Freshworks's (NASDAQ:FRSH) Q3 Sales Top Estimates But Quarterly Guidance Below Expectations

Jabin Bastian /
2022/11/01 4:17 pm EDT

Business software provider Freshworks (NASDAQ: FRSH) reported Q3 FY2022 results topping analyst expectations, with revenue up 33.2% year on year to $128.7 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $130.2 million, 2.02% below analyst estimates. Freshworks made a GAAP loss of $57.8 million, improving on its loss of $107.4 million, in the same quarter last year.

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Freshworks (FRSH) Q3 FY2022 Highlights:

  • Revenue: $128.7 million vs analyst estimates of $125.4 million (2.64% beat)
  • EPS (non-GAAP): -$0.01 vs analyst estimates of -$0.05
  • Revenue guidance for Q4 2022 is $130.2 million at the midpoint, below analyst estimates of $132.8 million
  • Free cash flow was negative $7.23 million, compared to negative free cash flow of $10.1 million in previous quarter
  • Net Revenue Retention Rate: 107%, down from 111% previous quarter
  • Customers: 16,713 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 81.2%, up from 76.9% same quarter last year

“We delivered a strong quarter of results with revenue up 37% on a constant currency basis and significantly improved our operating 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.

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Sales Growth

As you can see below, Freshworks's revenue growth has been impressive over the last two years, growing from quarterly revenue of $66.1 million in Q3 FY2020, to $128.7 million.

Freshworks Total Revenue

And unsurprisingly, this was another great quarter for Freshworks with revenue up 33.2% year on year. On top of that, revenue increased $7.32 million quarter on quarter, a solid improvement on the $6.79 million increase in Q2 2022, and even a sign of slight acceleration of growth.

Guidance for the next quarter indicates Freshworks is expecting revenue to grow 23.4% year on year to $130.2 million, slowing down from the 44.4% 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 24.1% 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 Q3. 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 Q3 Results

With a market capitalization of $3.89 billion Freshworks is among smaller companies, but its more than $432.3 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 deliver strong revenue growth this quarter. And we were also excited to see solid full year guidance. 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 ok. The company is up 2.27% on the results and currently trades at $13.47 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.