Veteran CFO’s Latest IPO Targets ‘Huge Market’

The third company Barry Zwarenstein has taken public, Five9, plants its stake in cloud-based call centers.
David McCannNovember 25, 2014
Veteran CFO’s Latest IPO Targets ‘Huge Market’

Barry Zwarenstein has taken three companies public, and he says doing it well “comes down to a matter of experience.” But there has to be a first time, right?

Barry Zwarenstein

Barry Zwarenstein

Back in 1996, he had been working for 21 years at FMC Corp., which is now a chemicals manufacturer but used to have a diverse portfolio of businesses. Zwarenstein says he had a strong desire to be the finance chief at a public company, but his path to that goal was blocked at FMC. Then, that year, a CFO opportunity presented itself at Logitech, the personal computer accessories maker, which was preparing to go public. But he had to talk his way into the job.

“Logitech took a gamble on me, because I’d never taken a company public,” he says. “I managed to convince them that it was a one-time event, and it was more important that I had spent the last 21 years making systems improvements, understanding ROI, making cost controls, doing financial planning and so on. They chose me, and it was really fortunate for me that it worked out.”

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Zwarenstein now runs finance at Five9, his sixth CFO post in Silicon Valley. The company sells subscription-based cloud software for running call centers. Its name suggests the “up” time it promises to customers: 99.999%. He joined at the beginning of 2012 and took the company public in April 2014.

Several things attracted him to Five9. One was the market opportunity: 14.5 million call-center agents worldwide (almost half of those in the United States), 95% of them working with premises-based software. Another was the company’s size — revenue of $43 million in 2011, just before he came aboard. “I like to be in companies that are still a size where you can make things happen,” he says.

Then there was the software-as-a-service subscription model, which generates recurring revenue and steady sales growth — the topline was up to $84 million in 2013 and through three quarters this year was about 25% over last year’s first nine months. “Having the ability to work with predictable, visible revenue streams and tell that story was appealing,” Zwarenstein says, “as opposed to most of my prior career, which was systems work that tended to be more lumpy.”

Finally was Five9’s unique sales proposition. It claims to be the only call-center software vendor whose products are entirely in the cloud, though some of the market leaders have added a cloud presence to their on-premises products. “This is a huge market, and it’s going to shift [to the cloud] — it’s only a matter of time,” Zwarenstein says.

Five9 currently has about 2,000 clients that use its service to handle more than 3 billion customer interactions per year, he notes. So far large companies haven’t shown a taste for switching wholly to cloud-based call centers, but some want to experiment with the concept for a particular call center or campaign.

It does seem to be a solid concept, given that having a virtual call center — in fact, Five9’s core product is called VCC, for virtual call center — not only allows a company to avoid buying on-premises software that takes a lot of time to install, isn’t very scalable and is difficult to update, it also frees the company from having to dedicate space to a call center. “All someone needs to be an agent on the Five9 platform is an Internet connection, a laptop and a headset,” says Zwarenstein. “They can be anywhere.” One of the company’s biggest customers is American Support, a telesales firm that hires many military spouses to make calls.

The revenue growth isn’t reflected in the company’s stock price, which opened at $4.60 on Tuesday, down from a 52-week high of $9.35. “There’s been a shift in the market, with some distancing over the past few quarters from companies that are not yet profitable,” the CFO acknowledges.

But Five9’s topline-growth achievements — especially because they’re coming at a time when industry generally is having a hard time in that area, with profits driven more by cost controls — suggest that investors eventually “will come to fully appreciate the opportunity we have to keep growing and become profitable,” Zwarenstein says. The company, which started serving customers in 2003, has told Wall Street that it expects to be cash-flow positive in 2017 or 2018.

The long-term goal is to get from the present 53% margin on a non-GAAP basis — i.e., excluding depreciation, amortization and stock-based compensation — to 65-70% within four and a half years. That, to be accomplished in part by growing R&D and G&A expenses more slowly than revenue, in turn is expected to drive EBITDA to 20% of revenue, Zwarenstein says.

Meanwhile, Zwarenstein ticked off a list of ways companies could trip up an IPO. A key one is trying to rush it. “This is not the time for a default setting of cost controls, but rather a time to get experienced people in support of the audit committee and the CEO,” he says.

He also warns against having insufficient financing to weather the ups and downs in today’s volatile markets, “so that you can go out when you want to go out and not when the cash runs out.” And danger lurks if company leaders fail to agree on which non-GAAP metrics to reveal, the frequency of doing that and whether they’re going to be quantitative or qualitative. “There are lots of ways to mess it up,” Zwarenstein says.