Freshworks (NASDAQ:FRSH) Posts Better-Than-Expected Sales In Q3 But Contract Wins Slow Down

Radek Strnad /
2023/10/31 4:12 pm EDT

Business software provider Freshworks (NASDAQ: FRSH) announced better-than-expected results in Q3 FY2023, with revenue up 19.3% year on year to $153.6 million. The company also expects next quarter's revenue to be around $158 million, in line with analysts' estimates. Turning to EPS, Freshworks made a GAAP loss of $0.11 per share, improving from its loss of $0.20 per share in the same quarter last year.

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Freshworks (FRSH) Q3 FY2023 Highlights:

  • Revenue: $153.6 million vs analyst estimates of $150.7 million (1.86% beat)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.05 ($0.03 beat)
  • Revenue Guidance for Q4 2023 is $158 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $22.1 million, up 22.1% from the previous quarter
  • Net Revenue Retention Rate: 108%, in line with the previous quarter
  • Customers: 19,551 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 82.9%, up from 81.2% in the same quarter last year

“We delivered another solid quarter of execution as we outperformed our estimates across our key financial metrics and further improved our profitability,” said Girish Mathrubootham, CEO and Founder of Freshworks.

Founded in Chennai, India in 2010 with the idea of creating a “fresh” helpdesk product, Freshworks (NASDAQ: FRSH) offers a broad range of software targeted at small and medium-sized businesses.

Sales Software

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrates data analytics with sales and marketing functions.

Sales Growth

As you can see below, Freshworks's revenue growth has been strong over the last two years, growing from $96.6 million in Q3 FY2021 to $153.6 million this quarter.

Freshworks Total Revenue

This quarter, Freshworks's quarterly revenue was once again up 19.3% year on year. We can see that Freshworks's revenue increased by $8.47 million in Q3, up from $7.39 million in Q2 2023. While we've no doubt some investors were looking for higher growth, it's good to see that quarterly revenue is re-accelerating.

Next quarter's guidance suggests that Freshworks is expecting revenue to grow 18.6% year on year to $158 million, slowing down from the 26.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 18% over the next 12 months before the earnings results announcement.

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Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Freshworks Net Revenue Retention Rate

Freshworks's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 108% in Q3. This means that even if Freshworks didn't win any new customers over the last 12 months, it would've grown its revenue by 8%.

Freshworks has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.

Key Takeaways from Freshworks's Q3 Results

Sporting a market capitalization of $5.17 billion, Freshworks is among smaller companies, but its more than $1.16 billion in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was encouraging to see Freshworks narrowly top analysts' revenue expectations this quarter. The company also beat Wall Street's free cash flow estimates and raised its full-year outlook for adjusted operating profit. That really stood out as a positive in these results. On the other hand, its new large contract wins slowed. Overall, this was a mixed quarter for Freshworks. In terms of new products, the company shared that it unveiled an AI-powered Customer Service Suite that brings together self-service bots, agent-led conversational messaging, and automated ticketing management. The stock is up 1.95% after reporting and currently trades at $18.31 per share.

So should you invest in Freshworks right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

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The author has no position in any of the stocks mentioned in this report.