Five9 (FIVN) Q3 2026 earnings review
Five9 subscription sales accelerate, but AI purchase drains its cash
Five9's subscription software grew faster in the third quarter, but the call-center software provider is spending nearly half its cash on an acquisition while cutting its full-year profit outlook. Revenue rose 13% from a year ago, helped by an easy comparison, as chief executive Amit Mathradas pointed to a jump in customer retention to 109%. However, gross margin fell again on data-center costs, and the fourth-quarter plan has revenue growth slowing back to 10% by our math.
| Revenue | $323.3M +13.1% from a year ago (~8% on a like-for-like basis) |
|---|---|
| Subscription revenue growth | +16% +14% last quarter |
| Profit per share, excluding one-offs | $0.82 +5.1% from a year ago |
| Full-year outlook | Mixed Revenue raised $6M; profit per share excluding one-offs cut $0.07 |
⚖️ Verdict: 🔴 Bearish
The story got worse because Five9 agreed to pay $325 million in cash for Level AI while trimming its full-year profit per share plan excluding one-offs. By our math, the purchase leaves $373 million in cash and investments against $738 million in convertible debt due in 2029, and the company also booked new layoff and research-consulting charges. On the other side, subscription growth sped up for a third straight quarter and customer retention beat the company's own target.
The question now is whether buying Level AI and restructuring the research team will lift growth above 10% or just add cost while customers replace human-agent seats with AI. If the deal and new AI tools bring net new spending, subscription growth will stay in the mid-teens; if they only defend existing contracts, growth will settle near the fourth-quarter plan while cash reserves shrink. Management's disclosure of Level AI's revenue upon closing in the fourth quarter will tell.
🐂 Bull Case
Subscription Growth Sped Up as Customers Spent More
Five9 sells cloud software that runs customer-service call centers, and subscription revenue is its main growth engine. “Q3 was another solid quarter, highlighted by accelerating subscription revenue growth, with AI revenue growth stepping up significantly,” chief executive Amit Mathradas said. Subscription revenue grew 16% from a year ago, after growing 14% in the second quarter and 13% in the first.
Existing customers drove the gain. Five9's last-twelve-months subscription dollar-based retention rate, which measures how much recurring revenue the company keeps and expands from existing customers over a year, rose to 109% from 107% in both the first and second quarters. That beat the one-point rise management had called for and lifted total revenue 13.1% to $323.3 million.
What to watch: the exact AI revenue dollar figure and core call-center growth rate on the conference call. A core growth rate at or above 7% would show that AI sales are adding to customer spending rather than replacing human-agent seats.
Positives this quarter didn't test
Two standing drivers from earlier in the year got no new activity or numbers in the third-quarter earnings release.
- Google Cloud Marketplace partnership: after closing a nine-figure contract in the second quarter, the release gave no update on joint pipeline or bookings, which leaves the conference call to show whether more large deals followed.
- Stock buybacks under the new $200 million program: nine-month cash spent on share repurchases stayed at $100.0 million, matching the six-month total, so Five9 bought no shares in the third quarter ahead of the Level AI deal.
🐻 Bear Case
Buying Level AI Drains Cash Before Debt Matures
Five9 signed a deal to buy Level AI, a customer-experience artificial intelligence company, for $325.0 million in cash. Mathradas said the deal “strengthens our competitive position, expands the customers we can serve, and deepens the AI talent behind our continuous innovation” as AI reshapes customer service.
Paying $325.0 million in cash cuts against the idea that Five9's own AI platform and balance sheet were already self-sufficient. In the same quarter, the call-center software provider booked $4.3 million in layoff costs and $2.2 million for “One-time expenses related to advisory services for research and development transformation”. Meanwhile, the cash price takes nearly half of its $697.7 million in cash and marketable investments.
- Cash and marketable investments after the deal: $372.7 million by our math, down from $697.7 million at quarter end
- Convertible senior notes due 2029: $738.2 million carrying value on the balance sheet
- Third-quarter restructuring and advisory charges: $4.3 million for layoffs and $2.8 million for R&D and strategy consultants
What to watch: Level AI's annual recurring revenue and cash burn when the deal closes in the fourth quarter. A small revenue base would mean Five9 spent half its cash reserve to catch up in AI while leaving $377.1 million in net debt by our math.
Fourth-Quarter Plan Points to Slower Revenue Growth
Third-quarter revenue rose 13.1% from a year ago, up from 10.3% growth in the second quarter. However, last year's third quarter grew only 8.2% because Five9's largest customer was reducing its spending by about five percentage points. Adjusted for that easy comparison, underlying growth was about 8.1% by our math.
The company's own fourth-quarter plan confirms that the 13.1% pace will not hold. Five9 expects fourth-quarter revenue of $328.0 million to $334.0 million, which means 10.2% growth at the middle of the range. Management raised the full-year revenue outlook by $6.0 million at the middle of the range, after beating the third-quarter midpoint by $4.3 million, so the fourth-quarter view rose by only $1.8 million.
What to watch: organic fourth-quarter revenue growth excluding any partial-quarter contribution from Level AI after it closes. A reading near 10% would confirm that growth is settling at the bottom of the company's 10% to 15% medium-term target.
Data-Center Costs Keep Pushing Gross Margin Down
Gross margin — the share of revenue left after the direct cost of running the service — fell again in the third quarter. Standard gross margin dropped 1.6 percentage points from a year ago to 53.4%, and gross margin excluding one-offs fell 1.1 percentage points to 61.7%.
Higher equipment costs inside cost of revenue drove the drop. Depreciation in cost of revenue — the accounting charge for data-center hardware — rose to 4.4% of revenue from 3.5% a year ago, a 1.0 percentage point increase by our math. That leaves Five9 further away from the 66% to 68% gross margin excluding one-offs it once targeted for 2027.
What to watch: gross margin excluding one-offs in the fourth quarter and any updated 2027 margin target at Investor Day. Another drop below 62% would show that data-center and implementation costs are offsetting higher-margin AI software.
Risks this quarter didn't answer
Four standing concerns could not be read from the earnings release because the details live on the call or in the quarterly filing.
- AI revenue growth rate vs pulled-forward second-quarter deals: the release said AI growth stepped up, but gave no percentage to compare with the second quarter's 78%.
- Seat compression vs core call-center growth: the release did not split subscription growth between AI and core human-agent software.
- Updated 2027 financial targets and Investor Day date: the release did not mention when management will replace or confirm the old 2027 margin goals.
- Securities class-action lawsuit: Five9 spent $0.7 million on legal fees for the suit in the quarter, with full status details due in the 10-Q filing.
💲 Other KPIs
Current deferred revenue — cash customers have paid upfront for software service not yet delivered — rose 15.2% from a year ago and 17.2% from last quarter, by our math. That reversed a second-quarter dip and outpaced the 13.1% rise in reported revenue, adding $12.7 million to short-term contract balances.
By our math from the nine-month cash flow statement, free cash flow — operating cash flow minus property, equipment and capitalized software — rose 13.7% from a year ago to 13.4% of revenue, up from 4.9% in the second quarter. A pause in equipment purchases to $5.1 million, against the $17.0 million to $19.0 million planned, drove the rebound.
The diluted share count used for standard profit per share fell 11.5% from a year ago and 9.6% from the second quarter, down from 85.5 million. Because Five9 excluded convertible-note shares that were previously counted, its standard diluted share count now matches the 77.3 million count used for profit excluding one-offs.
🔮 Guidance
Raised. The middle of the full-year range moved up $6.0 million to $1.272 billion, or 10.7% growth from last year by our math, excluding any revenue from the pending Level AI purchase. It is the third straight $6.0 million raise this year (+$6.0M in Q1, +$6.0M in Q2, +$6.0M in Q3).
New. The plan calls for 10.2% growth from a year ago and 2.4% growth from the third quarter at the middle of the range, down from 13.1% year-over-year growth in the third quarter. Five9 has beaten its quarterly revenue midpoint in seven straight quarters by an average of 1.6% over the last four.
Cut. The middle of the range fell $0.07 to $3.19, or 7.8% growth for the year by our math, even though Five9 beat the third-quarter target. A higher assumed diluted share count of 77.1 million, up from 76.0 million in the prior plan, plus higher acquisition costs drove the reduction.
New. The outlook points to $0.90 at the middle of the range, up 12.5% from $0.80 a year ago and up from $0.82 in the third quarter, assuming 78.0 million diluted shares.
Raised. The middle of the range moved up $0.025 to $0.79, or 75.6% growth from $0.45 last year by our math. The increase comes from lowering the full-year diluted share assumption to 77.1 million from 85.8 million, which more than offset new layoff and R&D consulting charges.
New. The plan puts fourth-quarter standard profit per share at $0.32 at the middle of the range, up 39.1% from $0.23 a year ago, as third-quarter layoff costs do not repeat in the fourth-quarter table.
❓ Key Questions
What are Level AI's revenue and cash burn?
Five9 is paying $325.0 million in cash — nearly half its cash and investments — for Level AI. Investors need Level AI's annual recurring revenue, growth rate, and operating margin to judge whether the price adds growth or covers a product gap.
What were Q3 AI and core call-center growth rates?
Chief executive Amit Mathradas said AI revenue growth stepped up significantly, while total subscription revenue grew 16%. Without the exact AI dollar figure and core call-center growth rate, readers cannot tell if core human-agent software sped up from 7% or slowed down.
Why did Q3 equipment spending drop to $5.1 million?
Last quarter management planned $17.0 million to $19.0 million of third-quarter property and equipment purchases for its data-center refresh, but spent only $5.1 million by our math. Did Five9 delay those server upgrades into the fourth quarter or cut the project's cost?
Why did the diluted share count assumption change?
In the third quarter, GAAP diluted shares dropped by 8.2 million to match the non-GAAP count of 77.3 million, yet the full-year non-GAAP share assumption rose from 76.0 million to 77.1 million and cut the full-year profit outlook. What drove both adjustments?