Freshworks (NASDAQ:FRSH) Q1: Strong Sales, Provides Optimistic Full Year Guidance

Adam Hejl /
2022/05/03 4:33 pm EDT
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Business software provider Freshworks (NASDAQ: FRSH) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 42.2% year on year to $114.6 million. The company expects that next quarter's revenue would be around $118 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Freshworks made a GAAP loss of $49 million, down on its loss of $2.41 million, in the same quarter last year.

Is now the time to buy Freshworks? Access our full analysis of the earnings results here, it's free.

Freshworks (FRSH) Q1 FY2022 Highlights:

  • Revenue: $114.6 million vs analyst estimates of $108.2 million (5.91% beat)
  • EPS (non-GAAP): -$0.01 vs analyst estimates of -$0.05
  • Revenue guidance for Q2 2022 is $118 million at the midpoint, above analyst estimates of $116.9 million
  • The company lifted revenue guidance for the full year, from $490.7 million to $498.5 million at the midpoint, a 1.57% increase
  • Free cash flow was negative $1.38 million, down from positive free cash flow of $2.83 million in previous quarter
  • Net Revenue Retention Rate: 115%, in line with previous quarter
  • Customers: 15,639 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 80.4%, up from 79.2% same quarter last year

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.

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 integrate data analytics with sales and marketing functions.

Sales Growth

As you can see below, Freshworks's revenue growth has been impressive over the last year, growing from quarterly revenue of $80.5 million, to $114.6 million.

Freshworks Total Revenue

And unsurprisingly, this was another great quarter for Freshworks with revenue up 42.2% year on year. Quarter on quarter the revenue increased by $9.15 million in Q1, which was in line with Q4 2021. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates Freshworks is expecting revenue to grow 33.5% year on year to $118 million, slowing down from the 56.4% 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 29.9% 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 115% in Q1. That means even if they didn't win any new customers, Freshworks would have grown its revenue 15% year on year. That is a good retention rate and a proof that Freshworks's customers are satisfied with their software and are getting more value from it over time. That is good to see.

Key Takeaways from Freshworks's Q1 Results

With a market capitalization of $5.13 billion Freshworks is among smaller companies, but its more than $603.4 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.

We enjoyed seeing Freshworks’s impressive revenue growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a decent quarter. But investors might have been expecting more and the company is down 0.52% on the results and currently trades at $16.9 per share.

Freshworks may have had a good quarter, so should you invest 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.