Five9 may present a significant value opportunity for activist investor Anson Funds.

Company: Five9 (FIVN)

The company offers intelligent cloud software for contact centers globally, providing a virtual platform with a range of applications for customer service, sales, and marketing. The platform matches customer interactions with agent resources and delivers real-time customer data through integrations with adjacent enterprise applications. The company serves customers in various industries, including banking and financial services, business process outsourcers, retail, health care, technology, and education.

Stock Market Value: $3.01B ($40.77 per share)

Activist: Anson Funds

Percentage Ownership:  n/a

Average Cost: n/a

Anson Funds, founded in 2007 by Moez Kassam, has $1.9 billion in assets. Although not traditionally activists, the firm hired Sagar Gupta, a former senior analyst and head of technology, media and telecommunications investing at Legion Partners, in October 2023 to develop its activism strategy.

What's happening

On July 11, Reuters reported that Anson acquired a position in Five9.

Behind the scenes

Five9 is a cloud-based contact center software provider that offers solutions for customer service, sales, and marketing. The company is a leader in the industry and the only pure-play cloud contact center provider, with peers InContact and Genesys, which are respectively owned by Nice and Permira.

In 2021, Zoom Video made a $14.7 billion offer to acquire Five9 for about $200 per share using Zoom stock. However, the value of the deal declined to approximately $170 per share as the price of Zoom stock fell, and Five9 shareholders voted against it. Two years later, in December 2023, with Five9 shares trading in the low $80s, the company received another acquisition offer which was widely reported to be from Zoom. Five9 rejected that offer. On Friday, the stock closed at $40.77.

Five9's shares have been declining due to two main factors: First, its growth rate decreased from 40% in 2021 to 17% in 2022. Second, this occurred at a time when the market viewed the company as a potential victim of artificial intelligence. There is a misconception that as AI applications reduce the need for human contact center staff, Five9 will lose market share and revenue. However, this is a fundamental misunderstanding of what Five9 does. The company is not being disrupted; rather, it is the disruptor. It provides AI contact center solutions that augment or replace human beings, often at more than double the price. Additionally, only 20% of contact centers are in the cloud, while 80% are still on-premises, and on-premise contact centers cannot use AI without converting to the cloud. Five9 is cloud-native and offers the software that large enterprises need to implement AI in their contact centers. Considering that, there is a significant market share left to be captured by the three incumbent cloud providers. As AI becomes more prevalent in contact centers, the total addressable market and revenue for Five

As an independent company, Five9 has a significant opportunity to increase its value. Firstly, although it may not achieve an annual growth rate of 40% at its current revenue level, it can certainly surpass 20% if the AI thesis plays out. Secondly, as the revenue mix shifts towards "software as a service," Five9's gross margins are expected to rise from the mid-60% to over 70%. Lastly, as SaaS revenue increases, a significant portion of it will go straight to the bottom line, improving the company's operating margins.

According to sources, Reuters has reported that Anson is pushing the company to explore a sale. However, we believe that the investor is encouraging the board to responsibly manage any incoming interest to sell the company and weigh that against the risk-adjusted value of Five9 on a standalone basis. This could lead to a more robust sales process, as the last remaining pure-play cloud-based contact center. There are a few potential acquirers, all strategic: ServiceNow, Salesforce, and Zoom. Despite reportedly trying to buy the company twice before, at significantly higher prices, Zoom has made no secret of its goal to use its $7.4 billion of net cash for an acquisition and has specifically mentioned a contact center.

Is Five9 management open to a sale? We believe they are due to several factors. Firstly, Five9's current chairman and CEO, Mike Burkland, was the chairman of the company in 2021 when he first agreed to sell to Zoom. Secondly, Five9 has had a change of control severance agreement since 2014, which had a five-year term and was renewed for an additional five years in 2019. However, in 2024, Five9 renewed it for only one year. Lastly, to put more pressure on management, while Five9 has a staggered board, its lead independent director for the past 10 years is up for election next year and would prefer to go out with a sale of the company at a premium rather than through a negative vote if it comes to that.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. The fund owns Five9.