Freshworks (FRSH)

Business software provider Freshworks (NASDAQ: FRSH) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 18.9% year on year to $196.3 million. Guidance for next quarter’s revenue was better than expected at $198.8 million at the midpoint, 0.6% above analysts’ estimates. Its non-GAAP profit of $0.18 per share was 39.4% above analysts’ consensus estimates.

Company Overview

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 integrates data analytics with sales and marketing functions.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Freshworks grew its sales at a decent 22.9% compounded annual growth rate. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, Freshworks reported year-on-year revenue growth of 18.9%, and its $196.3 million of revenue exceeded Wall Street’s estimates by 2.3%. Company management is currently guiding for a 14.2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.3% over the next 12 months, a deceleration versus the last three years. Still, this projection is above average for the sector and indicates the market is baking in some success for its newer products and services.

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 $203.3 million in Q1, and over the last four quarters, its growth was impressive as it averaged 19.2% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

This quarter, Freshworks reported 23,275 enterprise customers paying more than $5,000 annually, an increase of 717 from the previous quarter. That’s quite a bit more contract wins than last quarter and quite a bit above what we’ve observed over the previous year. Shareholders should take this as an indication that Freshworks’s go-to-market strategy is working well.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Freshworks to acquire new customers as its CAC payback period checked in at 75.2 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 Q1. This means Freshworks would’ve grown its revenue by 5.3% even if it didn’t win any new customers over the last 12 months.

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 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 84.4% gross margin over the last year. That means Freshworks only paid its providers $15.61 for every $100 in revenue.

This quarter, Freshworks’s gross profit margin was 84.8%, in line with the same quarter last year. Zooming out, Freshworks’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Freshworks’s expensive cost structure has contributed to an average operating margin of negative 15.5% 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, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Over the last year, Freshworks’s expanding sales gave it operating leverage as its margin rose by 9.2 percentage points. Still, it will take much more for the company to reach long-term profitability.

Freshworks’s operating margin was negative 5.3% this quarter.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 22.6% 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 $55.4 million in Q1, equivalent to a 28.2% margin. This result was good as its margin was 4.8 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Freshworks’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 22.6% for the last 12 months will increase to 26.5%, giving it more flexibility for investments, share buybacks, and dividends.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Freshworks is a well-capitalized company with $995.3 million of cash and $30.6 million of debt on its balance sheet. This $964.7 million net cash position is 22.1% 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 significant improvement in new large contract wins this quarter. We were also glad its billings outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 9.4% to $15.70 immediately following the results.

Updated: May 4, 2025 at 10:30 PM EDT

Before making an investment decision, investors should account for Freshworks’s business fundamentals and valuation in addition to what happened in the latest quarter.

There are some positives when it comes to Freshworks’s fundamentals. First off, its revenue growth was solid over the last three years. And while its operating margins are low compared to other software companies, its admirable gross margin indicates excellent unit economics. On top of that, its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Freshworks’s price-to-sales ratio based on the next 12 months is 5.3x. Looking at the software landscape right now, Freshworks trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $19.81 on the company (compared to the current share price of $14.38), implying they see 37.8% upside in buying Freshworks in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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