$95,143
12%
29%
The increase in general and administrative expenses for 2023 compared to 2022 was primarily due to a $23.4
million increase in personnel costs driven by increased stock-based compensation costs, increased headcount and
higher salaries, and a $5.1 million increase in legal and other professional service costs primarily as a result of the
expenses incurred in connection with the Aceyus acquisition and other strategic activities.
Other Income (Expense), Net
Interest expense
Interest income and other
Total other income (expense), net
% of Revenue
Year Ended December 31,
2023
2022
$ Change
% Change
(in thousands, except percentages)
$
(7,646)
26,799
$
(7,493)
4,813
$ 19,153
$
(2,680)
$
$
(153)
21,986
21,833
2 %
(1) %
2 %
457 %
815 %
Interest expense remained consistent for 2023 compared to 2022 as it primarily related to our 2025 convertible
senior notes for which the aggregate outstanding principal amount remained unchanged during 2022 and 2023. See
Note 6 to the consolidated financial statements for further details.
The increase in interest income and other for 2023 compared to 2022 was primarily due to higher interest
income on our marketable investments, offset in part by an increase in foreign currency transaction losses during this
period.
Liquidity and Capital Resources
To date, we have financed our operations, primarily through sales of our solution, net proceeds from our
equity and debt financings, including the issuance of our 2025 convertible senior notes in May and June 2020 and of
our 2023 convertible senior notes in May 2018, and lease facilities. As of December 31, 2023, we had $756.8
million in working capital, which included $143.2 million in cash and cash equivalents, and $587.1 million in
marketable investments. Our intent is that all marketable investments are available for use in our current operations,
including marketable investments with maturity dates greater than one year from December 31, 2023. The 2023
convertible senior notes matured on May 1, 2023 and were settled in a combination of cash and shares of our
common stock. Upon maturity, the outstanding capped calls associated with the repurchase and early settlements of
$194.7 million 2023 convertible senior notes were settled, which resulted in us receiving 370,877 shares of our
common stock and $74.5 million. We believe our existing cash and cash equivalents will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
We plan to continue to finance our operations in the future primarily through sales of our solution, net
proceeds from equity and debt financings, and lease facilities. Our future capital requirements will depend on many
factors including our growth rate, continuing market acceptance of our solution, the strength of the global economy,
client retention, growth within our installed base, our ability to gain new clients, the timing and extent of spending to
support research and development efforts, the outcome of any pending or future litigation or other claims by third
parties or governmental entities, the expansion of sales and marketing activities and personnel, the introduction of
new and enhanced offerings, expenses incurred in closing our Russia operations and expanding our operations in
Portugal and any operational disruptions due to this transition, and the effect of the length and severity of the current
economic downturn, the Russia-Ukraine conflict, and the conflict in Israel on these or other factors. We may also
acquire or invest in complementary businesses, technologies and intellectual property rights, such as our recent
acquisition of Aceyus in August 2023, which may increase our use of cash and future capital requirements, both to
pay acquisition costs and to support our combined operations. We may raise additional capital through equity or debt
financings at any time to fund these or other requirements. However, we may not be able to raise additional capital
through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial
60
performance and condition, economic and market conditions, the trading price of our common stock, and other
factors, including the length and severity of the current economic downturn and fluctuations in the financial markets,
including due to the Russia-Ukraine conflict and the conflict in Israel. If we are unable to raise additional capital as
needed, our business, operating results and financial condition could be harmed. In addition, if our operating
performance during the next twelve months is below our expectations, our liquidity and ability to operate our
business also could be harmed.
If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing
stockholders would be diluted. If we raise additional funds through the incurrence of additional indebtedness, we
will be subject to increased debt service obligations and could also be subject to restrictive covenants and other
operating restrictions that could negatively impact our ability to operate our business.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
Year Ended December 31,
2023
2022
Net cash provided by operating activities
$
128,838
$
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash, cash equivalents and
restricted cash
Cash Flows from Operating Activities
(259,562)
94,579
88,865
30,963
(30,232)
$
(36,145) $
89,596
Cash provided by operating activities is primarily influenced by our personnel-related expenditures, data
center and telecommunications carrier costs, office and facility related costs, USF contributions and other regulatory
costs and the amount and timing of client payments. If we continue to improve our financial results, we expect net
cash provided by operating activities to increase. Our largest source of operating cash inflows is cash collections
from our clients for subscription and related usage services. Payments from clients for these services are typically
received monthly.
Net cash provided by operating activities was $128.8 million during the year ended December 31, 2023. Net
cash provided by operating activities resulted from our net loss of $81.8 million, adjustments to reconcile net loss to
net cash provided by operating activities of $317.1 million, primarily consisting of $206.3 million of stock-based
compensation, $55.4 million of amortization of deferred contract acquisition costs,$48.5 million of depreciation and
amortization, $12.6 million of amortization of operating lease right-of-use assets, $3.7 million of amortization of
issuance costs on our convertible senior notes and $(11.4) million of accretion of discount on marketable
investments, partially offset by use of cash for operating assets and liabilities of $(106.5) million primarily due to the
timing of cash payments to vendors and cash receipts from customers.
Cash Flows from Investing Activities
Net cash used in investing activities of $(259.6) million in 2023 was comprised of $795.0 million related to
purchases of marketable investments, $80.6 million, in connection with the acquisition of Aceyus, net of cash
acquired, $31.2 million in capital expenditures and $9.5 million in capitalized software development costs, offset in
part by $656.8 million related to cash proceeds from sales and maturities of marketable investments.
Cash Flows from Financing Activities
Net cash provided by financing activities of $94.6 million in 2023 was related to $74.5 million of cash
received from the settlement at maturity of the outstanding capped calls associated with the repurchase and early
settlements of the 2023 convertible senior notes, $15.9 million from the sale of common stock under our employee
stock purchase plan, and cash proceeds of $9.1 million from the exercise of stock options, offset in part by $3.3
million related to payments of employee taxes related to vested RSUs, $1.0 million of payments related to finance
leases, $0.5 million of holdback payment related to an acquisition, and $0.2 million of cash paid in connection with
2023 convertible senior note settlements.
61
Contractual and Other Obligations
Our material cash requirements include the following contractual and other obligations.
Convertible Senior Notes
In May and June 2020, we issued $747.5 million aggregate principal amount of our 2025 convertible senior
notes in a private offering. The 2025 convertible senior notes mature on June 1, 2025 and are our senior unsecured
obligations. The 2025 convertible senior notes bear interest at a fixed rate of 0.50% per annum, payable
semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The total net proceeds
from the offering, after deducting initial purchasers’ discounts and commissions and estimated debt issuance costs,
were approximately $728.8 million. As of December 31, 2023, the aggregate principal amount outstanding of our
2025 convertible senior notes was $747.5 million.
In May 2018, we issued $258.8 million aggregate principal amount of our 2023 convertible senior notes in a
private offering. The 2023 convertible senior notes matured on May 1, 2023 and the remaining principle amounts
were settled in a combination of cash and shares of our common stock.
See Note 6 to the consolidated financial statements included in this report for further details.
Leases
We have leases for offices, data centers and computer and networking equipment that expire at various dates
through 2031. Our leases have remaining terms of one to seven years. Some of the leases include an option to extend
the leases for up to one to five years, and some of the leases include the option to terminate the leases upon 30-days
notice. We had outstanding operating lease obligations of $52.0 million as of December 31, 2023, with $12.3 million
payable within 12 months, $16.4 million payable within one to three years, $11.6 million payable within three to
five years, and $11.7 million after five years. We also had outstanding finance lease obligations of $5.0 million as of
December 31, 2023, with $2.0 million payable within 12 months, and $3.0 million payable within one to three years.
See Note 13 to the consolidated financial statements included in this report for further details.
Cloud Services and Software and Maintenance
As of December 31, 2023, we had outstanding cloud services and software and maintenance agreement
commitments totaling $104.4 million, of which $33.0 million is expected to be purchased in 2024, $45.6 million is
expected to be purchased in 2025 and the remaining $25.8 million is expected to be purchased in 2026.
Hosting and Telecommunication Usage Services
We have agreements with third parties to provide co-location hosting and telecommunication usage services.
The agreements require payments per month for a fixed period of time in exchange for certain guarantees of network
and telecommunication availability. As of December 31, 2023, we had outstanding hosting and telecommunication
usage services obligations of $14.9 million, with $7.9 million payable within 12 months, $5.0 million payable within
one to three years, and $2.0 million payable within three to five years.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we
agree to indemnify clients, vendors, lessors, business partners and other parties with respect to certain matters,
including, but not limited to, losses arising out of breach of such agreements, services to be provided by us or from
intellectual property infringement claims made by third parties. In addition, we have entered into indemnification
agreements with our directors, officers and certain employees that will require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.
There are no claims that we are aware of that could have a material effect on our consolidated balance sheet,
consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.
Contingencies — Legal and Regulatory
We are subject to certain legal and regulatory proceedings, and from time to time may be involved in a variety
of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights,
employment matters, regulatory compliance matters, and other litigation matters relating to various claims that arise
in the normal course of business. We determine whether an estimated loss from a contingency should be accrued by
assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by
analyzing specific litigation and regulatory matters using reasonably available information. We develop our views
62
on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential
results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Legal fees
are expensed in the period in which they are incurred. See Note 10 to the consolidated financial statements for more
details.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the consolidated financial statements.
Revenue Recognition
Revenue is recognized when control of the promised services is transferred to customers, in an amount that
reflects the consideration that we expect to receive in exchange for those services. We generate all of our revenue
from contracts with customers. In contracts with multiple performance obligations, we identify each performance
obligation and evaluate whether the performance obligations are distinct within the context of the contract at
contract inception. Performance obligations that are not distinct at contract inception are combined. We allocate the
transaction price to each distinct performance obligation proportionately based on the estimated standalone selling
price for each performance obligation. We then look to how services are transferred to the customer in order to
determine the timing of revenue recognition. Most services provided under our agreements result in the transfer of
control over time.
Our revenue consists of subscription services and related usage as well as professional services. We charge
clients subscription fees, usually billed on a monthly basis, for access to our VCC solution. The subscription fees are
primarily based on the number of agent seats, as well as the specific VCC functionalities and applications deployed
by the client. Agent seats are defined as the maximum number of named agents allowed to concurrently access the
VCC cloud platform. Clients typically have more named agents than agent seats. Multiple named agents may use an
agent seat, though not simultaneously. Substantially all of our clients purchase both subscriptions and related
telephony usage. A small percentage of our clients subscribe to our platform but purchase telephony usage directly
from a wholesale telecommunications service provider. We do not sell telephony usage on a stand-alone basis to any
client. The related usage fees are based on the volume of minutes used for inbound and outbound client interactions.
Revenue generated from telephony usage is presented in revenue and cost of sales on a gross basis, as we are the
party that controls the service and are responsible for fulfilling the promise to provide the call service by diverting
the calls to selected carriers. We also offer bundled plans, generally for smaller deployments, whereby the client is
charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the
contiguous 48 states and, in some cases, Canada. Professional services revenue is derived primarily from VCC
implementations, including application configuration, system integration, optimization, education and training
services. Clients are not permitted to take possession of our software.
We offer monthly, annual and multiple-year contracts to our clients, generally with 30 days’ notice required
for reductions in the number of agent seats. Increases in the number of agent seats can be provisioned almost
immediately. Our clients, therefore, are able to adjust the number of agent seats used to meet their changing contact
center volume needs. Our larger clients typically choose annual contracts, which generally include an
implementation and ramp period of several months. Fixed subscription fees, including bundled plans, are generally
billed monthly in advance, while related usage fees are billed in arrears. Support activities include technical
assistance for our solution and upgrades and enhancements to our VCC cloud platform on a when-and-if-available
basis, which are not billed separately.
Professional services are primarily billed on a fixed-fee basis and are performed by us directly or,
alternatively, clients may also choose to perform these services themselves or engage their own third-party service
providers. Revenue for professional services is recognized over time as services are performed, based on the
proportion of labor hours expended compared to the total hours expected to complete the related performance
obligation.
The estimation of variable consideration for each performance obligation requires us to make subjective
judgments. In the early stages of our larger contracts, in order to allocate the overall transaction fee on a relative
63
stand-alone selling price basis to our multiple performance obligations, we estimate variable consideration to be
included in the transaction fee to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. When services are included in the contract with the customer and are not sold at their stand-alone selling
price, we are required to estimate the number of seats the customer will use, especially during the initial ramp period
of the contract, during which we bill under an ‘actual usage’ model for subscription-related services. We expect
estimated variable consideration to continue to not have a material impact on the allocation of transaction fees to
multiple performance obligations.
The revenue recognition standards include guidance relating to any tax assessed by a governmental authority
that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is
not limited to, sales, use, value added and excise taxes. We record USF contributions and other regulatory costs on a
gross basis in our consolidated statements of operations and comprehensive loss and record surcharges and sales, use
and excise taxes billed to our clients on a net basis. The cost of gross USF contributions payable to the USAC and
suppliers is presented as a cost of revenue in the consolidated statements of operations and comprehensive loss.
Business Combinations, Goodwill, and Acquisition-Related Intangible Assets
Accounting for business combinations requires us to make significant estimates and assumptions. We allocate
the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair value at the acquisition dates, with the excess recorded to goodwill. Critical estimates in valuing
certain intangible assets and contingent consideration include, but are not limited to, future expected cash flows,
expected asset lives, royalty rates, and discount rates. The amounts and useful lives assigned to acquisition-related
intangible assets impact the amount and timing of future amortization expense.
We use estimates, assumptions, and judgments when performing a goodwill impairment test or assessing the
recoverability of acquisition-related finite-lived intangible assets. We test goodwill for impairment on an annual
basis in the fourth quarter and more frequently if a significant event or circumstance indicates impairment, and
assess the recoverability of acquisition-related intangible assets whenever events or circumstances indicate that the
carrying amounts of such assets may not be recoverable. We also evaluate the estimated remaining useful lives of
acquisition-related intangible assets for changes in circumstances that warrant a revision to the remaining periods of
amortization.
Recent Accounting Pronouncements
Refer to Note 1 in Item 8 of this Form 10-K for information related to recent accounting pronouncements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss
that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or
issue financial instruments for trading purposes.
Interest Rate Sensitivity
We had cash and cash equivalents, and marketable securities totaling $730.3 million as of December 31, 2023.
Cash equivalents and marketable securities were invested primarily in U.S. agency and government sponsored
securities, U.S. treasury securities, municipal bonds, commercial paper, corporate bonds, certificates of deposit and
money market funds. Our investment policy is focused on the preservation of capital and supporting our liquidity
needs. Under this policy, we invest in highly rated securities, while limiting the amount of credit exposure to any
one issuer other than the U.S. government. We do not invest in financial instruments for trading or speculative
purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the
guidelines of our investment policy. A hypothetical 100 basis point change in interest rates would not have a
material impact on the value of our cash and cash equivalents or marketable investments.
As of December 31, 2023, the aggregate principal amount outstanding of our 2025 convertible senior notes
was $747.5 million. The fair value of the 2025 convertible senior notes are subject to interest rate risk, market risk
and other factors due to their conversion features. The fair value of the 2025 convertible senior notes will generally
increase as our common stock price increases and will generally decrease as our common stock price declines. The
interest and market value changes affect the fair value of the 2025 convertible senior notes but do not impact our
64
financial position, cash flows or results of operations due to the fixed nature of the debt obligations. Additionally,
we carry the 2025 convertible senior notes at face value less unamortized discount on our consolidated balance
sheets, and we present the fair value for required disclosure purposes only.
Our 2025 convertible senior notes bear fixed interest rates and, therefore, are not subject to interest rate risk.
We have not utilized derivative financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions in any material fashion, except for the privately negotiated capped
call transactions entered into in May and June 2020 related to the issuance of our 2025 convertible senior notes.
Foreign Currency Risk
The functional currency of our foreign subsidiaries is the U.S. dollar. Our sales are primarily denominated in
U.S. dollars and, therefore, our revenue is not directly subject to foreign currency risk. However, we are indirectly
exposed to foreign currency risk. A stronger U.S. dollar makes our solution more expensive outside the United
States and therefore can reduce demand. A weaker U.S. dollar could have the opposite effects. Such economic
exposure to currency fluctuations is difficult to measure or predict because our sales are influenced by many factors
in addition to the impact of currency fluctuations.
Our operating expenses are generally denominated in the currencies of the countries in which our operations
are located, except for Russia where compensation of our employees was primarily denominated in the U.S. dollar.
In March 2022, we made a decision to close our Russia office in June 2022 and to establish a new European
development center in Portugal.
Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in
foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange
rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other
derivative financial instruments. During the year ended December 31, 2023, the effect of a hypothetical 10% change
in foreign currency exchange rates applicable to our business would have a maximum impact of $8.5 million on our
operating expenses.
65
ITEM 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm (PCAOB ID: 185)
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
67
70
71
72
74
76
66
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Five9, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Five9, Inc. and subsidiaries (the Company) as of
December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the
related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal
control over financial reporting as of December 31, 2023, based on criteria, established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an
opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
67
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1)
relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Evaluation of the sufficiency of audit evidence over revenues from subscription services and related usage
As discussed in Note 1 to the consolidated financial statements, the Company charges clients subscription
fees, usually billed on a monthly basis, for access to the Company’s Virtual Contact Center (VCC) solution.
For the year ended December 31, 2023, the Company recorded $910,488 thousand of revenue. The
subscription fees are primarily based on the number of agent seats as well as the specific VCC
functionalities and applications deployed by the client. Agent seats are defined as the maximum number to
named agents allowed to concurrently access the VCC cloud platform. Substantially all of the Company’s
clients purchase both subscriptions and related telephony usage. The related usage fees are generally based
on the volume of minutes used for inbound and outbound client interactions. There are high volumes of
subscription and related usage transactions processed across multiple information technology (IT) systems.
We identified the evaluation of the sufficiency of audit evidence over subscription services and related
usage as a critical audit matter. Revenues from subscription services and related usage involve a high
volume of automated transactions dependent on the Company’s IT systems. Therefore, our audit
procedures required the involvement of IT professionals and auditor judgment was required to determine
the nature and extent of audit evidence obtained and evaluate the results of the procedures.
The following are the primary procedures we performed to address this critical audit matter. We involved
IT professionals with specialized skills and knowledge, who assisted in evaluating the design and testing
the operating effectiveness of certain internal controls over the Company’s revenue process. This included
controls over the capture and flow of subscription and related usage transactional information through the
Company’s IT systems. We placed test calls and observed that call attributes such as duration and type of
service were captured in the relevant IT systems. We assessed the recorded revenue by comparing total
cash received during the year, adjusted for reconciling items, to the revenue recognized. Such assessment
also evaluated the relevance and reliability of reconciling items to underlying documentation, including the
changes in accounts receivable and deferred revenue. We evaluated the sufficiency of audit evidence
obtained by assessing the results of procedures performed, including the appropriateness of the nature and
extent of such evidence.
/s/ KPMG LLP
68
We have served as the Company’s auditor since 2012.
Santa Clara, California
February 21, 2024
69
FIVE9, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Marketable investments
Accounts receivable, net
Prepaid expenses and other current assets
Deferred contract acquisition costs, net
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Finance lease right-of-use assets
Intangible assets, net
Goodwill
Marketable investments
Other assets
Deferred contract acquisition costs, net — less current portion
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued and other current liabilities
Operating lease liabilities
Finance lease liabilities
Deferred revenue
Convertible senior notes
Total current liabilities
Convertible senior notes - less current portion
Operating lease liabilities — less current portion
Finance lease liabilities — less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
$
$
$
December 31,
2023
2022
$
$
$
143,201
587,096
97,424
34,622
61,711
924,054
108,572
38,873
4,564
38,323
227,412
—
16,199
136,571
1,494,568
24,399
62,131
10,731
1,767
68,187
—
167,215
742,125
36,378
2,877
7,888
956,483
180,520
433,743
87,494
29,711
47,242
778,710
101,221
44,120
—
28,192
165,420
885
11,057
114,880
1,244,485
23,629
58,536
10,626
—
57,816
169
150,776
738,376
41,389
—
3,979
934,520
Preferred stock, $0.001 par value; 5,000 shares authorized, no shares issued and
outstanding as of December 31, 2023 and 2022
Common stock, $0.001 par value; 450,000 shares authorized, 73,317 shares and 71,047
shares issued and outstanding as of December 31, 2023 and 2022, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
73
942,280
582
(404,850)
538,085
1,494,568
$
71
635,668
(2,688)
(323,086)
309,965
1,244,485
$
See accompanying notes to the consolidated financial statements.
70
FIVE9, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income (expense), net:
Interest expense
Interest income and other
Total other income (expense), net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share:
Basic and diluted
Shares used in computing net loss per share:
Basic and diluted
Comprehensive Loss:
Net loss
Other comprehensive income (loss)
Comprehensive loss
Year Ended December 31,
2023
2022
2021
$ 910,488
$ 778,846
$ 609,591
432,690
477,798
156,582
296,713
123,079
576,374
367,501
411,345
141,794
261,990
95,143
498,927
271,099
338,492
106,897
193,929
93,916
394,742
(98,576)
(87,582)
(56,250)
(7,646)
26,799
19,153
(7,493)
4,813
(2,680)
(79,423)
(90,262)
2,341
4,388
(8,027)
(8)
(8,035)
(64,285)
(11,285)
$
(81,764)
$
(94,650)
$
(53,000)
$
(1.13)
$
(1.35)
$
(0.79)
72,048
69,920
67,512
$
(81,764)
$
(94,650)
$
(53,000)
3,270
(2,401)
(622)
$
(78,494)
$
(97,051)
$
(53,622)
See accompanying notes to the consolidated financial statements.
71
FIVE9, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
67 $ 476,941 $
Accumulated
Other
Comprehensive
Income (Loss)
—
(168,412)
—
(353)
—
—
1
—
—
—
—
68
1
—
1
1
—
—
—
—
71
—
9
7,402
(2)
15,397
108,805
—
—
439,787
(281)
10
8,521
—
13,413
174,218
—
—
635,668
—
Balance as of December 31, 2020
66,496 $
Cumulative effect adjustment due to adoption
of ASU 2020-06(1)
Issuance of common stock upon partial
conversion of the 2023 convertible senior notes
Partial unwind of capped calls and retirement of
common stock related to the 2023 convertible
senior notes
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon vesting of
restricted stock units
Issuance of common stock under ESPP
Stock-based compensation
Other comprehensive loss
Net loss
—
454
(69)
389
1,097
121
—
—
—
Balance as of December 31, 2021
68,488
574
(119)
531
1,383
190
—
—
—
71,047
2
Issuance of common stock upon partial
conversion of the 2023 convertible senior notes
Partial unwind of capped calls and retirement of
common stock related to the 2023 convertible
senior notes
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon vesting of
restricted stock units
Issuance of common stock under ESPP
Stock-based compensation
Other comprehensive loss
Net loss
Balance as of December 31, 2022
Issuance of common stock upon partial
conversion of the 2023 convertible senior notes
Settlement at maturity of the outstanding
capped calls and retirement of common stock
related to the 2023 convertible senior notes
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon vesting of
restricted stock units
Shares held for tax withholdings
Issuance of common stock under ESPP
Stock-based compensation
Other comprehensive income
Net loss
Balance as of December 31, 2023
(371)
—
74,453
491
—
9,127
1,844
(40)
344
—
—
—
73,317 $
(2)
(3,270)
2
—
—
—
—
—
73 $ 942,280 $
15,927
210,377
—
—
Accumulated
Deficit
Total
Stockholders’
Equity
335 $ (198,179) $ 279,164
—
—
—
—
22,743
(145,669)
—
—
—
(353)
9
7,402
—
—
—
(622)
—
(287)
—
—
—
—
(53,000)
(1)
15,397
108,805
(622)
(53,000)
(228,436)
211,132
—
—
—
—
—
—
(2,401)
—
(2,688)
—
—
—
—
—
—
—
—
—
—
(94,650)
(323,086)
—
—
—
(280)
10
8,522
1
13,413
174,218
(2,401)
(94,650)
309,965
—
74,453
9,127
—
—
(3,270)
—
15,927
—
210,377
—
3,270
3,270
—
(81,764)
582 $ (404,850) $ 538,085
—
—
—
—
—
(81,764)
(1)
Effective January 1, 2021, the Company adopted ASU 2020-06. Accordingly, the Company recorded a net reduction to opening accumulated deficit of
$22.7 million and a net reduction to opening additional paid-in capital of $168.4 million as of January 1, 2021 due to the cumulative impact of adopting this new
standard.
72
See accompanying notes to the consolidated financial statements.
73
FIVE9, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Amortization of operating lease right-of-use assets
Amortization of deferred contract acquisition costs
(Accretion of discount) amortization of premium on marketable investments
Provision for credit losses
Stock-based compensation
Amortization of discount and issuance costs on convertible senior notes
Deferred taxes
Change in fair value of contingent consideration
Payment of contingent consideration liability in excess of acquisition-date fair value
Other
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Deferred contract acquisition costs
Other assets
Accounts payable
Accrued and other current liabilities
Deferred revenue
Other long-term liabilities (including non-current portions of operating and finance
lease liabilities)
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of marketable investments
Proceeds from sales of marketable investments
Proceeds from maturities of marketable investments
Purchases of property and equipment
Capitalization of internal-use software development costs
Payments of initial direct costs
Cash paid for an equity investment in a privately-held company
Cash paid to acquire Aceyus, Inc.
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Repurchase of a portion of 2023 convertible senior notes, net of costs
Repayment of outstanding 2023 convertible senior notes at maturity
Cash received from the settlement at maturity of the outstanding capped calls
associated with the 2023 convertible senior notes
Proceeds from exercise of common stock options
Proceeds from sale of common stock under ESPP
Payment of employee taxes related to vested RSUs
Payment of contingent consideration liability up to acquisition-date fair value
Year Ended December 31,
2023
2022
2021
$
(81,764)
$
(94,650)
$
(53,000)
48,515
12,642
55,384
(11,351)
989
206,292
3,749
53
—
—
807
(9,844)
(3,532)
(91,544)
(3,988)
2,932
(9,274)
4,958
3,814
128,838
44,671
10,377
41,034
(90)
1,105
38,732
8,698
26,050
6,385
808
172,507
108,805
3,743
3,088
260
(5,900)
188
(4,899)
661
(85,197)
(319)
845
(7,878)
13,176
(3,857)
88,865
3,957
(6,907)
5,640
—
396
(35,986)
(14,193)
(71,380)
(1,216)
4,305
20,045
10,462
(22,603)
28,998
(795,002)
(435,768)
(680,490)
1,211
655,588
(31,234)
(9,537)
—
—
(80,588)
(259,562)
—
(169)
74,453
9,127
15,927
(3,270)
—
600
524,568
(52,272)
(3,899)
(266)
(2,000)
—
44,288
527,940
(42,216)
—
—
—
—
30,963
(150,478)
(34,067)
(24,688)
—
—
8,522
13,413
—
(18,100)
—
—
7,402
15,397
—
—
74
Payment of holdbacks related to acquisitions
Payments of finance leases
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of year
Supplemental disclosures of cash flow data:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities:
Equipment purchased and unpaid at period-end
Capitalization of leasehold improvement through non-cash lease incentive
Stock-based compensation included in capitalized software development costs
Reconciliation of Cash, Cash Equivalents and Restricted Cash to the
Consolidated Balance Sheets - Beginning of Period:
Cash and cash equivalents
Restricted cash in other assets
Total cash, cash equivalents and restricted cash
Reconciliation of Cash, Cash Equivalents and Restricted Cash to the
Consolidated Balance Sheets - End of Period:
Cash and cash equivalents
Restricted cash in other assets
Total cash, cash equivalents and restricted cash
Year Ended December 31,
2023
2022
2021
(500)
(989)
94,579
(36,145)
—
—
(30,232)
89,596
(5,000)
(612)
(7,501)
(128,981)
180,987
91,391
220,372
144,842
$
180,987
$
91,391
3,897
$
3,744
$
4,073
1,589
1,033
31
11,243
—
4,085
12,332
109
1,711
13,871
5,121
—
180,520
$
90,878
$
220,372
467
513
—
180,987
$
91,391
$
220,372
143,201
$
180,520
$
90,878
1,641
467
513
144,842
$
180,987
$
91,391
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
75
FIVE9, INC.
Notes to Consolidated Financial Statements
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 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 annual financial reporting. All intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of 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 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.
Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic
evaluation. Actual results could differ from those estimates.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. For these subsidiaries, the
monetary assets and liabilities resulting from foreign currency transactions are adjusted to reflect the exchange rate
as of the balance sheet date. Foreign currency transaction gains and losses were not significant in any period and are
reported in “Other income (expense), net” in the consolidated statements of operations and comprehensive loss.
Cash and Cash Equivalents
The Company’s cash and cash equivalents consist of highly liquid investments with maturities of three months
or less at the time of purchase. The Company’s cash equivalents consist of investments in money market funds and
U.S. treasury securities.
Marketable Investments
The Company’s marketable investments consist of U.S. agency securities and government sponsored
securities, U.S. treasury securities, certificates of deposit, municipal bonds, corporate bonds and commercial paper.
The Company determines the appropriate classification of its investments in marketable investments at the time of
purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable investments have
been classified and accounted for as available-for-sale. The intent is that all marketable investments are available for
use in the Company’s current operations, including marketable investments with maturity dates greater than one year
from December 31, 2023. Marketable investments are carried at fair value.
Concentration Risks
Financial instruments, which potentially subject the Company to significant concentrations of credit risk,
consist primarily of cash and cash equivalents, marketable investments and accounts receivable. A significant
portion of the Company’s cash and cash equivalents is held at three large reputable financial institutions. Total cash
and cash equivalents in excess of insured limits were $141.1 million and $178.6 million as of December 31, 2023
and 2022, respectively. The Company has not experienced any losses in such accounts.
76
As of December 31, 2023, there was one client which represented 11% of accounts receivable. As of
December 31, 2022, no single client represented more than 10% of accounts receivable. For the years ended
December 31, 2023, 2022 and 2021, no single client represented more than 10% of revenue.
Provision for Credit Losses
The Company uses an expected credit loss model, which requires it to consider historical loss rates and
expectations of forward-looking losses to estimate its provision for credit losses on its trade accounts receivables,
unbilled accounts receivables and contract assets.
The following table presents the changes in the provision for credit losses (in thousands):
Year Ended December 31,
2023
2022
Balance, beginning of period
Add: bad debt expense
Less: write-offs, net of recoveries
$
$
262
989
(987)
Balance, end of period
$
264
$
220
1,105
(1,063)
262
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization, and is depreciated
using the straight-line method over the estimated useful lives of the assets as follows:
Asset Category
Computer and network equipment
Computer software
Internal-use software development costs
Furniture and fixtures
Leasehold improvements
Estimated Useful Lives
3 to 5 years
3 years
3 years
7 years
Shorter of useful life or lease term
The Company capitalizes certain qualifying costs incurred during the development stage of internal-use
software. Costs related to preliminary project activities and post-implementation activities are expensed in research
and development as incurred. Preliminary project activities include conceptual formulation, evaluation and final
selection of alternatives, planning, proof of concept and requirement analysis of the selected alternative. The post-
implementation stage begins when the internal-use software is ready for its intended use, and includes all internal
and external training and application maintenance activities. Capitalized internal-use software development costs are
included within property and equipment, net on the consolidated balance sheets, and are amortized over the
estimated useful life of the software, which is three years. The related amortization expense is recognized in cost of
revenue in the consolidated statements of operations and comprehensive loss.
Maintenance and repairs of property and equipment are charged to expense as incurred, and improvements
and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the consolidated balance sheet and any resulting gain or loss is
reflected in the consolidated statements of operations and comprehensive loss in the period realized.
The Company evaluates the recoverability of property and equipment for possible impairment whenever
events or circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable.
Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash
flows the assets or asset groups are expected to generate. If such evaluation indicates that the carrying amount of the
assets or asset groups is not recoverable, the carrying amount of such assets or asset groups is reduced to fair value.
No impairment losses have been recognized in any of the periods presented.
77
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets
acquired and liabilities assumed as of the acquisition date. The Company’s estimates are inherently uncertain and
subject to change. During the measurement period, which may be up to one year from the acquisition date, the
Company may record adjustments to the fair value of these tangible and intangible assets and liabilities assumed,
with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances
are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of
the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever
comes first, any subsequent adjustments are recorded to its consolidated statements of operations and comprehensive
loss.
Goodwill and Intangible Assets
The Company records goodwill when the consideration paid in a business combination exceeds the fair value
of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but instead is
required to be tested for impairment annually and whenever events or changes in circumstances indicate that the
carrying value of goodwill may exceed its fair value.
The Company performs testing for impairment of goodwill in its fourth quarter, or as events occur or
circumstances change that would more likely than not reduce the fair value of the Company’s single reporting unit
below its carrying amount. A qualitative assessment is first made to determine whether it is necessary to perform the
quantitative goodwill impairment test. This initial qualitative assessment includes, among other things,
consideration of: (i) market capitalization of the Company; (ii) past, current and projected future earnings and
equity; (iii) recent trends and market conditions; and (iv) valuation metrics involving similar companies that are
publicly-traded and acquisitions of similar companies, if available. If this initial qualitative assessment indicates that
it is more likely than not that impairment exists, a second quantitative assessment will be performed, involving a
comparison between the estimated fair values of the Company’s single reporting unit with its respective carrying
amount including goodwill. If the carrying value exceeds estimated fair value, an impairment charge is recorded for
the excess. The Company may elect to bypass the qualitative assessment and proceed to perform the quantitative
goodwill impairment test.
Intangible assets, consisting of acquired developed technology, trademarks and customer relationships, are
carried at cost less accumulated amortization. All intangible assets have been determined to have definite lives and
are amortized on a straight-line basis over their estimated remaining economic lives, ranging from three to eight
years. Amortization expense related to developed technology is included in cost of revenue. Amortization expense
related to customer relationships is included in sales and marketing expense. Amortization expense related to
domain names is included in general and administrative expense. Intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.
Revenue Recognition
Revenue is recognized when control of the promised services is transferred to customers in an amount that
reflects the consideration that the Company expects to receive in exchange for those services. The Company
generates all of its revenue from contracts with customers. In contracts with multiple performance obligations, it
identifies each performance obligation and evaluates whether the performance obligations are distinct within the
context of the contract at contract inception. Performance obligations that are not distinct at contract inception are
combined. The Company allocates the transaction price to each distinct performance obligation proportionately
based on the estimated standalone selling price for each performance obligation. The Company then looks to how
services are transferred to the customer in order to determine the timing of revenue recognition. Most services
provided under the Company’s agreements result in the transfer of control over time.
The Company’s revenue consists of subscription services and related usage as well as professional services.
The Company charges clients subscription fees, usually billed on a monthly basis, for access to the Company’s VCC
solution. The subscription fees are primarily based on the number of agent seats, as well as the specific VCC
functionalities and applications deployed by the client. Agent seats are defined as the maximum number of named
agents allowed to concurrently access the VCC cloud platform. Clients typically have more named agents than agent
seats. Multiple named agents may use an agent seat, though not simultaneously. Substantially all of the Company’s
clients purchase both subscriptions and related telephony usage. A small percentage of the Company’s clients
subscribe to its platform but purchase telephony usage directly from a wholesale telecommunications service
78
provider. The Company does not sell telephony usage on a stand-alone basis to any client. The related usage fees are
generally based on the volume of minutes used for inbound and outbound client interactions. Revenue generated
from telephony usage is presented in revenue and cost of sales on a gross basis, as the Company is the party that
controls the service and is responsible for fulfilling the promise to provide the call service by diverting the calls to
selected carriers. The Company also offers bundled plans, generally for smaller deployments, whereby the client is
charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the
contiguous 48 states and, in some cases, Canada. Professional services revenue is derived primarily from VCC
implementations, including application configuration, system integration, optimization, education and training
services. Clients are not permitted to take possession of the Company’s software.
The Company offers monthly, annual and multiple-year contracts to its clients, generally with 30 days’ notice
required for reductions in the number of agent seats. Increases in the number of agent seats can be provisioned
almost immediately. The Company’s clients, therefore, are able to adjust the number of agent seats used to meet
their changing contact center needs. The Company’s larger clients typically choose annual contracts, which
generally include an implementation and ramp period of several months. Fixed subscription fees, including bundled
plans, are generally billed monthly in advance, while related usage fees are billed in arrears. Support activities
include technical assistance for the Company’s solution and upgrades and enhancements to the VCC cloud platform
on a when-and-if-available basis, which are not billed separately.
The Company generally requires advance deposits from its clients based on estimated usage when such usage
is not billed as part of a bundled plan. Any unused portion of the deposit is refundable to the client upon termination
of the arrangement, provided all amounts due have been paid. All fees, except usage deposits, are non-refundable.
Professional services are primarily billed on a fixed-fee basis. Revenue for professional services is recognized
over time, as services are performed.
The estimation of variable consideration for each performance obligation requires the Company to make
subjective judgments resulting in estimated variable consideration that is included in the transaction fee. This is done
to the extent that it is probable, in the Company’s judgment, that a significant reversal in the amount of cumulative
revenue recognized under the contract will not occur. The Company estimates the variable consideration in order to
allocate the overall transaction fee on a relative stand-alone selling price basis to its multiple performance
obligations. When services are included in the contract with the customer and are not sold at their stand-alone selling
price, the Company is required to estimate the number of seats the customer will use, especially during the initial
ramp period of the contract, during which the Company bills under an ‘actual usage’ model for subscription-related
services. To date, variable consideration has not had a material impact on the allocation of transaction fees to
multiple performance obligations.
The Company recognizes revenue on fixed fee professional services performance obligations based on the
proportion of labor hours expended compared to the total hours expected to complete the related performance
obligation. The determination of the total labor hours expected to complete the performance obligations involves
judgment, which influences the initial stand-alone selling price estimate as well as the timing of professional
services revenue recognition, although this is typically resolved in a short time frame.
When a contract with a customer is signed, the Company assesses whether collection of the fees under the
arrangement is probable. The Company assesses collection based on a number of factors, including past transaction
history and the creditworthiness of the client. The Company maintains a revenue reserve for potential credits to be
issued in accordance with service level agreements or for other revenue adjustments.
Deferred Revenue
Deferred revenue consists of billings or payments received from clients for subscription services, usage and
professional services in advance of revenue recognition and is recognized in accordance with the Company’s
revenue recognition policy discussed above. The Company generally invoices its clients monthly in advance for
subscription services. Accordingly, the deferred revenue balance does not represent the total contract value of sales
arrangements.
Cost of Revenue
Cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that the
Company pays to telecommunications providers for usage, USF contributions and other regulatory costs,
79
depreciation and related expenses of servers and equipment, costs to build out and maintain co-location data centers,
costs of public cloud-based data centers, allocated office and facility costs, amortization of acquired technology and
amortization of internal-use software costs. Personnel costs include those associated with support of the Company’s
solution, clients and data center operations, as well as with providing professional services. Data center costs include
costs for servers and equipment to build out and setup, as well as co-location fees for the right to place the
Company’s servers in data centers owned by third parties.
Research and Development
Research and development expenses consist primarily of salary and related expenses, including stock-based
compensation, for personnel related to the development of improvements and expanded features for the Company’s
solution, as well as quality assurance, testing, product management and allocated overhead. Research and
development costs are expensed as incurred except for internal use software development costs that qualify for
capitalization. The Company reviews development costs incurred for internal-use software in the application
development stage and assesses costs for capitalization.
Advertising Costs
The Company primarily advertises its services through the internet and in conjunction with partners.
Advertising costs are expensed as incurred and were $31.3 million, $28.1 million and $20.8 million for the years
ended December 31, 2023, 2022 and 2021, respectively.
Commissions
Commissions consist of variable compensation earned by sales personnel and referral fees the Company pays
to third parties. The Company defers all incremental commission costs to obtain the contract, and amortizes these
costs over a period of benefit determined to be five years. Commission expense was $61.5 million, $47.3 million and
$31.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Stock-Based Compensation
All stock-based compensation granted to employees and non-employee directors is measured at the grant date
fair value of the award. The Company estimates the fair value of stock options under the Company’s Equity
Incentive Plans and purchase rights under the Company’s 2014 Employee Stock Purchase Plan (“2014 ESPP Plan”
or “ESPP”) using the Black-Scholes option-pricing model. The fair value of restricted stock units (“RSUs”),
including performance-based restricted stock units (“PRSUs”) subject to performance conditions, is equal to the fair
value of the Company’s common stock on the date of grant. The fair value of PRSUs subject to market conditions
are determined using a Monte Carlo Simulation model. Compensation expense is recognized net of actual forfeitures
over the service period, which is generally the vesting period.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in operations in the period that includes the enactment date. The Company records a valuation allowance
to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. As of
December 31, 2023 and 2022, the Company recorded a full valuation allowance against the U.S. net deferred tax
assets because of its history of operating losses in the United States. As of December 31, 2023, the Company
recognized a net deferred tax asset balance of $3.8 million related to its operations in Australia and Portugal, and
placed a valuation allowance against its UK net deferred tax asset balance due to its recent history of losses. As of
December 31, 2022, the Company recognized a net deferred tax asset balance of $3.8 million related to its
operations in the UK and Australia. The Company classifies interest and penalties on unrecognized tax benefits as
income tax expense.
Comprehensive loss
80
Comprehensive loss consists of net loss, and unrealized gains or losses on available-for-sale marketable
investments. The Company presents comprehensive loss as part of the consolidated statements of operations. The
changes in the accumulated balances of the components of other comprehensive loss were not material for the
periods presented.
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of
common stock outstanding during the period, and excludes any dilutive effects of employee stock-based awards and
potential shares issuable upon conversion of the convertible senior notes. Diluted net loss per share is computed
giving effect to all potentially dilutive shares of common stock, including common stock issuable upon exercise of
stock options, vesting of RSUs and PRSUs, and shares of common stock issuable upon conversion of convertible
senior notes. In periods of net loss, all potentially issuable shares of common stock are excluded from the diluted net
loss per share computation because they are anti-dilutive. Therefore, basic and diluted net loss per share are the same
for all years presented in the Company’s consolidated statements of operations and comprehensive loss.
Indemnification
The Company, in the ordinary course of business, enters into agreements of varying scope and terms pursuant
to which it agrees to indemnify clients, vendors, lessors, business partners and other parties with respect to certain
matters, including, but not limited to, losses arising out of breach of such agreements, including breach of security,
services to be provided by the Company or from intellectual property infringement claims made by third parties. To
date, the Company has not incurred any material costs as a result of such indemnification provisions and the
Company has not accrued any liabilities related to such obligations in the consolidated financial statements as of
December 31, 2023 and 2022.
Segment Information
The Company has determined that its Chief Executive Officer is its chief operating decision maker. The
Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of
assessing performance and making decisions on how to allocate resources. Accordingly, the Company has
determined that it operates in a single reportable segment.
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.
81
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):
December 31, 2023
December 31, 2022
Accounts receivable, net
Deferred contract acquisition costs, net:
Current
Non-current
Total deferred contract acquisition costs, net
Contract assets and contract liabilities:
Contract assets (included in prepaid expenses and other current assets)
Contract liabilities (deferred revenue)
Noncurrent contract liabilities (deferred revenue) (included in other long term
liabilities)
Net contract liabilities
$
$
$
$
$
97,424 $
87,494
61,711 $
136,571
198,282 $
47,242
114,880
162,122
4,106 $
68,187
1,350
(65,431) $
3,401
57,816
1,178
(55,593)
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.
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 year ended December 31, 2023, the Company recognized revenue of $49.1 million related to its contract
liabilities at December 31, 2022.
Remaining Performance Obligations
As of December 31, 2023, 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 $1,055.9 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
82
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 December 31, 2023. The Company’s
marketable investments as of December 31, 2023 and 2022 were as follows (in thousands):
Short-Term Marketable Investments
Certificates of deposit
U.S. treasury securities
U.S. agency and government-sponsored securities
Commercial paper
Municipal bonds
Corporate bonds
Total
Short-Term Marketable Investments
Certificates of deposit
U.S. treasury securities
U.S. agency and government-sponsored securities
Commercial paper
Municipal bonds
Corporate bonds
Total
Long-Term Marketable Investments
U.S. agency and government-sponsored securities
Total
December 31, 2023
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Fair Value
$ 1,463 $
— $
— $
1,463
315,608
239,358
17,382
927
12,630
191
78
9
1
4
(362) 315,437
(177) 239,259
—
—
17,391
928
(16)
12,618
$ 587,368 $
283 $
(555) $ 587,096
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Fair Value
$
747 $
— $
(13) $
734
186,776
197,597
25,386
22,764
3,658
8
29
—
—
—
(1,382) 185,402
(1,660) 195,966
—
25,386
(145)
22,619
(22)
3,636
$ 436,928 $
37 $ (3,222) $ 433,743
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Fair Value
$
$
885 $
885 $
— $
— $
— $
— $
885
885
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 December 31, 2023 and 2022 (in thousands):
Certificates of deposit
U.S. treasury securities
U.S. agency and government-sponsored securities
Municipal bonds
Corporate bonds
Total
December 31, 2023
December 31, 2022
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
$
— $
— $
(13) $
734
(362)
79,644
(1,382) 126,534
(177) 165,493
(1,660) 172,458
—
—
(145)
12,623
(16)
7,550
(22)
3,636
$
(555) $ 252,687 $
(3,222) $ 315,985
Although the Company had certain available-for-sale debt securities in an unrealized loss position as of
December 31, 2023, 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.
83
The amortized cost and fair value of the Company’s marketable investments by contractual maturity as of
December 31, 2023 were as follows (in thousands):
Due within one year
Due after one year through two years
Total
Fair Value Measurements
Cost
Fair Value
$ 457,498 $ 457,484
129,870
129,612
$ 587,368 $ 587,096
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.
84
The following tables set forth the Company’s assets measured at fair value by level within the fair value
hierarchy (in thousands):
Assets
Cash equivalents
Money market funds
Certificates of deposit
U.S. treasury securities
Commercial paper
Total cash equivalents
Marketable investments
Certificates of deposit
U.S. treasury securities
U.S. agency and government-sponsored securities
Commercial paper
Municipal bonds
Corporate bonds
December 31, 2023
Level 1
Level 2
Level 3
Total
$ 66,661
$
—
$
—
4,983
—
493
—
1,498
$ 71,644
$
1,991
$
$
—
$
1,463
$
315,437
—
—
—
—
—
239,259
17,391
928
12,618
—
—
—
—
—
—
—
—
—
—
—
—
$
66,661
493
4,983
1,498
$
73,635
$
1,463
315,437
239,259
17,391
928
12,618
$ 587,096
Total marketable investments
$ 315,437
$ 271,659
$
Assets
Cash equivalents
Money market funds
U.S. treasury securities
Total cash equivalents
Marketable investments (short and long-term)
Certificates of deposit
U.S. treasury securities
U.S. agency and government-sponsored securities
Commercial paper
Municipal bonds
Corporate bonds
Total marketable investments
December 31, 2022
Level 1
Level 2
Level 3
Total
$ 37,560
$
19,700
$ 57,260
$
—
—
—
$
$
$
—
$
734
$
185,402
—
—
—
—
196,851
25,386
22,619
—
$ 185,402
3,636
$ 249,226
$
—
—
—
—
—
—
—
—
—
—
$
37,560
19,700
$
57,260
$
734
185,402
196,851
25,386
22,619
3,636
$ 434,628
As of December 31, 2022, the estimated fair value of the Company’s outstanding 2023 convertible senior
notes was $0.3 million. The 2023 convertible senior notes matured on May 1, 2023. As of December 31, 2023 and
2022, the estimated fair value of the Company's outstanding 2025 convertible senior notes was $718.3 million and
$687.1 million, respectively. 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 it
does not have the ability to exercise significant influence over. The Company elected 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
85
the date that the observable transactions or events occurred. The Company concluded that there was no indicator of
impairment of this investment as of December 31, 2023.
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 December 31, 2023 and 2022.
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):
Cash
Money market funds
Certificates of deposit
U.S. Treasury
Commercial paper
December 31,
2023
2022
$
69,566
$
123,260
66,661
493
4,983
1,498
37,560
—
19,700
—
Total cash and cash equivalents
$
143,201
$
180,520
Accounts receivable, net consisted of the following (in thousands):
Trade accounts receivable
Unbilled trade accounts receivable, net of advance client deposits
Provision for credit losses
Accounts receivable, net
December 31,
2023
2022
$
86,912
$
10,776
(264)
77,621
10,135
(262)
$
97,424
$
87,494
Prepaid expenses and other current assets consisted of the following (in thousands):
Prepaid expenses
Other current assets
Contract assets
December 31,
2023
2022
$
22,023
$
17,151
8,493
4,106
9,159
3,401
Prepaid expenses and other current assets
$
34,622
$
29,711
86
Property and equipment, net consisted of the following (in thousands):
Computer and network equipment
Computer software
Internal-use software development costs
Furniture and fixtures
Leasehold improvements
Property and equipment
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2023
2022
$
155,997
$
148,789
59,452
19,734
4,666
6,425
50,955
6,111
3,326
6,574
246,274
(137,702)
215,755
(114,534)
$
108,572
$
101,221
Depreciation and amortization expense associated with property and equipment was $36.5 million, $33.0
million and $26.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Property and equipment capitalized under finance lease obligations consists primarily of computer and
network equipment and was immaterial as of December 31, 2023 and 2022.
Other assets consisted of the following (in thousands):
Other assets
Equity investment in a privately-held company
Deferred tax assets
Other assets
December 31,
2023
2022
$
10,433
$
2,000
3,766
5,081
2,000
3,976
$
16,199
$
11,057
Accrued and other current liabilities consisted of the following (in thousands):
Accrued expenses
Accrued compensation and benefits
Accrued federal fees
Sales tax liabilities
December 31,
2023
2022
$
18,282
$
35,927
4,166
3,756
19,343
33,749
2,471
2,973
Accrued and other current liabilities
$
62,131
$
58,536
Other long-term liabilities consisted of the following (in thousands):
Deferred revenue
Deferred tax liabilities
Sales tax liabilities
Other long-term liabilities
Other long-term liabilities
December 31,
2023
2022
$
1,350
$
1,178
—
926
5,612
$
7,888
$
157
899
1,745
3,979
87
5. Goodwill and Intangible Assets
Goodwill of $62.0 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 14 for further details. The following table
summarizes the activity in the Company's goodwill and intangible asset balances during the years ended
December 31, 2023 and 2022 (in thousands):
Beginning of the period, January 1, 2022
Amortization
Beginning of the period, December 31, 2022
Addition (Aceyus)
Amortization
Goodwill
Intangible Assets
$
165,420 $
39,897
—
(11,705)
165,420
61,992
28,192
22,150
—
(12,019)
End of the period, December 31, 2023
$
227,412 $
38,323
During the fourth quarter of 2023, the Company completed its annual goodwill impairment test. Based on the
Company’s assessment, it concluded that it is more likely than not that the fair values are more than their carrying
values. Accordingly, there was no indication of impairment of goodwill, and further quantitative testing was not
required. Subsequent to the 2023 annual impairment test, the Company believes there have been no significant
events or circumstances negatively affecting the valuation of goodwill. As of December 31, 2023 and 2022, there
was no impairment to the carrying value of the Company’s goodwill.
The components of intangible assets were as follows (in thousands):
December 31, 2023
December 31, 2022
Developed
technology
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 75,314 $
(40,327) $
34,987
Acquired workforce
470
(470)
—
Customer
relationships
Trademarks
Total
4,150
1,000
(1,252)
(562)
2,898
438
$ 80,934 $
(42,611) $
38,323
Weighted
Average
Remaining
Amortization
Period
(Years)
5.2
0.0
4.1
2.6
5.1
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$ 56,214 $
(28,881) $ 27,333
470
1,600
500
(470)
(741)
(500)
—
859
—
$ 58,784 $
(30,592) $ 28,192
Weighted
Average
Remainin
g
Amortizat
ion Period
(Years)
3.2
0.0
2.7
0.0
3.2
Amortization expense related to intangible assets was $12.0 million, $11.7 million and $11.8 million for the
years ended December 31, 2023, 2022 and 2021, respectively.
88
As of December 31, 2023, the expected future amortization expense for intangible assets was as follows (in
thousands):
Period
2024
2025
2026
2027
2028
Thereafter
Total
Expected Future
Amortization Expense
$
10,591
8,660
7,201
2,898
2,706
6,267
$
38,323
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate an asset’s
carrying value may not be recoverable. The Company concluded that there was no indicators of impairment of its
intangible assets as of December 31, 2023 and 2022.
6. Debt
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.
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
89
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 $78.69 per share as of December 29, 2023, the last
trading day during the three months ended December 31, 2023, 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, December 29, 2023, was not greater than or
equal to 130% of the initial conversion price. As such, during the three months ended December 31, 2023, 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 March 31, 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 December
31, 2023, 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 December 31, 2023 and 2022 was as
follows (in thousands):
Principal
Unamortized issuance costs
Net carrying amount
December 31, 2023
December 31, 2022
$
$
747,500 $
(5,375)
742,125 $
747,500
(9,124)
738,376
Interest expense related to the 2025 convertible senior notes was as follows (in thousands):
December 31, 2023
December 31, 2022
December 31, 2021
Year Ended
Contractual interest expense
Amortization of issuance costs
Total interest expense
$
$
3,737 $
3,749
7,486 $
3,737 $
3,711
7,448 $
4,007
3,674
7,681
In connection with the issuance of the 2025 convertible senior notes, the Company entered into privately
negotiated capped call transactions (the “2025 Capped Call Transactions”) with certain financial institutions. The
initial cap price of the 2025 Capped Call Transactions was $206.68 per share and is subject to certain adjustments
under the terms of the 2025 Capped Call Transactions. The 2025 Capped Call Transactions cover, subject to anti-
dilution adjustments, approximately 5.6 million shares of the Company’s common stock.
90
2023 Convertible Senior Notes and Related Capped Call Transactions
In May 2018, the Company issued $258.8 million aggregate principal amount of the 2023 convertible senior
notes in a private offering. The total net proceeds from the offering, after deducting initial purchasers' discounts and
commissions and estimated debt issuance costs, was approximately $250.8 million.
In May 2020, the Company used part of the net proceeds from the issuance of the 2025 convertible senior
notes to repurchase, exchange or otherwise retire approximately $181.0 million aggregate principal amount of the
2023 convertible senior notes in privately-negotiated transactions for aggregate consideration of $449.6 million,
consisting of $181.0 million in cash and 2,723,581 shares of the Company’s common stock.
The 2023 convertible senior notes matured on May 1, 2023, and were settled in a combination of cash and
shares of the Company’s common stock. Prior to maturity, the 2023 convertible senior notes bore interest at a fixed
rate of 0.125% per annum, payable semiannually in arrears on May 1 and November 1 of each year. There were no
changes to the 2023 convertible senior notes’ initial conversion price of approximately $40.82 per share of common
stock since issuance.
The net carrying amount of the 2023 convertible senior notes as of December 31, 2022 was $0.2 million.
There were no 2023 convertible senior notes outstanding as of December 31, 2023. Interest expense related to the
2023 convertible senior notes was immaterial for the years ended December 31, 2023, 2022 and 2021.
In connection with the issuance of the 2023 convertible senior notes, the Company entered into privately
negotiated capped call transactions (the “2023 Capped Call Transactions”) with certain financial institutions. The
initial cap price of the 2023 Capped Call Transactions was $62.80 per share. The 2023 Capped Call Transactions
covered approximately 6.3 million shares of the Company’s common stock. Upon maturity, the outstanding capped
calls associated with the repurchase, early settlements and settlements at maturity of $194.7 million of the 2023
convertible senior notes were settled, which resulted in the Company receiving 370,877 shares of the Company’s
common stock and $74.5 million.
7. Stockholders’ Equity
Capital Structure
Common Stock
The Company is authorized to issue 450,000,000 shares of common stock with a par value of $0.001 per
share. As of December 31, 2023 and 2022, the Company had 73,316,968 and 71,047,179 shares of common stock
issued and outstanding, respectively.
During 2023 and 2022, the Company issued 1,445 and 573,633 shares, respectively, of common stock in
connection with 2023 convertible senior note settlements. During 2023 and 2022, the Company also received
370,877 and 119,492 shares, respectively, from the partial unwind and settlement of capped calls resulting from the
settlement of its 2023 convertible senior notes. The receipt of the 370,877 and 119,492 shares reduced the number of
shares of common stock outstanding. See Note 6 for further details.
Holders of the Company’s common stock are entitled to dividends, if and when declared by the board of
directors. In the event of liquidation, dissolution or winding up, subject to the rights of the holders of any then
outstanding shares of preferred stock, holders of common stock will be entitled to receive the assets and funds of the
Company that are legally available for distribution.
Preferred Stock
The Company is authorized to designate and issue up to 5,000,000 shares of preferred stock with a par value
of $0.001 per share in one or more series without stockholder approval and to fix the rights, preferences, privileges
and restrictions thereof. As of December 31, 2023 and 2022, there were no shares of preferred stock issued and
outstanding.
91
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance related to outstanding equity awards and employee
equity incentive plans as of December 31, 2023, were as follows (in thousands):
Stock options outstanding
RSUs (including PRSUs) outstanding
Shares available for future grant under 2014 Plan
Shares available for future issuance under ESPP
Total shares of common stock reserved
Equity Incentive Plans
Common Stock
Reserved
918
4,076
15,653
3,937
24,584
Prior to the Company’s initial public offering (“IPO”) in April 2014, the Company granted stock options
under its Amended and Restated 2004 Equity Incentive Plan, as amended (“2004 Plan”).
Under the terms of the 2004 Plan, the Company had the ability to grant incentive and nonstatutory stock
options. Incentive stock options could only be granted to Company employees. Nonstatutory stock options could be
granted to Company employees, directors and consultants. Such options are exercisable at prices, as determined by
the board of directors, generally equal to the fair value of the Company’s common stock at the date of grant. Options
granted to employees generally vest over a four-year period, with an initial vesting period of 12 months for 25% of
the shares, and the remaining 75% of the shares vesting monthly on a ratable basis over the remaining 36 months.
Options generally expire 10 years after the grant date and are generally exercisable upon vesting. Vested options
generally expire 90 days after termination of the optionee’s employment or relationship as a consultant or director,
unless otherwise extended by the terms of the stock option agreement.
In March 2014, the Company’s board of directors and stockholders approved the 2014 Equity Incentive Plan
(“2014 Plan”) and 5,300,000 shares of common stock were authorized for issuance under the 2014 Plan. In addition,
on the first day of each year beginning in 2015 and ending in 2024, the 2014 Plan provides for an annual automatic
increase to the shares reserved for issuance in an amount equal to 5% of the total number of shares outstanding on
December 31st of the preceding calendar year or a lesser number as determined by the Company’s board of
directors. Pursuant to the automatic annual increase, 3,665,848 additional shares were reserved under the 2014 Plan
on January 1, 2024. No further grants were made under the 2004 Plan once the 2014 Plan became effective on April
3, 2014. Upon the effectiveness of the 2014 Plan, all shares reserved for future issuance under the 2004 Plan became
available for issuance under the 2014 Plan. Additionally, any forfeited or expired shares that would have otherwise
returned to the 2004 Plan, instead return to the 2014 Plan. The 2014 Plan allows the Company to grant stock options,
RSUs, restricted stock awards, performance stock awards, stock appreciation rights, performance cash awards, and
other stock awards. To date, the Company has granted stock options and RSUs under the 2014 Plan. Stock options
granted under the 2014 Plan are in general at a price equal to the fair market value of the common stock on the date
of grant and vest over four years. The Company’s stock options expire 10 years from the date of grant. Each RSU
granted under the 2014 Plan represents a right to receive one share of the Company’s common stock when the RSU
vests. RSUs generally vest over one to four years. Vested options generally expire three months after termination of
the optionee’s employment or relationship as a consultant or director, unless otherwise extended by the terms of the
stock option agreement.
In connection with the Company’s acquisition of Inference in 2020, the Company assumed unvested stock
options that had been granted under the Inference Technologies Group Inc. 2018 Equity Incentive Plan. Each of the
assumed stock options are subject to substantially the same terms and conditions as applied to the assumed stock
options immediately prior to the acquisition date, except that the number of shares of the Company’s common stock
subject to each assumed stock option and the exercise price has been adjusted in accordance with the terms of the
acquisition agreement. If these assumed stock options are cancelled, forfeited or expire unexercised, the underlying
shares do not become available for future grant. As of the acquisition date, the estimated fair value of the assumed
unvested options was $7.6 million, of which $0.2 million was recognized as goodwill and the balance of
$7.4 million is being recognized as stock-based compensation expense over the remaining service period of the
assumed unvested stock options.
92
Stock Options
A summary of the Company’s stock option activity during the year ended December 31, 2023 is as follows
(in thousands, except years and per share data):
Outstanding as of December 31, 2022
Options granted
Options exercised
Options forfeited or expired
Outstanding as of December 31, 2023
Vested and expected to vest as of December 31, 2023
Exercisable as of December 31, 2023
Number of
Shares
1,481
$
0
(491)
(72)
918
918
841
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic
Value (1)
47.75
0.00
18.58
141.83
55.96
55.96
48.61
4.7
4.7
4.5
$
34,205
34,205
34,131
(1) The aggregate intrinsic value amounts are computed based on the difference between the exercise price of the
stock options and the fair market value of the Company’s common stock of $78.69 per share as of December
29, 2023 for all in-the-money stock options outstanding.
Following is additional information pertaining to the Company’s stock option activity (in thousands, except
per share data):
Weighted average grant date fair value per share of options granted
Intrinsic value of options exercised (1)
Total fair value of options vested during the period
Cash received from options exercised
Year Ended December 31,
2023
2022
2021
$
—
$
50.44
$
78.72
26,943
5,602
9,127
45,698
11,421
8,522
59,762
12,760
7,402
(1) Intrinsic value of options exercised is the difference between the fair market value of the Company’s common
stock at the time of exercise and the exercise price paid.
Restricted Stock Units (including Performance-Based Restricted Stock Units)
A summary of RSU activity (including PRSUs) during the year ended December 31, 2023 is as follows (in
thousands, except years and per share data):
Outstanding as of December 31, 2022
RSUs granted(1)
RSUs vested and released
RSUs forfeited or cancelled
Outstanding as of December 31, 2023
(1) Includes 36 thousand PRSUs granted during 2023.
Number of
Shares
Weighted
Average Grant
Date Fair Value
Per Share
3,718
$
2,648
(1,844)
(446)
4,076
103.55
69.84
100.60
100.75
83.25
PRSUs with Market and Service Conditions. In 2022, the Company granted 284,282 PRSUs subject to market
and service conditions (“market-based PRSUs”) with a grant date fair value of $30.6 million as part of its annual
grant of equity incentive awards to certain executives and in connection with the appointment of Michael Burkland
as its new Chief Executive Officer. In 2023, the Company granted an additional 35,921 market-based PRSUs with a
grant date fair value of $3.1 million. The amount that may be earned pursuant to the market-based PRSUs ranges
93
from 0% to 200% of the target number based on the Company’s relative total shareholder return (“RTSR”)
performance as compared to the companies in the S&P Software and Services Select Index during three one-year
performance periods. One-third of the total market-based PRSUs may be earned and settled in shares following the
end of each one-year performance period based on RTSR performance and subject to continued employment
through the payment date, but the amount initially paid for the first two one-year performance periods is limited to
100% of the target amount for such years, and any market-based PRSUs resulting from above-target performance in
those first two years will be paid following the end of the final one-year performance period, subject to the
executive’s continued employment through the payment date. If the Company’s absolute total shareholder return for
any performance period is negative, then no more than 100% of the target amount of market-based PRSUs for such
period may be earned. If an executive's employment with the Company terminates before the end of the final one-
year performance period due to death or disability, 100% (if due to death) or 50% (if due to disability) of the
unvested market-based PRSUs may be earned subject to ultimate RTSR performance in each remaining performance
period. Upon a qualifying termination of employment in connection with a change in control of the Company, the
unvested market-based PRSUs will vest on a double-trigger basis (i) at the target level for the market-based PRSUs
subject to the 2022-2024 performance period, and (ii) for the market-based PRSUs subject to the 2023-2025
performance period, (a) at the target level for the uncompleted portions of the performance periods and (b) at the
actual level of performance measured through the date of the change in control of the Company, based on the price
per share paid in such change in control. The fair value of the market-based PRSUs is determined on their grant date
using a Monte Carlo Simulation model based upon assumptions presented below. The Company recognizes the fair
value of the market-based PRSUs ratably over their requisite service period.
During the first quarter of 2023, the Company certified the performance results for the 2022 measurement
period for the market-based PRSUs subject to the 2022-2024 performance period. Under the market-based PRSU
agreements, the TSR payout percentage ranges from 0% to 200%, with a 50% payout at the 25th TSR percentile
(threshold), 100% payout at the 55th TSR percentile (target), 200% payout at the 90th percentile or greater
(maximum) and no payout below the threshold performance level. The Company determined that its actual total
shareholder return was -52.64% for 2022, and that its relative total shareholder return ranking was in the 30.2
percentile relative to companies in the S&P Software & Services Select Index, which resulted in a payout percentage
of 58.7% of target. During the first quarter of 2024, the Company certified the performance results for the 2023
measurement period for the market-based PRSUs subject to the 2022-2024 performance period. The Company
determined that its actual total shareholder return was 19.95% for 2023, and that its relative total shareholder return
ranking was in the 53.8 percentile relative to companies in the S&P Software & Services Select Index, which
resulted in a payout percentage of 98.0% of target. During the first quarter of 2024, the Company also certified the
performance results for the 2023 measurement period for the market-based PRSUs subject to the 2023-2025
performance period. The Company determined that its actual total shareholder return was 19.95% for 2023, and that
its relative total shareholder return ranking was in the 50.5 percentile relative to companies in the S&P Software &
Services Select Index, which resulted in a payout percentage of 92.5% of target.
PRSUs with Revenue and Service Conditions. In 2022, the Company granted 66,167 PRSUs subject to
revenue-based performance and service conditions (“revenue-based PRSUs”) with a grant date fair value of
$6.6 million. The amount of revenue-based PRSUs that may be earned will be determined based on achievement of
two quarterly revenue goals. One third of the revenue-based PRSUs may be earned based on achievement of the first
revenue target and, if achieved, will vest in four quarterly installments, with the first installment occurring on the
date such achievement is certified, subject to the executive's continuous service through the applicable vesting dates.
Two thirds of the revenue-based PRSUs may be earned based on achievement of the second revenue target and, if
achieved, will vest in eight quarterly installments, with the first installment occurring on the date such achievement
is certified, subject to the executive's continuous service through the applicable vesting dates. The revenue-based
PRSUs are otherwise on the Company's standard award terms for its market-based PRSUs. During 2023, the
Company certified that the first revenue target was achieved, and thus recognized the related stock-based
compensation expense for this first revenue target. However, the Company certified during the first quarter of 2024
94
that, as of December 31, 2023, the second revenue target was not achieved, and thus did not recognize the related
stock-based compensation expense and cancelled the shares associated with this target.
Following is additional information pertaining to the Company’s RSU activity (including PRSUs) (in
thousands, except per share data):
Year Ended December 31,
2023
2022
2021
Weighted average grant date fair value per share of RSUs granted
$
69.84
$
90.51
$
177.00
Total fair value of RSUs vested during the period
184,443
125,798
174,500
Employee Stock Purchase Plan
In March 2014, the Company’s board of directors and stockholders adopted the 2014 ESPP and the shares
authorized for issuance thereunder. The 2014 ESPP became effective on April 3, 2014.
The 2014 ESPP permits eligible employees to purchase shares of the Company’s common stock through
payroll deductions with up to 15% of their pre-tax earnings subject to certain Internal Revenue Code limitations. The
purchase price of the shares is 85% of the lower of the fair market value of the Company’s common stock on the
first day of a six month offering period, except for the initial offering period, or the relevant purchase date. In
addition, no participant may purchase more than 1,500 shares of common stock in each purchase period.
The number of shares of common stock originally reserved for issuance under the 2014 ESPP was 880,000
shares, which increases automatically each year, beginning on January 1, 2015 and continuing through January 1,
2024, by the lesser of (i) 1% of the total number of shares of the Company’s common stock outstanding on
December 31 of the preceding calendar year; (ii) 1,000,000 shares of common stock (subject to adjustment to reflect
any split or combination of its common stock); or (iii) such lesser number as determined by its board of directors.
Pursuant to the automatic annual increase, 733,169 additional shares were reserved under the 2014 ESPP on January
1, 2024.
During 2023 and 2022, 344,309 and 190,257 shares were purchased by employees under the 2014 ESPP at a
weighted average price of $46.26 and $70.50 per share, respectively.
Stock-Based Compensation
Stock-based compensation expenses for the years ended December 31, 2023, 2022 and 2021 were as follows
(in thousands):
Cost of revenue
Research and development
Sales and marketing
General and administrative
Year Ended December 31,
2023
2022
2021
$
38,259
$
33,297
$
50,430
66,229
51,374
206,292
$
44,367
59,300
35,543
172,507
$
17,734
29,179
35,269
26,623
108,805
Total stock-based compensation
$
As of December 31, 2023, unrecognized stock-based compensation expense by award type and their expected
weighted-average recognition periods are summarized in the following table (in thousands, except years).
Stock Option
RSU (excluding
PRSUs)
PRSU
ESPP
Unrecognized stock-based
compensation expense
$
4,660
$
284,201
$
13,068 $
2,888
Weighted-average amortization period
1.5 years
2.7 years
1.8 years
0.4 years
The Company recognizes stock-based compensation expense that is calculated based upon awards that have
vested, reduced for actual forfeitures. All stock-based compensation for equity awards granted to employees and non-
employee directors is measured based on the grant date fair value of the award.
95
The Company values RSUs, including PRSUs subject to performance conditions, at the closing market price of its
common stock on the date of grant. The Company estimates the fair value of each stock option and purchase right under
the 2014 ESPP granted to employees on the date of grant using the Black-Scholes option-pricing model using the
assumptions disclosed in the table below. The Company estimates the fair value of PRSUs subject to market conditions
using a Monte Carlo Simulation model using the assumptions disclosed in the table below. Expected volatility is based
upon the weighting of the Company’s historical volatility. The expected term of options granted is estimated using the
simplified method by taking the average of the vesting term and the contractual term of the option. The expected
volatility assumption for purchase rights under the 2014 ESPP is based on the historical volatility of the Company’s
common stock. The risk-free rate for the expected term of the awards is based on U.S. Treasury zero-coupon issues at the
time of grant. The Company has not paid, and does not anticipate paying, cash dividends on its shares of common stock.
Accordingly, the expected dividend yield is zero.
The weighted average assumptions used to value stock options granted during the periods presented were as
follows:
Stock Options
Expected term (years)
Volatility
Risk-free interest rate
Dividend yield
Year Ended December 31,
2022
6.0
46%
1.8%
—
2021
6.0
47%
1.0%
—
2023
—
—
—
—
The weighted average assumptions used to value PRSUs with market conditions granted during the periods
presented were as follows:
PRSUs (Market Conditions)
Expected term (years)
Volatility
Risk-free interest rate
Dividend yield
Year Ended December 31,
2023
2.8
51.1%
4.5%
—
2022
3.0
53.0%
3.5%
—
2021
—
—
—
—
The weighted average assumptions used to value purchase rights under the 2014 ESPP granted during the periods
presented were as follows:
ESPP
Granted In
November
2023
May 2023
November
2022
May 2022
November
2021
May 2021
0.5
48%
4.8%
—
0.5
75%
4.6%
—
0.5
59%
2.1%
—
0.5
46%
0.2%
—
0.5
46%
0.2%
—
0.5
49%
0.1%
—
Expected term (years)
Volatility
Risk-free interest rate
Dividend yield
8. Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of
common stock outstanding during the period, and excludes any dilutive effects of employee stock-based awards and
potential shares upon conversion of the convertible senior notes. Diluted net loss per share is computed giving effect
to all potentially dilutive shares of common stock, including common stock issuable upon exercise of stock options,
vesting of RSUs and PRSUs, and shares of common stock issuable upon conversion of convertible senior notes. As
the Company had net losses for the years ended December 31, 2023, 2022 and 2021, all potentially issuable shares
of common stock were determined to be anti-dilutive.
96
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per
share data):
Net loss
Weighted-average shares used in computing basic and diluted
net loss per share
Basic and diluted net loss per share
Year Ended December 31,
2023
2022
2021
$
(81,764)
$
(94,650)
$
(53,000)
72,048
69,920
67,512
$
(1.13)
$
(1.35)
$
(0.79)
The following securities were excluded from the calculation of diluted net loss per share because their effect
would have been anti-dilutive (in thousands):
Stock options
RSUs (including PRSUs)
Convertible senior notes
Total
December 31,
2023
2022
2021
918
4,076
5,566
10,560
1,481
3,718
5,685
10,884
1,982
2,560
6,663
11,205
The Company used the if-converted method for calculating any potential dilutive effect of the convertible
senior notes for the years ended December 31, 2023, 2022 and 2021. Under this method, the Company calculates
diluted earnings per share under both the cash and share settlement assumptions to determine which is more dilutive.
If share settlement is more dilutive, the Company calculates diluted earnings per share assuming that all of the
convertible senior notes were converted solely into shares of common stock at the beginning of the reporting period.
The potential impact upon the conversion of the convertible senior notes were excluded from the calculation of
diluted net loss per share for the years ended December 31, 2023, 2022 and 2021 because the effect would have been
anti-dilutive.
97
9. Income Taxes
The following table presents components of loss before income taxes for the periods presented (in thousands):
United States
International
Loss before income taxes
Year Ended December 31,
2023
2022
2021
$
$
(80,348) $
(76,280) $
(59,856)
925
(13,982)
(4,429)
(79,423) $
(90,262) $
(64,285)
Provision for (benefit from) income taxes for the periods presented consisted of (in thousands):
Current:
U.S. federal
U.S. state
Foreign
Total provision for income taxes - Current
$
Deferred:
U.S. federal
U.S. state
Foreign
Total provision for (benefit from) income taxes -
Deferred
Total provision for (benefit from) income taxes
$
Year Ended December 31,
2023
2022
2021
$
—
2,531
(243)
2,288
—
—
53
53
2,341
$
—
576
724
1,300
—
—
3,088
3,088
4,388
$
$
—
262
(202)
60
—
—
(11,345)
(11,345)
(11,285)
The Company recorded current income tax expense during 2023 principally due to U.S. taxable income as a
result of IRC Section 174 research and experimental capitalization requirements. The Company offset federal
98
taxable income through the utilization of available net operating loss carryforward attributes. However, the
Company was subject to net operating loss utilization limitations in some U.S. state jurisdictions.
Income tax expense (benefit) differed from the amount computed by applying the U.S. federal statutory
income tax rate of 21% to pre-tax (loss) income for the periods presented as a result of the following (in thousands):
U.S. federal tax at statutory rate
$
(16,676) $
(18,957) $
(13,500)
Year Ended December 31,
2023
2022
2021
U.S. state income taxes
Section 162(m)
Global intangible low-taxed income
Effect of waived tax deductions - Base Erosion and Anti-
Abuse Tax
Non-deductible expenses
Research and development credit
Stock-based compensation
Tax benefit from acquisition/reorganizations
Foreign taxes
Other
Change in valuation allowance
2,531
6,417
(4,002)
7,751
894
(943)
10,829
—
(383)
—
(4,077)
576
3,851
4,127
—
78
(1,194)
1,722
(3,852)
6,749
—
11,288
262
7,543
—
—
1,361
(1,181)
(25,241)
(5,877)
(4,760)
20
30,088
Total provision for (benefit from) income taxes
$
2,341
$
4,388
$
(11,285)
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax
assets and liabilities as of December 31, 2023 and 2022 related to the following (in thousands):
Deferred tax assets:
Net operating loss and credit carryforwards
$
115,137
$
125,698
December 31,
2023
2022
Capitalized R&D costs
Accrued liabilities
Provision for credit losses
Amortized intangibles
Deferred revenue
Accrued compensation
Long-term lease liabilities
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property and equipment
Other
Right of use assets
Deferred contract acquisition costs
Gross deferred tax liabilities
Net deferred taxes
55,167
9,807
1,236
29
2,440
4,132
11,171
199,119
30,552
10,295
1,143
3,041
1,992
3,238
12,421
188,380
(134,802)
(135,406)
64,317
52,974
(7,037)
(205)
(9,092)
(44,217)
(60,551)
(2,737)
(556)
(10,419)
(35,443)
(49,155)
$
3,766
$
3,819
With the exception of Russia, the Company has not provided for U.S. income taxes on undistributed earnings
of its foreign subsidiaries because it intends to permanently re-invest those earnings outside the United States. The
Company has plans to liquidate its Russian subsidiary. As such, the Company can no longer assert an intention to
99
permanently re-invest those earnings. The undistributed earnings of the Company’s foreign subsidiaries were
immaterial as of December 31, 2023 and 2022 and no U.S. income taxes have been accrued.
A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain.
The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely
than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Based on the weight
of the available evidence, which includes the Company’s historical operating losses, lack of taxable income and the
accumulated deficit for the year ended December 31, 2023, the Company has provided a valuation allowance against
its U.S. and U.K. net deferred tax assets. The Company has recorded net foreign deferred tax assets associated with
its Australia and Portugal operations totaling $3.8 million since management has assessed it is more likely than not
that the results of future operations within these jurisdictions will generate sufficient taxable income to realize the
deferred tax assets. The Australia and Portugal deferred tax assets cannot increase its U.S. or U.K. valuation
allowance. The net change in the valuation allowance for the years ended December 31, 2023 and 2022 was a
decrease of $0.6 million and an increase of $13.6 million, respectively. The decrease of the valuation allowance in
the current year was primarily attributed to the utilization of net operating losses, an increase in deductible deferred
contract acquisition costs, federal bonus tax depreciation, and Aceyus purchased intangibles, offset by the
requirement to capitalize research and development costs under IRC Section 174.
As of December 31, 2023, the Company had net operating loss carryforwards for federal, state and foreign
income tax purposes of $403.4 million, $298.6 million and $14.0 million, respectively, available to reduce future
income subject to income taxes. If not utilized, $69.5 million of federal and various amounts of significant state net
operating loss carryforwards will begin to expire in 2027 and 2028, respectively, while $333.9 million of federal net
operating losses, as well as the foreign net operating losses, do not expire. As of December 31, 2023, the Company
also had gross research credit carryforwards for federal and California state tax purposes of $12.9 million and $7.5
million, available to reduce future income subject to income taxes. The federal research credit carryforwards will
expire between 2024 and 2043. The California state research credits do not expire. The IRC imposes restrictions on
the utilization of net operating losses and credits in the event of an “ownership change” of a corporation.
Accordingly, a company’s ability to use net operating losses and credits may be subject to substantial limitation as
prescribed under the IRC Sections 382 and 383 and similar state provisions. Events that may cause limitations in the
amount of the net operating losses and credits that the Company may use in any one year include, but are not limited
to, a cumulative ownership change of more than 50% over a three-year period. The Company completed a study
covering through December 31, 2022, discovering we experienced certain ownership changes prior to 2015, and
adjusted the disclosed amounts of our net operating losses and research credit carryforwards for the resulting effect
of the IRC Section 382 limitations, as necessary. In the event the Company has further changes in ownership, net
operating losses and research and development credit carryforwards, which are fully reserved by the deferred tax
asset valuation allowance, could be limited and may expire unutilized.
Unrecognized Tax Benefits
The table below shows the changes in the gross amount of unrecognized tax benefits for the periods presented
(in thousands):
Year Ended December 31,
2023
2022
2021
Unrecognized benefit — beginning of period
$
9,415
$
7,643
$
Gross increases — current year tax positions
Gross increases — prior year tax positions
Gross decreases — prior year tax positions
Settlements with tax authorities
1,413
299
(3)
—
1,773
—
(1)
—
Unrecognized benefit — end of period
$
11,124
$
9,415
$
6,076
1,851
—
—
(284)
7,643
As of each of December 31, 2023 and 2022, the Company had unrecognized tax benefits that, if recognized,
would impact its effective tax rate by $0.5 million and $0.1 million, respectively. The Company recognizes interest
and penalties related to uncertain tax positions as income tax expense, which has cumulatively been immaterial to its
financial statements. The Company does not anticipate its total unrecognized tax benefits as of December 31, 2023
will significantly change due to settlement of examination or the expiration of statutes of limitation during the next
100
12 months. The Company is currently unaware of any uncertain tax positions that could result in significant
additional payments, accruals or other material deviation in this estimate over the next 12 months.
The Company is subject to taxation in the United States, various states and several foreign jurisdictions. Due
to the Company’s net carryover of unused operating losses, all years from 2003 forward remain subject to future
examination by the U.S. federal and state tax authorities. The Company’s foreign tax returns are open to audit under
the statutes of limitation of the respective foreign countries in which its subsidiaries are located. With the exception
of Russia, the Company considers all undistributed earnings of its foreign subsidiaries indefinitely reinvested.
10. Commitments and Contingencies
Commitments
As of December 31, 2023, $747.5 million of aggregate principal of the 2025 convertible senior notes were
outstanding and are due on June 1, 2025. As of December 31, 2023, no 2023 convertible senior notes were
outstanding. See Note 6 for more information concerning the convertible senior notes.
The Company had outstanding operating lease and finance lease obligations of $52.0 million and $5.0 million,
respectively, as of December 31, 2023. See Note 13 for further details. As of December 31, 2023, the Company also
had outstanding cloud services and software and maintenance agreement commitments totaling $104.4 million, of
which $33.0 million is expected to be purchased in 2024, $45.6 million is expected to be purchased in 2025 and the
remaining $25.8 million is expected to be purchased in 2026.
Hosting and Telecommunication Usage Services
The Company has agreements with third parties to provide co-location hosting and telecommunication usage
services. The agreements require payments per month for a fixed period of time in exchange for certain guarantees
of network and telecommunication availability.
As of December 31, 2023, future minimum payments under these arrangements were as follows in thousands):
Year Ending December 31,
Hosting Services
Telecommunication
Usage Services
2024
2025
2026
2027
Thereafter
Total future minimum payment
Universal Services Fund Liability
$
$
246
$
4
—
—
—
7,619
3,144
1,871
1,358
685
250
$
14,677
The Company is classified as a telecommunications service provider for regulatory purposes and is required
to make contributions to the USF based on the revenue the Company receives from the resale of interstate and some
international telecommunications services. In order to comply with the obligation to make direct contributions, the
Company is registered with the USAC, which is charged by the FCC with administering the USF, and has been
remitting the required contributions to USAC since its registration with the USAC in April 2013. The Company also
made retroactive USF contributions based on its revenues for the period from 2008 to 2012. The Company,
however, has an unresolved and arguably dormant dispute with the FCC regarding whether the Company is liable
for USF contributions related to the period from 2003 through 2007. As of December 31, 2023, the Company had
accrued $0.1 million in interest related to the disputed assessments for the period of 2003 through 2007.
State and Local Taxes and Surcharges
The Company, based on analysis of its activities, has determined that it is obligated to collect and remit U.S.
state or local sales, use, gross receipts, excise and utility user taxes, as well as fees or surcharges as a
communications service provider in certain U.S. states, municipalities or local tax jurisdictions. The Company is
registered for, collecting and remitting applicable taxes where such a determination has been made. Prior to the
Company’s making such determination, the Company neither collected nor remitted these taxes, fees or surcharges
to applicable local, municipal or state jurisdictions. The Company continues to analyze its activities to determine if it
is subject to these taxes in additional jurisdictions and based on the Company’s ongoing assessment of its U.S. state
101
and local tax collection and remittance obligations, the Company registers for tax and regulatory purposes in such
jurisdictions and commences collecting and remitting applicable state and local taxes and surcharges to these
jurisdictions.
As of December 31, 2023 and 2022, the Company had total accrued liabilities of $1.7 million and
$1.2 million, respectively, for such contingent sales taxes and surcharges that were not being collected from its
clients but may be imposed by various taxing authorities, of which $0.8 million and $0.3 million, respectively, were
included in “Accrued and other current liabilities” on the consolidated balance sheet, and the remaining were
included in “Other long-term liabilities” on the consolidated balance sheet. The Company’s estimate of the probable
loss incurred under this contingency is based on its analysis of the source location of its usage-based fees and the
regulations and rules in each tax jurisdiction.
Legal Matters
The Company is involved in various legal and regulatory matters arising in the normal course of business. In
management’s opinion, resolution of these matters is not expected to have a material impact on the Company’s
consolidated results of operations, cash flows, or its financial position. However, due to the uncertain nature of legal
matters, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of
operations, cash flows or financial position in a particular period. The Company expenses legal fees as incurred.
Indemnification Agreements
In the ordinary course of business, the Company enters into agreements of varying scope and terms pursuant
to which it agrees to indemnify clients, vendors, lessors, business partners and other parties with respect to certain
matters, including, but not limited to, losses arising out of breach of such agreements, including breach of security,
services to be provided by the Company or from intellectual property infringement claims made by third parties. In
addition, the Company has entered into indemnification agreements with its directors, officers and certain employees
that requires it, among other things, to indemnify them against certain liabilities that may arise by reason of their
status or service as directors, officers or employees. There are no claims that the Company is aware of that could
have a material effect on the consolidated balance sheets, consolidated statements of operations and comprehensive
loss, or consolidated statements of cash flows.
11. Geographical Information
The following table summarizes revenues by geographic region based on client billing address (in thousands):
United States
International
Total revenue
Year Ended December 31,
2023
2022
2021
$
$
812,708
$
702,206
$
556,385
97,780
76,640
53,206
910,488
$
778,846
$
609,591
The following table summarizes total property and equipment, net in the respective locations (in thousands):
United States
International
Property and equipment, net
12. Retirement Plans
December 31,
2023
2022
$
$
101,567
$
7,005
92,659
8,562
108,572
$
101,221
The Company has a 401(k) plan to provide tax deferred salary deductions for all eligible employees.
Participants may make voluntary contributions to the 401(k) plan, limited by certain Internal Revenue Service
restrictions. The Company is responsible for the administrative costs of the 401(k) plan. The Company began
matching employee contributions in cash in the fourth quarter of 2019. The contribution expense for the years ended
December 31, 2023 and 2022 was $2.4 million and $2.1 million, respectively.
102
The Company complies with the requirement of maintaining a retirement plan for employees in the
Philippines. This plan is a non-contributory and defined benefit plan that provides retirement to employees equal to
approximately one month salary for every year of credited service for employees who attain the normal retirement
age of 60 with at least five years of service. The benefits are paid in a lump sum amount upon retirement from the
Company. Total defined benefit liability under this plan was $0.8 million and $0.5 million as of each of
December 31, 2023 and 2022, respectively. Total retirement expense for this plan were $0.3 million, $0.2 million,
and $0.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.
13. Leases
The Company has leases for offices, data centers and computer and networking equipment that expire at
various dates through 2031. The Company’s leases have remaining terms of one to seven years, some of the leases
include a Company option to extend the leases for up to one to five years, and some of the leases include the option
to terminate the leases upon 30-days notice. The Company does not separate lease and non-lease components for
real estate operating leases.
The components of lease expenses were as follows (in thousands):
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on finance lease liabilities
Total finance lease cost
Year Ended December 31,
2023
2022
2021
13,544
$
12,072
$
10,238
$
940
155
1,095
$
56
—
56
$
$
438
—
438
$
$
$
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease
liabilities:
Operating cash used in operating leases
Financing cash used in finance leases
Right of use assets obtained in exchange for lease
obligations:
Year Ended December 31,
2023
2022
2021
$
(10,966) $
(989)
(11,684) $
—
(7,178)
(612)
Operating leases
Finance leases
6,454
5,505
5,984
—
50,101
—
103
Supplemental balance sheet information related to leases was as follows (in thousands):
Operating leases
Operating lease right-of-use assets
Operating lease liabilities:
Operating lease liabilities — less current portion
Total operating lease liabilities
Finance leases
Finance lease right-of-use assets
Property and equipment, gross
Less: accumulated depreciation and amortization
Property and equipment, net
Finance lease liabilities
Finance lease liabilities — less current portion
Total finance lease liabilities
Weighted average remaining terms were as follows (in years):
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rates were as follows:
Weighted average discount rate
Operating leases
Finance leases
December 31,
2023
2022
38,873
$
44,120
10,731
$
36,378
47,109
$
10,626
41,389
52,015
4,564
$
—
29,503
$
36,282
(29,503)
(36,203)
—
$
1,767
$
2,877
4,644
$
79
—
—
—
$
$
$
$
$
$
$
$
December 31,
2023
2022
5.7 years
2.6 years
6.4 years
0.0 years
December 31,
2023
2022
3.8 %
6.1 %
3.4 %
— %
Maturities of lease liabilities were as follows (in thousands):
Year Ending December 31,
Operating Leases
Finance Leases
2024
2025
2026
2027
2028
Thereafter
Total future minimum lease payments
Less: imputed interest
Total
$
12,283
$
9,329
7,109
5,969
5,582
11,709
51,981
(4,872)
47,109
$
$
1,991
1,991
1,013
—
—
—
4,995
(351)
4,644
104
14. Acquisitions
Aceyus
On August 14, 2023, the Company acquired all of the issued and outstanding shares of capital stock of
Aceyus for total cash consideration of approximately $82.0 million. This acquisition, which was accounted for as a
business combination, is intended to accelerate the Company's ability to capitalize on two business opportunities,
namely facilitating the migration of large enterprise customers from on-premise to cloud and leveraging contextual
data to deliver personalized experiences throughout the customer journey, including using this contextual data in the
Company's AI & Automation solutions.
The excess of the purchase price over identifiable intangible assets and net tangible assets in the amount of
$62.0 million was allocated to goodwill, which is not deductible for tax purposes. The fair values assigned to assets
acquired and liabilities assumed are based on management’s best estimates and assumptions as of the acquisition
date and are considered preliminary pending finalization of valuation analyses pertaining to intangible assets
acquired, liabilities assumed and tax liabilities assumed. During the measurement period, which may be up to one
year from the acquisition date, the Company may record adjustments to the fair value of these tangible and
intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. The following table
presents the preliminary allocation of the purchase price at the acquisition date (in thousands):
Cash
Tangible assets acquired
Other assets acquired
Acquired technology
Customer relationships
Trademarks
Goodwill
Total assets acquired
Liabilities assumed
Total
$
$
1,424
383
3,002
19,100
2,550
500
61,992
88,951
(6,939)
82,012
The acquired technology, customer relationships, and trademarks will be amortized on a straight-line basis
over their estimated useful lives of eight years, five years, and three years, respectively. The Company used the
income approach to estimate the fair value of intangible assets acquired.
In connection with this acquisition, the Company incurred total acquisition-related transaction costs of
$2.2 million during the year ended December 31, 2023 that have been expensed as incurred and included in general
and administrative expenses in the consolidated statements of operations and comprehensive loss.
The results of operations of this acquisition are included in the accompanying consolidated statements of
operations and comprehensive loss from the date of acquisition and are not material to the Company's consolidated
financial statements.
105
15. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial information for 2023 and 2022 is as follows:
Dec. 31,
2023
Sept. 30,
2023
Jun. 30,
2023
Mar. 31,
2023
Dec. 31,
2022
Sept. 30,
2022
Jun. 30,
2022
Mar. 31,
2022
Quarter Ended
(unaudited, in thousands, except per share data)
$ 239,062
$ 230,105
$ 222,882
$ 218,439
$ 208,345
$ 198,342
$ 189,382
$ 182,777
112,493
111,080
104,361
104,756
96,294
94,111
88,229
88,867
126,569
119,025
118,521
113,683
112,051
104,231
101,153
93,910
Revenue
Cost of revenue (1)(2)
Gross profit
Operating expenses:
Research and development (1)(2)
Sales and marketing (1)(2)
General and administrative (1)(2)
38,873
72,956
33,338
40,391
73,366
31,006
39,210
74,077
30,477
38,108
76,314
28,258
36,865
34,113
34,992
35,824
65,928
67,353
64,098
64,611
22,509
24,496
23,824
24,314
Total operating expenses
145,167
144,763
143,764
142,680
125,302
125,962
122,914
124,749
Loss from operations
(18,598)
(25,738)
(25,243)
(28,997)
(13,251)
(21,731)
(21,761)
(30,839)
Other (expense) income, net:
Interest expense
(1,963)
(1,972)
(1,866)
(1,845)
(1,887)
(1,879)
(1,857)
(1,870)
Interest income and other
Total other income (expense), net
8,322
6,359
8,233
6,261
6,123
4,257
4,121
2,276
2,706
819
982
280
845
(897)
(1,577)
(1,025)
Loss before income taxes
(12,239)
(19,477)
(20,986)
(26,721)
(12,432)
(22,628)
(23,338)
(31,864)
Provision for (benefit from) income
taxes
Net loss
Net loss per share:
Basic
Diluted
Shares used in computing net loss
per share:
119
942
753
527
1,221
579
332
2,256
$ (12,358) $ (20,419) $ (21,739) $ (27,248) $ (13,653) $ (23,207) $ (23,670) $ (34,120)
$
$
(0.17) $
(0.28) $
(0.30) $
(0.38) $
(0.19) $
(0.33) $
(0.34) $
(0.49)
(0.17) $
(0.28) $
(0.30) $
(0.38) $
(0.19) $
(0.33) $
(0.34) $
(0.49)
Basic
Diluted
72,926
72,926
72,356
72,356
71,627
71,627
71,259
71,259
70,704
70,232
69,748
68,974
70,704
70,232
69,748
68,974
(1) Included stock-based compensation as follows:
Dec. 31,
2023
Sept. 30,
2023
Jun. 30,
2023
Mar. 31,
2023
Dec. 31,
2022
Sept. 30,
2022
Jun. 30,
2022
Mar. 31,
2022
Quarter Ended
(unaudited, in thousands)
Cost of revenue
$ 9,182
$ 9,856
$ 9,888
$ 9,333
$ 8,638
$ 8,329
$ 8,538
$ 7,793
Research and development
12,055
12,980
13,013
12,382
11,799
10,603
11,818
10,145
Sales and marketing
15,389
16,404
17,391
17,045
15,152
15,761
14,963
13,424
General and administrative
12,945
13,371
13,075
11,983
8,235
9,810
9,467
8,032
Total stock-based compensation
$ 49,571
$ 52,611
$ 53,367
$ 50,743
$ 43,824
$ 44,503
$ 44,786
$ 39,394
106
(2) Included depreciation and amortization expenses as follows:
Dec. 31,
2023
Sept. 30,
2023
Jun. 30,
2023
Mar. 31,
2023
Dec. 31,
2022
Sept. 30,
2022
Jun. 30,
2022
Mar. 31,
2022
Quarter Ended
(unaudited, in thousands)
Cost of revenue
$ 10,308
$ 10,075
$ 9,269
$ 8,907
$ 8,803
$ 8,904
$ 8,747
$ 8,500
Research and development
Sales and marketing
1,012
27
831
36
868
1
872
1
768
1
768
1
804
1
825
1
General and administrative
1,615
1,540
1,586
1,567
1,449
1,542
2,088
1,469
Total depreciation and amortization
$ 12,962
$ 12,482
$ 11,724
$ 11,347
$ 11,021
$ 11,215
$ 11,640
$ 10,795
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2023.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2023, our disclosure controls and procedures were designed, and were effective, to provide
assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC
rules and forms, and that such information is accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that any
disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures
must reflect the fact that there are resource constraints and that management is required to apply its judgment in
evaluating the benefits of possible controls and procedures relative to their costs.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our management conducted an
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the
criteria set forth in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the assessment, our management has concluded that our
internal control over financial reporting was effective as of December 31, 2023 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S.
GAAP.
KPMG LLP, the independent registered public accounting firm that audited our financial statements included
in this Annual Report on Form 10-K, has issued an auditors’ report on our internal control over financial reporting,
which is included herein.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2023, there was no change in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
107
ITEM 9B. Other Information
Rule 10b5-1 Plans
During the fiscal quarter ended December 31, 2023, none of the Company’s directors and officers adopted,
modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
108
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information concerning our directors, compliance with Section 16(a) of the Exchange Act, our Audit
Committee and any changes to the process by which stockholders may recommend nominees to the Board required
by this Item are incorporated herein by reference to information contained in our Proxy Statement for the 2024
Annual Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2023, or
the 2024 Proxy Statement, including “Proposal No 1. — Election of Directors,” “Corporate Governance” and
“Section 16(a) Beneficial Ownership Reporting Compliance.”
The information concerning our executive officers required by this Item is incorporated herein by reference
to information contained in the 2024 Proxy Statement including “Executive Officers.”
We have adopted a code of ethics and business conduct, or code of conduct, that applies to all employees,
including our principal executive officer, our principal financial officer, our principal accounting officer, and all
other executive officers. Our code of conduct is available on our website at http://investors.five9.com/corporate-
governance.cfm. We plan to post on our website at the address described above any future amendments or waivers
of our code of conduct.
ITEM 11. Executive Compensation
The information required by this Item is incorporated herein by reference to information contained in the
2024 Proxy Statement, including “Corporate Governance,” “Executive Compensation” and “Compensation of
Directors.”
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to information contained in the
2024 Proxy Statement, including “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to information contained in the
2024 Proxy Statement, including “Corporate Governance” and “Transactions With Related Persons.”
ITEM 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to information contained in the
2024 Proxy Statement, including “Proposal No. 4 — Ratification of Appointment of Independent Registered Public
Accounting Firm.”
109
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements of Five9 and the report of independent registered public accounting firm
thereon are set forth under Part II, Item 8 of this report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
67
70
71
72
74
76
The Financial Statement Schedules not listed have been omitted because the information required to be set
forth herein is included in ITEM 8 — Financial Statements and Supplementary Data or they are not applicable or are
not required.
3. Exhibits.
The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration statement or report, such registration statement or report
is identified in parentheses.
Exhibit
Number
Exhibit Index
Description
3.1Ø
Amended and Restated Certificate of Incorporation of Five9, Inc. (filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed with the SEC on April 10, 2014 (File No. 001-36383)
and incorporated by reference herein).
3.2Ø
Amended and Restated Bylaws of Five9, Inc. (filed as Exhibit 3.1 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on November 2, 2023 (File No. 001-36383) and
incorporated by reference herein).
4.1Ø
Form of Common Stock Certificate (filed as Exhibit 4.1 to Amendment No.1 to the Company’s
Registration Statement on Form S-1 filed with the SEC on March 24, 2014 (File No. 333-194258)
and incorporated by reference herein).
4.2Ø
4.3Ø
4.6Ø
Description of Registrant’s Securities. (filed as Exhibit 4.4 to the Company’s Annual Report on
Form 10-K filed with the SEC on February 27, 2020 (File No. 001-36383) and incorporated by
reference herein).
Indenture, dated as of May 27, 2020, between Five 9, Inc. and U.S. Bank National Association, as
trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on
May 28, 2020 (File No. 001-36383) and incorporated by reference herein).
Form of 0.500% Convertible Senior Notes due 2025 (filed as Exhibit 4.2 to the Company's Current
Report on Form 8-K filed with the SEC on May 28, 2020 (File No. 001-36383) and incorporated by
reference herein).
10.1+Ø Form of Indemnification Agreement between the Registrant and each of its directors and executive
officers, as amended on July 31, 2015 (filed as Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed with the SEC on August 5, 2015 (File No. 001-36383) and incorporated by
reference herein).
110
Exhibit
Number
Exhibit Index
Description
10.2+Ø Confirmation Letter between the Registrant and Barry Zwarenstein (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed with the SEC on March 3, 2014 (File No.
333-194258) and incorporated by reference herein).
10.3+Ø Offer Letter between the Registrant and Dan Burkland and amendment (filed as Exhibit 10.4 to the
Company’s Registration Statement on Form S-1 filed with the SEC on March 3, 2014 (File No.
333-194258) and incorporated by reference herein).
10.4+Ø
10.5+Ø
10.6+Ø
10.7+Ø
10.8+Ø
10.9+Ø
10.10+Ø
10.11+Ø
10.12+Ø
10.13Ø
10.14Ø
10.15+Ø
10.16+Ø
10.17+Ø
10.18+Ø
Offer Letter between the Registrant and Michael Burkland (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the SEC on October 11, 2022 (File No. 001-36383) and
incorporated by reference herein).
Five9, Inc. Amended and Restated 2004 Equity Incentive Plan (filed as Exhibit 10.8 to Amendment
No.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on April 3, 2014
(File No. 333-194258) and incorporated by reference herein).
Amendment to Five9, Inc. Amended and Restated 2004 Equity Incentive Plan, effective March 6,
2014 (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on
May 14, 2014 (File No. 001-36383) and incorporated by reference herein).
Five9, Inc. 2014 Equity Incentive Plan and related form agreements (filed as Exhibit 10.9 to
Amendment No.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on
March 24, 2014 (File No. 333-194258) and incorporated by reference herein).
Inference Technologies Group Inc. 2018 Equity Incentive Plan (filed as Exhibit 4.3 to the
Company’s Form S-8 filed with the SEC on November 19, 2020 (File No. 333-250197) and
incorporated by reference herein).
Five9, Inc. 2014 Employee Stock Purchase Plan (filed as Exhibit 10.10 to Amendment No.1 to the
Company’s Registration Statement on Form S-1 filed with the SEC on March 24, 2014 (File No.
333-194258) and incorporated by reference herein).
Five9, Inc. 2019 Key Employee Severance Benefit Plan (filed as Exhibit 10.1 to the Company’s
Current Report Form 8-K filed with the SEC on April 9, 2019 (File No. 001-36383) and
incorporated by reference herein).
Five9 Inc. Executive Incentive Compensation Plan (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on February 18, 2021 (File No. 001-36383) and
incorporated by reference herein).
Five9 Inc. Non-Employee Director Compensation Policy (filed as Exhibit 10.13 to the Company’s
Annual Report on Form 10-K filed with the SEC on February 24, 2023 (File No. 001-36383) and
incorporated by reference herein).
Form of Capped Call Confirmation (filed as Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the SEC on May 28, 2020 (File No. 001-36383) and incorporated by reference
herein).
Bishop Ranch Building Lease, dated July 29, 2020, between the Registrant and 2600 CR, LLC
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on August
3, 2020 (File No. 001-36383) and incorporated by reference herein).
Five9 Inc. Performance-Based Restricted Stock Unit Grant Notice and Award Agreement - 2014
Equity Incentive Plan (filed as Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed
with the SEC on February 28, 2022 (File No. 001-36383) and incorporated by reference herein).
Form of Five9 Inc. Restricted Stock Unit Grant Notice and Award Agreement - 2014 Equity
Incentive Plan (filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed with the
SEC on February 28, 2022 (File No. 001-36383) and incorporated by reference herein).
Form of Five9 Inc. Stock Option Grant Notice and Award Agreement - 2014 Equity Incentive Plan
(filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K filed with the SEC on
February 28, 2022 (File No. 001-36383) and incorporated by reference herein).
Five9, Inc. Form of Performance-Based Restricted Stock Unit Grant Notice and Award Agreement
(Revenue Goals) - 2014 Equity Incentive Plan (filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q filed with the SEC on July 28, 2022 (File No. 001-36383) and incorporated
by reference herein).
111
Exhibit
Number
10.19+Ø
Exhibit Index
Description
Five9, Inc. Performance-Based Restricted Stock Unit Grant Notice and Award Agreement for
2023-2025 Performance Period - 2014 Equity Incentive Plan (filed as Exhibit 10.21 to the
Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2023 (File No.
001-36383) and incorporated by reference herein).
10.20+
Five9, Inc. Performance-Based Restricted Stock Unit Grant Notice and Award Agreement for
2024-2026 Performance Period - 2014 Equity Incentive Plan
21.1
23.1
24.1
31.1
31.2
32.1†
97.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Subsidiaries of the Company.
Consent of KPMG LLP, independent registered public accounting firm.
Power of Attorney (included on signature page to this Annual Report on Form 10-K).
Certification of Chief Executive Officer of Five9, Inc. Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer of Five9, Inc. Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer of Five9, Inc. Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Five9, Inc. Compensation Recoupment Policy
XBRL Instance Document
XBRL Taxonomy Schema Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
XBRL Taxonomy Labels Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
Cover Page Interactive Data File. Formatted as inline XBRL and contained in Exhibit 101.
Ø Previously filed.
+ Indicates management contract or compensatory plan.
† The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, are not deemed
filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of
Five9, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general
incorporation language contained in such filing.
ITEM 16. Form 10-K Summary
None.
112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 21, 2024
By:
Five9, Inc.
/s/ Michael Burkland
Michael Burkland
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below
constitutes and appoints Michael Burkland and Barry Zwarenstein, and each of them, severally, as his or her true
and lawful attorneys-in-fact and agents with the power to act, with or without the other, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in his or her capacity as a
director or officer or both, as the case may be, of the Company, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
113
Signature
Title
/s/ Michael Burkland
Michael Burkland
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ Barry Zwarenstein
Barry Zwarenstein
Chief Financial Officer
(Principal Financial Officer)
/s/ Leena Mansharamani
Leena Mansharamani
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
/s/ Jack Acosta
Jack Acosta
/s/ Susan Barsamian
Susan Barsamian
/s/ Michael Burdiek
Michael Burdiek
/s/ David DeWalt
David DeWalt
/s/ Julie Iskow
Julie Iskow
/s/ Jonathan Mariner
Jonathan Mariner
/s/ David Welsh
David Welsh
/s/ Robert Zollars
Robert Zollars
Date
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
Director; Lead Independent Director
February 21, 2024
Director
February 21, 2024
114
[This page intentionally left blank]
[This page intentionally left blank]
BR338307-0424-10K