Freshworks reports a 19% jump in consolidated revenue at $153.6 million, targets $1 billion revenue by 2026

Freshworks

Nasdaq-listed Software-as-a-Service (SaaS) firm Freshworks on 1st November reported a 19% year-on-year jump in its consolidated revenue of $153.6 million during the third quarter of 2023, beating its own estimates of $149- $151 million on the back of new customer addition and by retaining large customers.

The firm's Non-GAAP income from operations was $17.4 million, compared to non-GAAP loss from operations of $3.1 million in the third quarter of 2022.

"We delivered another solid quarter of performance and we outperformed our own estimates across major key financial metrics, " Said Girish Mathrubootham, Chief Executive Officer of Freshworks during the company's earnings call held on November 1st.

The company's growth drivers for the quarter include new customer additions, especially large customers, said the company's President, Dennis Woodside during the earnings call.

"The company added nearly 1000 net customers during the quarter taking the overall number to 66,600 customers of Freshworks...we are targetting larger and higher yielding customers and in Q3 customers contributing to more than $50,000 in ARR grew 32% year-on-year", Woodside said.

The company also said that the growth drivers are pointing towards achieving its target of reaching $1 billion in revenue by 2026.

"The combination of large customers and the SMB opportunity gives us a unique GTM strategy and we believe this will fastrack and take us to the goal of reaching $1 billion in revenue in the next three years, " Woodside added

Freshworks' direct competitor Zoho said that it crossed $1 billion in revenue in 2022.

During the quarter, the company appointed Johanna Jackman as Chief People Officer and announced Mika Yamamoto to join as Chief Customer and Marketing Officer.

Other key metrics

Freshworks' GAAP (Loss) from Operations was at $38.7 million, compared to a loss of $58.3 million in the third quarter of 2022

During the second quarter of 2023, Freshworks reported a revenue of $145 million with a Non-GAAP profit of $11 million.

GAAP refers to Generally Accepted Accounting Principles, which is a collection of commonly followed accounting rules and standards for financial reporting. Meanwhile, non-GAAP financial results exclude the impact of stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles, and other adjustments.

The firm's operating expenses for the quarter were recorded at $166 million with the majority of the spending going toward sales and marketing at $90 million.

The company's net loss came at $32 million in the quarter under review as against a loss of $57 million in Q3 of 2022.

Macroeconomic pressure

The number of customers contributing more than $5,000 in ARR was 19,551, an increase of 17% year-over-year, however grew flat on a quarterly basis. In Q2 of  2023 number of customers contributing more than $5,000 in ARR (Annual Recurring Revenue) was recorded at 19,105.

The company's net dollar retention rate, an important metric that tells us the spending capacity of existing customers grew flat at 108% in Q3. This shows that it is able to retain its older customers at the same rate as last quarter.

This comes at a time when the overall SaaS ecosystem is facing a slowdown. Large deals have come down and existing customers are reevaluating their SaaS product spending.

"We have factored in the impacts of macroeconomic pressure in our estimates... We expect the pressure to affect our expansion revenue, however, other factors are heading us in the right direction, " Mathrubootham said during the call.

Freshworks' Free cash flow was $22.1 million, compared to a negative FCF of $7.2 million in the third quarter of 2022, and its Cash, cash equivalents, and marketable securities were recorded at $1.16 billion as of September 30, 2023.

Monetising AI offerings

While the firm committed to making significant investments in AI last quarter, it unveiled an AI-powered Customer Service Suite that brings together self-service bots, agent-led conversational messaging, and automated ticketing management solution by uniting Freshchat, Freshdesk and the company’s generative artificial intelligence technology, Freddy AI, it said in its financial statement announcement.

"We will start monetising the Freddy AI chat capabilities from Q1 of next year, " Mathrubootham said.

Outlook

Freshworks estimates its overall revenue to touch $593-$596 million in 2023 even as Q4 revenues record a marginal growth of $156-$159 million.

The company has increased its non-GAAP operating income guidance to $38.5 to $41 million from an earlier forecast of $24-$32 million.

The firm has also increased its free cash flow estimates by $15 million to $75 million for the full year.