Freshworks Inc. (FRSH) Bundle
Understanding Freshworks Inc. (FRSH) Revenue Streams
Understanding Freshworks Inc.’s Revenue Streams
The company generates revenue primarily from two segments: subscription services and professional services. The breakdown of revenue for the nine months ended September 30, 2024, is as follows:
| Revenue Source | 2024 (in thousands) | 2023 (in thousands) | Change ($ thousands) | Change (%) |
|---|---|---|---|---|
| Subscription services, software licenses, and maintenance | $518,582 | $425,755 | $92,827 | 22% |
| Professional services | $7,267 | $10,566 | ($3,299) | (31%) |
| Total Revenue | $525,849 | $436,321 | $89,528 | 21% |
For the three months ended September 30, 2024, the revenue breakdown is as follows:
| Revenue Source | 2024 (in thousands) | 2023 (in thousands) | Change ($ thousands) | Change (%) |
|---|---|---|---|---|
| Subscription services, software licenses, and maintenance | $184,409 | $150,033 | $34,376 | 23% |
| Professional services | $2,166 | $3,517 | ($1,351) | (38%) |
| Total Revenue | $186,575 | $153,550 | $33,025 | 22% |
Year-over-year revenue growth shows a strong performance with a 22% increase for the three months and a 21% increase for the nine months ended September 30, 2024, compared to the same periods in 2023. The majority of revenue continues to be derived from subscription services, which reflects the company’s core business model.
Notably, the revenue from existing customers for the nine months ended September 30, 2024, contributed approximately $46.2 million, while new customer acquisitions added around $43.3 million. The acquisition of Device42 also contributed to revenue, enhancing the overall growth trajectory.
The company's net dollar retention rate was reported at 107% as of September 30, 2024, indicating a healthy expansion within existing customers despite macroeconomic pressures that have impacted customer spending and retention. This rate slightly decreased from 108% as of the previous year, which reflects challenges in expanding revenue from existing accounts.
Overall, the revenue analysis illustrates robust growth driven by subscription services, with significant contributions from new customer acquisitions and the recent acquisition of Device42. The shift in professional services revenue indicates potential areas for strategic focus moving forward.
A Deep Dive into Freshworks Inc. (FRSH) Profitability
A Deep Dive into Freshworks Inc. Profitability
Gross Profit Margin: For the three months ended September 30, 2024, the gross margin was 84%, an increase from 83% for the same period in 2023. For the nine months ended September 30, 2024, the gross margin also improved to 84% from 82% year-over-year.
Operating Profit Margin: The loss from operations was ($38,864,000) for the three months ended September 30, 2024, compared to ($38,735,000) for the same period in 2023. For the nine months ended September 30, 2024, the loss from operations was ($114,818,000), compared to ($130,131,000) in 2023.
Net Profit Margin: The net loss for the three months ended September 30, 2024, was ($29,959,000), with a net loss per share of ($0.10). For the nine months ended September 30, 2024, the net loss was ($73,468,000), with a net loss per share of ($0.24).
Trends in Profitability Over Time
The following table summarizes the profitability metrics for the three and nine months ended September 30, 2024, compared to the same periods in 2023:
| Metric | Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 |
|---|---|---|---|---|
| Gross Profit Margin | 84% | 83% | 84% | 82% |
| Operating Loss | ($38,864,000) | ($38,735,000) | ($114,818,000) | ($130,131,000) |
| Net Loss | ($29,959,000) | ($31,033,000) | ($73,468,000) | ($109,355,000) |
Comparison of Profitability Ratios with Industry Averages
According to industry benchmarks, the average gross margin for software companies typically ranges from 70% to 85%. The gross margin of 84% for Freshworks falls within this range, indicating solid performance relative to peers. The operating loss margin, however, reflects higher operational expenditures which are common in growth-focused SaaS companies.
Analysis of Operational Efficiency
Operating Expenses: Total operating expenses for the three months ended September 30, 2024, were $195,633,000, up 18% from $166,022,000 in 2023. For the nine months ended September 30, 2024, total operating expenses were $556,796,000, an increase of 14% from $490,092,000 in 2023.
Cost Management: The breakdown of operating expenses includes:
| Category | Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 |
|---|---|---|---|---|
| Research and Development | $47,885,000 | $34,885,000 | $123,562,000 | $101,922,000 |
| Sales and Marketing | $101,253,000 | $90,673,000 | $300,143,000 | $265,458,000 |
| General and Administrative | $46,495,000 | $40,464,000 | $133,091,000 | $122,712,000 |
The increase in expenses is primarily driven by personnel-related costs and stock-based compensation, reflecting the company's commitment to growth and expansion.
Debt vs. Equity: How Freshworks Inc. (FRSH) Finances Its Growth
Debt vs. Equity: How Freshworks Inc. Finances Its Growth
As of September 30, 2024, Freshworks Inc. reported total liabilities of $440.2 million, comprising both current and long-term obligations. The breakdown of these liabilities includes:
- Total current liabilities: $377.9 million
- Operating lease liabilities (non-current): $25.5 million
- Other liabilities: $36.7 million
The company's long-term debt appears minimal, indicating a preference for equity financing. This is reflected in its debt-to-equity ratio, calculated at 0.39 as of the same date. This figure is below the industry average of approximately 0.50, suggesting a conservative approach towards leveraging debt.
Recent financial activities include:
- Issuance of common stock under employee stock purchase plans, netting $3.6 million.
- Payment of withholding taxes on net share settlements of equity awards, totaling $49.6 million.
The company has maintained a robust cash position, with cash and cash equivalents reported at $391.1 million and marketable securities at $663.9 million. This liquidity provides a cushion for operational flexibility and potential future investments.
In balancing debt and equity financing, Freshworks relies heavily on equity to fund its growth initiatives. The accumulated deficit stands at $3.7 billion, indicating that while the company has historically incurred losses, it continues to attract investment through equity offerings.
| Financial Metric | Value |
|---|---|
| Total Liabilities | $440.2 million |
| Total Current Liabilities | $377.9 million |
| Long-term Debt | Minimal |
| Debt-to-Equity Ratio | 0.39 |
| Industry Average Debt-to-Equity Ratio | 0.50 |
| Cash and Cash Equivalents | $391.1 million |
| Marketable Securities | $663.9 million |
| Accumulated Deficit | $3.7 billion |
Freshworks has demonstrated a strategic inclination towards equity financing while maintaining a manageable level of debt, positioning itself for sustainable growth despite its accumulated losses.
Assessing Freshworks Inc. (FRSH) Liquidity
Assessing Freshworks Inc.'s Liquidity
As of September 30, 2024, Freshworks Inc. reported cash and cash equivalents of $391.1 million and marketable securities totaling $663.9 million. The marketable securities primarily consist of U.S. treasury securities, U.S. government agency securities, corporate debt securities, and certificates of deposit .
Current and Quick Ratios
The current ratio, which measures the company's ability to cover its short-term liabilities with its short-term assets, can be calculated as follows:
| Current Assets | Current Liabilities | Current Ratio |
|---|---|---|
| $1,054.3 million (cash + marketable securities + other current assets) | $377.9 million | 2.79 |
The quick ratio, which excludes inventory from current assets, is also favorable:
| Quick Assets | Current Liabilities | Quick Ratio |
|---|---|---|
| $1,054.3 million | $377.9 million | 2.79 |
Analysis of Working Capital Trends
Freshworks Inc. has shown robust working capital trends with the following data:
| Period | Current Assets | Current Liabilities | Working Capital |
|---|---|---|---|
| September 30, 2024 | $1,054.3 million | $377.9 million | $676.4 million |
| September 30, 2023 | $1,203.5 million | $327.2 million | $876.3 million |
Cash Flow Statements Overview
For the nine months ended September 30, 2024, the cash flow statement showed:
| Cash Flow Category | 2024 (in thousands) | 2023 (in thousands) |
|---|---|---|
| Net cash provided by operating activities | $119,284 | $55,312 |
| Net cash provided by (used in) investing activities | ($170,345) | $146,280 |
| Net cash used in financing activities | ($45,958) | ($47,409) |
Potential Liquidity Concerns or Strengths
Despite the accumulated deficit of $3.7 billion, the liquidity position remains strong due to substantial cash reserves. The company expects to meet its working capital needs for at least the next 12 months through existing cash, cash equivalents, and marketable securities .
Furthermore, Freshworks has a remaining performance obligation totaling $488.9 million, indicating future revenue potential .
Is Freshworks Inc. (FRSH) Overvalued or Undervalued?
Valuation Analysis
As of September 30, 2024, the company had a stock price of $10.39. The following financial ratios are crucial for assessing its valuation:
| Valuation Metric | Value |
|---|---|
| Price-to-Earnings (P/E) Ratio | Not applicable (Net loss reported) |
| Price-to-Book (P/B) Ratio | 9.14 |
| Enterprise Value-to-EBITDA (EV/EBITDA) | Not applicable (Negative EBITDA) |
Over the past 12 months, the stock price has exhibited significant volatility:
| Date | Stock Price ($) |
|---|---|
| September 30, 2023 | 9.50 |
| March 30, 2024 | 11.50 |
| June 30, 2024 | 10.00 |
| September 30, 2024 | 10.39 |
Currently, the company does not pay dividends, with a dividend yield of 0% and a payout ratio of 0%.
Analyst consensus on the stock valuation suggests a mixed outlook:
| Analyst Rating | Count |
|---|---|
| Buy | 5 |
| Hold | 7 |
| Sell | 2 |
In summary, the valuation metrics indicate that the company is currently facing challenges in maintaining profitability, as reflected in its P/E and EV/EBITDA ratios. The P/B ratio suggests a premium over book value, while the mixed analyst ratings depict a cautious outlook among investors.
Key Risks Facing Freshworks Inc. (FRSH)
Key Risks Facing Freshworks Inc.
Freshworks Inc. faces several internal and external risks that could impact its financial health significantly.
Industry Competition
The software industry is highly competitive, with several established companies and new entrants vying for market share. The company competes with major players such as Salesforce, Zendesk, and HubSpot. As of September 30, 2024, the company reported a net dollar retention rate of 107%, a decrease from 108% in the previous year, indicating challenges in maintaining revenue from existing customers amid competitive pressures.
Macroeconomic Conditions
Current macroeconomic uncertainties, including inflation and geopolitical developments, have impacted business spending. The company noted that macroeconomic pressures adversely affected demand for its products. Approximately 27% of its revenue is exposed to fluctuations in the euro and British Pound, which can lead to revenue volatility.
Regulatory Changes
The company's operations are subject to various regulations in the jurisdictions where it operates. Compliance with these regulations can introduce additional costs and operational complexities. Any changes in regulations could adversely impact its business model and financial outcomes.
Operational Risks
Increased operational costs have been a concern, with total operating expenses rising by 18% to $195.6 million for the three months ended September 30, 2024, compared to the same period in 2023. This increase was primarily driven by personnel-related costs and stock-based compensation.
Financial Risks
As of September 30, 2024, the company reported an accumulated deficit of $3.7 billion and a net loss of $73.5 million for the nine months ended September 30, 2024, down from a net loss of $109.4 million in 2023. The company may need to seek additional financing, which could be dilutive to shareholders and may not be available on favorable terms.
Investment Risks
The company has made significant investments, including the acquisition of Device42 for approximately $238.1 million. Future acquisitions may require additional funding, and the integration of acquired businesses poses risks to operational efficiency.
Mitigation Strategies
To address these risks, the company has implemented various strategies, including:
- Enhancing product offerings to stay competitive.
- Utilizing cash reserves, which amounted to $391.1 million as of September 30, 2024, to fund operations and potential acquisitions.
- Monitoring macroeconomic indicators to adjust business strategies proactively.
| Key Risk Factor | Description | Impact Level |
|---|---|---|
| Industry Competition | High competition from established players | High |
| Macroeconomic Conditions | Inflation and geopolitical risks affecting demand | Medium |
| Regulatory Changes | Compliance costs and operational complexities | Medium |
| Operational Risks | Rising operational costs impacting profitability | High |
| Financial Risks | Accumulated deficit and need for financing | High |
| Investment Risks | Risks associated with acquisitions and integrations | Medium |
Future Growth Prospects for Freshworks Inc. (FRSH)
Future Growth Prospects for Freshworks Inc.
Analysis of Key Growth Drivers
Product Innovations: Freshworks has focused on enhancing its product offerings, particularly following its acquisition of Device42. This acquisition has introduced new capabilities in IT asset management, which is expected to drive additional revenue streams. As of September 30, 2024, the company reported total revenue of $525.8 million, a 21% increase compared to $436.3 million for the same period in 2023.
Market Expansions: The company's revenue from new customers during the twelve months ended September 30, 2024, was approximately $43.3 million, contributing to its net dollar retention rate of 107%. This indicates strong growth potential in existing markets and the ability to penetrate new segments effectively.
Future Revenue Growth Projections and Earnings Estimates
For the three months ended September 30, 2024, Freshworks generated revenue of $186.6 million, up 22% from $153.6 million in the corresponding period of 2023. Analysts estimate continued growth, projecting revenues to reach approximately $700 million by the end of 2025, driven by increasing subscription services and new customer acquisitions.
Strategic Initiatives or Partnerships That May Drive Future Growth
Freshworks has actively engaged in partnerships with other tech firms to enhance its product offerings and expand its market reach. The integration of Device42's technology is expected to lead to cross-selling opportunities across existing customer bases. The acquisition costs related to Device42 were approximately $238.1 million, with assets acquired valued at $261.9 million.
Competitive Advantages That Position the Company for Growth
One of the key competitive advantages for Freshworks is its robust customer base, which has resulted in a strong net dollar retention rate of 107%. This reflects effective customer engagement and satisfaction, crucial for sustaining long-term growth. Additionally, the company maintains a high gross margin of 84% as of September 30, 2024, indicating efficient operational management.
| Key Financial Metrics | 2024 (9 months) | 2023 (9 months) | Change (%) |
|---|---|---|---|
| Total Revenue | $525,849,000 | $436,321,000 | 21% |
| Net Loss | ($73,468,000) | ($109,355,000) | 33% improvement |
| Gross Margin | 84% | 82% | 2% increase |
| Operating Expenses | $556,796,000 | $490,092,000 | 14% increase |
Conclusion
The company's strategic initiatives, strong growth projections, and competitive advantages position it well for future expansion. With ongoing investments in product innovation and market penetration, Freshworks is set to capitalize on emerging opportunities within the SaaS landscape.
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Updated on 16 Nov 2024
Resources:
- Freshworks Inc. (FRSH) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Freshworks Inc. (FRSH)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View Freshworks Inc. (FRSH)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.