Freshworks (FRSH)

Business software provider Freshworks (NASDAQ:FRSH) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 15.3% year on year to $215.1 million. Guidance for next quarter’s revenue was better than expected at $218.5 million at the midpoint, 1% above analysts’ estimates. Its non-GAAP profit of $0.16 per share was 25.5% above analysts’ consensus estimates.

Company Overview

Starting as a customer service solution before expanding into a comprehensive software suite, Freshworks (NASDAQ:FRSH) provides AI-powered software-as-a-service solutions that help companies manage customer service, IT support, sales, and marketing functions.

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 competes with Salesforce (NYSE:CRM), Zendesk (acquired by private equity), and ServiceNow (NYSE:NOW) in various segments, along with legacy vendors like Oracle (NYSE:ORCL), SAP (NYSE:SAP), and Microsoft (NASDAQ:MSFT). The company also faces competition from specialized providers like HubSpot (NYSE:HUBS) in marketing and Atlassian (NASDAQ:TEAM) in IT service management.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Freshworks’s 29% annualized revenue growth over the last five years was impressive. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Freshworks’s annualized revenue growth of 19.3% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Freshworks reported year-on-year revenue growth of 15.3%, and its $215.1 million of revenue exceeded Wall Street’s estimates by 3%. Company management is currently guiding for a 12.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.4% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Freshworks’s billings punched in at $224 million in Q3, and over the last four quarters, its growth slightly outpaced the sector as it averaged 16.9% year-on-year increases. This performance aligned with its total sales growth and shows the company is successfully converting sales into cash. Its growth also enhances liquidity and provides a solid foundation for future investments.

This quarter, Freshworks reported 24,377 enterprise customers paying more than $5,000 annually, an increase of 402 from the previous quarter. That’s a bit fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that Freshworks will likely need to upsell its existing large customers or move down market to maintain its top-line growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Freshworks to acquire new customers as its CAC payback period checked in at 75.8 months this quarter. The company’s drawn-out sales cycles partly stem from its focus on enterprise clients who require some degree of customization, resulting in long onboarding periods. The complex integrations are a double-edged sword - while Freshworks may not see immediate returns from its sales and marketing investments, it is rewarded with higher switching costs and lifetime value if it can continue meeting its customer’s needs.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Freshworks’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 105% in Q3. This means Freshworks would’ve grown its revenue by 4.8% even if it didn’t win any new customers over the last 12 months.

Freshworks has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Freshworks’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 84.8% gross margin over the last year. Said differently, roughly $84.77 was left to spend on selling, marketing, and R&D for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Freshworks has seen gross margins improve by 2.6 percentage points over the last 2 year, which is very good in the software space.

Freshworks produced a 84.7% gross profit margin in Q3, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Freshworks’s expensive cost structure has contributed to an average operating margin of negative 6.2% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, but it’s unclear what would happen if Freshworks reeled back its investments. Still, we’re optimistic the business can continue growing and reach profitability upon scale.

Over the last two years, Freshworks’s expanding sales gave it operating leverage as its margin rose by 16.4 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q3, Freshworks generated a negative 3.5% operating margin.

If you’ve followed StockStory for a while, you know 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 has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 25.7% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Freshworks’s free cash flow clocked in at $57.21 million in Q3, equivalent to a 26.6% margin. This result was good as its margin was 5.1 percentage points higher than in the same quarter last year. We hope the company can build on this trend.

Over the next year, analysts predict Freshworks’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 25.7% for the last 12 months will decrease to 26.4%.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Freshworks is a well-capitalized company with $813.2 million of cash and $31.42 million of debt on its balance sheet. This $781.8 million net cash position is 25.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Freshworks’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. On the other hand, its new large contract wins slowed. Overall, this print had some key positives. The stock traded up 4.2% to $11.54 immediately after reporting.

Updated: December 3, 2025 at 9:38 PM EST

Are you wondering whether to buy Freshworks or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Freshworks possesses a number of positive attributes. First off, its revenue growth was strong over the last five years. And while its customers generally do not adopt its complementary products, its admirable gross margin indicates excellent unit economics. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Freshworks’s price-to-sales ratio based on the next 12 months is 3.8x. Looking at the software landscape right now, Freshworks trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $18.43 on the company (compared to the current share price of $12.51), implying they see 47.4% upside in buying Freshworks in the short term.