Freshworks (NASDAQ:FRSH) Q4 Sales Beat Estimates But Stock Drops

Adam Hejl /
2022/02/10 4:41 pm EST
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Business software provider Freshworks (NASDAQ: FRSH) reported Q4 FY2021 results topping analyst expectations, with revenue up 44.4% year on year to $105.4 million. Guidance for next quarter's revenue was $108 million at the midpoint, which is 1.34% above the analyst consensus. Freshworks made a GAAP loss of $74.7 million, down on its loss of $1.53 million, in the same quarter last year.

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Freshworks (FRSH) Q4 FY2021 Highlights:

  • Revenue: $105.4 million vs analyst estimates of $100.3 million (5.12% beat)
  • EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.06
  • Revenue guidance for Q1 2022 is $108 million at the midpoint, above analyst estimates of $106.5 million
  • Management's revenue guidance for upcoming financial year 2022 is $490.7 million at the midpoint, beating analyst estimates by 1.24% and predicting 32.2% growth (vs 49% in FY2021)
  • Free cash flow of $2.83 million, up from negative free cash flow of $4.18 million in previous quarter
  • Net Revenue Retention Rate: 114%, down from 117% previous quarter
  • Customers: 14,814 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 80.6%, up from 78.8% same quarter last year

“We had a strong finish to the year as we surpassed $100 million in quarterly revenue and achieved 44% year-over-year growth in the fourth quarter,” 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 impressive over the last year, growing from quarterly revenue of $73 million, to $105.4 million.

Freshworks Total Revenue

And unsurprisingly, this was another great quarter for Freshworks with revenue up 44.4% year on year. On top of that, revenue increased $8.86 million quarter on quarter, a solid improvement on the $8.27 million increase in Q3 2021, and even a sign of slight re-acceleration of growth.

Guidance for the next quarter indicates Freshworks is expecting revenue to grow 34% year on year to $108 million, slowing down from the 49.2% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $490.7 million at the midpoint, growing 32.2% compared to 49% increase in FY2021.

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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 114% in Q4. That means even if they didn't win any new customers, Freshworks would have grown its revenue 14% 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 Q4 Results

With a market capitalization of $6.18 billion Freshworks is among smaller companies, but its more than $747.8 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 were impressed by the exceptional revenue growth Freshworks delivered this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, the revenue guidance for next year indicates a significant slowdown. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 8.72% on the results and currently trades at $20.5 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.