Freshworks (NASDAQ:FRSH) Q1 Sales Beat Estimates, Stock Soars

Petr Huřťák /
2023/05/02 4:12 pm EDT

Business software provider Freshworks (NASDAQ: FRSH) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 20.1% year on year to $137.7 million. The company expects that next quarter's revenue would be around $141.3 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Freshworks made a GAAP loss of $42.7 million, improving on its loss of $49.1 million, in the same quarter last year.

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Freshworks (FRSH) Q1 FY2023 Highlights:

  • Revenue: $137.7 million vs analyst estimates of $134.2 million (2.57% beat)
  • EPS (non-GAAP): $0.03 vs analyst estimates of -$0.02 ($0.05 beat)
  • Revenue guidance for Q2 2023 is $141.3 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $586.3 million at the midpoint
  • Free cash flow of $9.1 million, up 125% from previous quarter
  • Net Revenue Retention Rate: 107%, in line with previous quarter
  • Customers: 18,441 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 81.7%, in line with same quarter last year

“Freshworks had a strong quarter of execution in Q1,” 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.

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Sales Growth

As you can see below, Freshworks's revenue growth has been very strong over the last two years, growing from quarterly revenue of $80.6 million in Q1 FY2021, to $137.7 million.

Freshworks Total Revenue

This quarter, Freshworks's quarterly revenue was once again up a very solid 20.1% year on year. Quarter on quarter the revenue increased by $4.52 million in Q1, which was in line with Q4 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Guidance for the next quarter indicates Freshworks is expecting revenue to grow 16.3% year on year to $141.3 million, slowing down from the 37.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 16.5% over the next twelve months.

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Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Freshworks Net Revenue Retention Rate

Freshworks's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 107% in Q1. That means even if they didn't win any new customers, Freshworks would have grown its revenue 7% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Freshworks's customers stick around but at least some of them get increasing value from its software over time.

Key Takeaways from Freshworks's Q1 Results

With a market capitalization of $3.87 billion Freshworks is among smaller companies, but its more than $344.5 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

It was good to see Freshworks outperform Wall St’s revenue expectations this quarter. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. On the other hand, it was unfortunate to see the continued slowdown in retention rate. The company is up 9.55% on the results and currently trades at $14.11 per share.

Should you invest in Freshworks right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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