Freshworks (NASDAQ:FRSH) Q2 Sales Beat Estimates

Anthony Lee /
2023/08/01 4:09 pm EDT

Business software provider Freshworks (NASDAQ: FRSH) beat analysts' expectations in Q2 FY2023, with revenue up 19.5% year on year to $145.1 million. The company also expects next quarter's revenue to be around $150.3 million, roughly in line with analysts' estimates. Freshworks made a GAAP loss of $35.7 million, improving from its loss of $69.8 million in the same quarter last year.

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Freshworks (FRSH) Q2 FY2023 Highlights:

  • Revenue: $145.1 million vs analyst estimates of $141.4 million (2.57% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.02 ($0.05 beat)
  • Revenue Guidance for Q3 2023 is $150.3 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year of $591 million at the midpoint
  • Free Cash Flow of $18.1 million, up 98.8% from the previous quarter
  • Net Revenue Retention Rate: 108%, in line with the previous quarter
  • Customers: 19,105 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 82.9%, up from 80.2% in the same quarter last year

“Freshworks is building on the foundations we set at the start of the year to deliver faster product innovation, and improve our efficiency,” 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.

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 over the last two years, growing from $88.3 million in Q2 FY2021 to $145.1 million this quarter.

Freshworks Total Revenue

This quarter, Freshworks's quarterly revenue was once again up 19.5% year on year. We can see that Freshworks's revenue increased by $7.39 million quarter on quarter, which is a solid improvement from the $4.52 million increase in Q1 2023. Shareholders should applaud the re-acceleration of growth.

Next quarter's guidance suggests that Freshworks is expecting revenue to grow 16.7% year on year to $150.3 million, slowing down from the 33.3% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 17% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

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 Q2. 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%.

Despite falling over the last year, Freshworks still 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 Q2 Results

With a market capitalization of $5.43 billion, Freshworks is among smaller companies, but its $1.16 billion cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was good to see Freshworks beat analysts' revenue expectations this quarter. We were also glad that its gross margin improved. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 2.09% after reporting and currently trades at $18.6 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, it's free.

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