Freshworks clocks first-ever operating profit at $3.9 million, revenue up 20% YoY in Q1CY23

Freshworks

Nasdaq-listed Software-as-a-Service (SaaS) giant Freshworks on Wednesday reported consolidated revenue of $138 million, up around 20% year-on-year for Q1CY23 and delivered its first-ever quarterly adjusted operating (Non-GAAP) profit of $3.9 million as a public company.

During Q4 of 2022, the company reported a revenue of $133 million with an operating loss of $2.8 million. The SaaS firm attributed the growth in Q1 revenue and operating profit to new customer addition during the quarter.

“We exceeded our financial estimates for revenue growth and delivered our first quarter of non-GAAP (Generally Accepted Accounting Principles) operating profit as a public company. More companies are taking advantage of the opportunity to buy software that is designed to scale to meet their IT and customer needs," said  Girish Mathrubootham, CEO and Founder of Freshworks while announcing the earnings.

GAAP refers to Generally Accepted Accounting Principles, which is a collection of commonly-followed accounting rules and standards for financial reporting. Freshworks follows January to December financial year. 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.

Freshworks'  GAAP (loss) from operations was $48.1 million as against $47.1 million in the first quarter of 2022. In Q4 of 2022, the loss was at $60.6 million. The company's net loss was at $43.5 million in Q1 of 2023  as against $50 million in Q1 of 2022, down 13% year-on-year.

For the first time since becoming a public company, Freshworks has reported a positive Non-GAAP income from operations was $3.9 million, compared to a loss of $0.6 million in the first quarter of 2022.

The company had a free cash flow of $9.1 million in the quarter under review up from negative $1.4 million in the first quarter of 2022.

As of the end of March, cash and cash equivalents were recorded at $1.5 billion, up from $1.1 billion in the previous quarter.

The company's number of customers contributing more than $5,000 in ARR (Annual Recurring Revenue)  was 18,441, an increase of 18% year-over-year and 19% adjusting for constant currency.

Freshworks' Net Dollar Retention rate was recorded at 107%, compared to 108% in the fourth quarter of 2022 and 115% in the first quarter of 2022. This basically measures the changes in recurring revenue caused due to fluctuations within the revenue from the existing customer base.

"Expansion activity for the quarter performed roughly in line with our expectations, as agent additions continue to be affected by a slower growth environment," said Dennis Woodside, President at Freshworks during the earnings conference call held on Wednesday.

The company is estimating further pressure in existing customer retention going ahead.

"Although we saw churn improve in the first quarter, we are seeing some risk going forward. Given both factors, we estimate Q2 constant currency and reported net dollar retention to be approximately 105% with net retention rate stabilize in the second half of the year," Woodside added.

Freshworks' new customer portfolio includes Fila, Johnsonville, Los Angeles Dodgers, Smyths Toys, Sonata Software, and The City of Escondido.

Freshworks expects its adjusted net income per share to grow between the break-even level of $0.02 per share on revenue of $140 million to $142.5 million. For its full year 2023, Freshworks expects revenue of $580 million to $592.5 million. In 2022, Freshworks reported consolidated revenue of $498 million.

During the quarter, Freshworks elevated Pradeep Rathinam as the company’s Chief Revenue Officer who was the Chief Customer Officer at the company.

Commenting on investments in Artificial Intelligence products, Mathrubootham said that the company will leverage the capabilities of ChatGPT.

"Where we are excited and actually investing right now with ChatGPT, which is a priority for us, like in this quarter and the coming quarters is how do we actually use generative AI to think about improving our ability to help businesses deliver better customer experiences and better employee experiences and also use in out IT and Sales products," He said.