Activist Anson Funds may have spotted a huge opportunity for value in Five9

Business: Five9 provides intelligent cloud software for contact centers in the United States and internationally. It offers a virtual contact center cloud platform that delivers a suite of applications, which enables the breadth of contact center-related customer service, sales and marketing functions. The platform also matches each customer interaction with an agent resource and delivers customer data to the agent in real-time through integrations with adjacent enterprise applications. The company serves customers in a range of industries, including banking and financial services, business process outsourcers, retail, health care, technology and education.

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

Percentage Ownership:  n/a

Average Cost: n/a

Activist Commentary: Anson Funds is a multi-strategy fund founded in 2007 by Moez Kassam, and it has $1.9 billion in assets. While not historically activists, in October 2023, Anson hired Sagar Gupta (former senior analyst and head of technology, media and telecommunications investing at Legion Partners) to build out the firm’s activism strategy.

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

Five9 is a cloud-based contact center software provider empowering clients with solutions for customer service, sales and marketing. The company is a leader in the space 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 tumbling for two main reasons: First, its growth has slowed to 17% last year from 40% in 2021. Second, this happened at a time when the market perceived the company as a potential artificial intelligence victim. There is a misguided belief that as AI applications reduce the staffing of contact centers, Five9 will lose market share and revenue. However, this is a fundamental misunderstanding of what Five9 is and what it does. The company is not being disrupted. Rather, it’s the disruptor. It is a developer and provider of AI contact center solutions that augment or replace human beings often at more than double the price. Moreover, only 20% of contact centers are in the cloud, 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 tremendous market share left to be captured by the three incumbent cloud providers. So as AI becomes more prevalent in contact centers, the total addressable market and revenue for Five9 and its peers should greatly increase. In other words, the bear case for this company is, in fact, the bull case.

As an independent company, Five9 has a tremendous opportunity for value. First, while the company is not likely to get annual growth back to 40% at this level of revenue, it can certainly get it over 20%, particularly if the AI thesis plays. Second, as the revenue mix skews more toward “software as a service” as expected, Five9’s gross margins should increase from the mid-60% over 70%. Finally, as SaaS revenue increases, a lot of that will go straight to the bottom line improving the company’s operating margins.

Reuters, citing sources familiar, has also reported that Anson is pushing the company to explore a sale. We do not think that is the case as much as 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. While this could lead to a more robust sales process, as the last remaining pure-play cloud-based contact center, there are a handful of 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.

The question is whether Five9 management is receptive to a sale. We think they are for several reasons. First, Five9’s current chairman and CEO Mike Burkland was the chairman of the company in 2021 when he first agreed to sell to Zoom. Second, the company 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. In 2024, Five9 renewed it for only one year. Finally, to put a little additional 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 certainly 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. Five9 is owned in the fund.