👩‍💻 Does Freshworks Need A Refresh?

McDonald's decides to exit Russia.

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👩‍💻 Freshworks: Where’s The Refresh?

Business software provider Freshworks (FRSH) reported another quarterly loss in Q1 2022. The company also warned of slowing revenue growth. So does Freshworks need a fresh approach?

Growth Stocks Or Sheep?

2021 was a record year for IPOs globally. 2.1K companies (not including SPAC mergers) went public during the year, raising $400B, 80% higher than in 2020. Tech and tech-related companies comprised over 20% of the total IPOs. Investors jumped headlong with nothing but animal spirits.

Freshworks, the San Mateo, California-based SaaS startup, has its roots in Chennai, India. The company provides customer experience, IT service management, customer relationship management (CRM), and human resource management solutions. The CRM offering puts the company in direct competition with market leader Salesforce.

When Freshworks went public in September last year, it set an aspirational trend for Indian companies wanting to list overseas. It sold shares at $36 apiece, which soon hit a peak of $53.36. Revenue projection may have been above consensus estimates, but the company remained loss-making.

Soon after that, rising bond yields and speculation that the US Federal Reserve would raise interest rates led to a sell-off of growth stocks. Some of the go-go stocks lost half their value in 2021 itself. Freshworks had topped out on the day it reported Q3 results. It has all been downhill since.

Q4 was the first time the company reported quarterly revenue of over $100M. 2021 revenue stood at $371M, higher than the company’s guided range. Although topline was up 49% from 2020, its operating loss widened to $204.8M for the year from $56.1M in 2020.

For the first quarter of 2022, Freshworks guided for $108M in revenue with loss from operations between $12.5M to $10.5M. The company guided to earn between $486.5M and $495M in revenue for the whole year.

Many Small Customers

That was the guidance back in the day. So how did reality compare to projections?

Key Highlights From Q1 2022:

  • Revenue: $115.6M Vs $108.3M expected
  • Loss per Share: $0.01 Vs $0.05 expected

Revenue was up 42.2% Y-o-Y, the second-straight quarter in which Freshworks reported revenue above $100M. The overall customer base for the company grew to 58.1K with the addition of 2.1K new customers during the quarter.

Names like California Credit Union, Allbirds, Sodexo, Thermo Fisher Scientific, and TicketNetwork were added as customers during the quarter. Freshworks also announced partnerships with Shopify, Good Data, & Device42. It completed 150 projects with India’s largest IT firm Tata Consultancy Services (TCS).

Annual Recurring Revenue (ARR) is the total revenue that will be recognized over the next 12 months at any given point in time. For Q1, customers contributing to more than $5K in ARR rose to 15,639, up 27% Y-o-Y. Those contributing more than $50K stood at 1,547, up 54% Y-o-Y. Current customers increased their spending by 15% on average from last year.

Be that as it may, net loss in Q1 widened to $49M from $2.4M during the same period last year, led by stock-based compensation expenses, which stood at $46.6M. Operating cash flow fell to $1.4M from $7.8M in Q1 2021.

Freshworks expects to earn $118M in revenue for the current quarter, marginally ahead of analysts estimate of $116.9M. It also raised its full-year revenue guidance to $498.5M from $490.7M earlier. Revenue guidance was also ahead of analysts’ projections of $490.2M. Revenue growth is expected to be 33%, slower than the 56% growth seen during Q2 2021.

CEO Girish Mathrubootham asserted that Freshworks is focused on mid-market and SMB customers and is pinning hopes on the new CRM solution launched last month. The solution combines marketing automation, conversational support, sales, and customer support and will enable D2C brands and online retailers to have a 360-degree view of the customer.

With the global economy headed towards a rising interest rate environment, it does not appear to be an easy road back to normalcy either. Shares are down 70% from their peak, and investors would hope that a fresh approach may just be the fillip that’s needed!

Market Reaction
FRSH ended at $15.32, down 5.37%.

Company Snapshot 📈

FRSH $15.32 -0.87 (5.37%)

Analyst Ratings (13 Analysts) BUY 62%  HOLD 38%  SELL 0%

Newsworthy 📰

Exit After Pause: McDonald’s says it will sell its Russia business after previously pausing operations due to Ukraine war (MCD -0.41%)

Hostile Attempt: JetBlue launches tender offer for Spirit Airlines (SAVE +13.49%)

Problems Again: Rivian warns dispute with seat supplier threatens production of Amazon delivery vans (RIVN -6.89%)

Later Today 🕒

  • Walmart Inc. Earnings (WMT)
  • The Home Depot Inc. Earnings (HD)
  • JD.com Inc. Earnings (JD)
  • Bio-Path Holdings Inc. Earnings (BPTH)
  • HUYA Inc. Earnings (HUYA)
  • NextGen Healthcare Inc. Earnings (NXGN)
  • Sea Ltd. Earnings (SE)
  • Taro Pharmaceuticals Industries Ltd. Earnings (TARO)
  • 6:00 PM IST: Retail Sales
  • 6:45 PM IST: Industrial Production Index

Today’s Fun Fact

John Deere designed his first plow for Midwestern farmers as a 33-year old blacksmith

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