Freshworks (NASDAQ:FRSH) Q2 Sales Beat Estimates But Quarterly Guidance Underwhelms

Radek Strnad /
2022/08/02 4:27 pm EDT

Business software provider Freshworks (NASDAQ: FRSH) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 37.4% year on year to $121.4 million. However, guidance for the next quarter was less impressive, coming in at $125.5 million at the midpoint, being 1.2% below analyst estimates. Freshworks made a GAAP loss of $69.7 million, down on its loss of $7.42 million, in the same quarter last year.

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Freshworks (FRSH) Q2 FY2022 Highlights:

  • Revenue: $121.4 million vs analyst estimates of $117.9 million (2.95% beat)
  • EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.07
  • Revenue guidance for Q3 2022 is $125.5 million at the midpoint, below analyst estimates of $127 million
  • The company reconfirmed revenue guidance for the full year, at $495 million at the midpoint
  • Free cash flow was negative $10.1 million, compared to negative free cash flow of $1.38 million in previous quarter
  • Net Revenue Retention Rate: 111%, down from 115% previous quarter
  • Customers: 16,212 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 80.2%, up from 78.8% 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 $88.3 million, to $121.4 million.

Freshworks Total Revenue

And unsurprisingly, this was another great quarter for Freshworks with revenue up 37.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $6.79 million in Q2, compared to $9.15 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Freshworks is expecting revenue to grow 29.8% year on year to $125.5 million, slowing down from the 45.9% 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 28.7% 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 111% in Q2. That means even if they didn't win any new customers, Freshworks would have grown its revenue 11% year on year. Despite the recent drop this is still 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 Q2 Results

With a market capitalization of $3.82 billion Freshworks is among smaller companies, but its more than $590.1 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 analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Freshworks. The company is down 3.01% on the results and currently trades at $13.5 per share.

Freshworks may have had a tough quarter, but does that actually create an opportunity to 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.