Freshworks (NASDAQ:FRSH) Q4: Beats On Revenue, Guides For 18.6% Growth Next Year

Full Report / February 06, 2024

Business software provider Freshworks (NASDAQ: FRSH) beat analysts' expectations in Q4 FY2023, with revenue up 20.2% year on year to $160.1 million. The company expects next quarter's revenue to be around $163.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.08 per share, improving from its profit of $0.01 per share in the same quarter last year.

Freshworks (FRSH) Q4 FY2023 Highlights:

  • Revenue: $160.1 million vs analyst estimates of $158.5 million (1% beat)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.05 ($0.03 beat)
  • Revenue Guidance for Q1 2024 is $163.5 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for the upcoming financial year 2024 is $707.5 million at the midpoint, in line with analyst expectations and implying 18.6% growth (vs 19.8% in FY2023)
  • Free Cash Flow of $28.59 million, up 29.5% from the previous quarter
  • Net Revenue Retention Rate: 108%, in line with the previous quarter
  • Customers: 20,261 customers paying more than $5,000 annually
  • Gross Margin (GAAP): 83.1%, up from 81.1% in the same quarter last year
  • Market Capitalization: $6.40 billion

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.

Small and medium sized businesses (SMB) are facing the same digital transformation pressures as larger enterprises. However, they don’t have the human and capital resources to build out integrated front office and back office products for customer service, IT service management (ITSM) and sales & marketing automation (CRM) tools, and are hesitant to have multiple vendors like Zendesk, ServiceNow, and Salesforce, which can be too complex for a small business to manage.

Freshworks has assembled a one-stop-shop for SMB customers looking for customer service, IT service management (ITSM) and sales & marketing automation (CRM) tools. Its approach is to provide enterprise grade products at a discount to larger competitors.

Sales Software

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 integrates data analytics with sales and marketing functions.

Freshworks operates in a highly competitive space, with rivals like Microsoft (NASDAQ:MSFT), Salesforce.com (NASDAQ: CRM), ServiceNow (NYSE: NOW), Hubspot (NYSE: HUBS), PagerDuty (NYSE:PD), and Zendesk (NASDAQ: ZEN).

Sales Growth

As you can see below, Freshworks's revenue growth has been strong over the last two years, growing from $105.5 million in Q4 FY2021 to $160.1 million this quarter.

Freshworks Total Revenue

This quarter, Freshworks's quarterly revenue was once again up a very solid 20.2% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $6.56 million in Q4 compared to $8.47 million in Q3 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Freshworks is expecting revenue to grow 18.7% year on year to $163.5 million, in line with the 20.1% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $707.5 million at the midpoint, growing 18.6% year on year compared to the 19.8% increase in FY2023.

Large Customers Growth

This quarter, Freshworks reported 20,261 enterprise customers paying more than $5,000 annually, an increase of 710 from the previous quarter. That's quite a bit more contract wins than last quarter and quite a bit above what we've typically observed in past quarters, demonstrating that the business has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Freshworks customers paying more than $5,000 annually

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 Q4. 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%.

Freshworks 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.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Freshworks's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 83.1% in Q4.

Freshworks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Freshworks's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Freshworks's free cash flow came in at $28.59 million in Q4, up 608% year on year.

Freshworks Free Cash Flow

Freshworks has generated $77.84 million in free cash flow over the last 12 months, a solid 12.8% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Freshworks's Q4 Results

We were impressed by Freshworks's significant improvement in new large contract wins and free cash flow this quarter. We were also glad next year's revenue guidance is strong. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The market was likely expecting more, however, and the stock is down 2.9% after reporting, trading at $21.18 per share.

Is Now The Time?

When considering an investment in Freshworks, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Freshworks is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its impressive gross margins indicate excellent business economics and its strong free cash flow generation gives it re-investment options.

The market is certainly expecting long-term growth from Freshworks given its price-to-sales ratio based on the next 12 months is 9.2x. There's definitely a lot of things to like about Freshworks and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

Wall Street analysts covering the company had a one-year price target of $25.7 per share right before these results (compared to the current share price of $21.18), implying they saw upside in buying Freshworks in the short term.

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