Financial Performance Overview

Freshworks, a leading provider of cloud-based customer and employee experience software, has reported its financial results for the three and nine months ended September 30, 2024. The company has seen strong revenue growth, with total revenue increasing by 22% year-over-year in the third quarter and 21% for the first nine months of the year.

The majority of Freshworks’ revenue continues to come from subscription services, software licenses, and maintenance, which grew 23% year-over-year in the third quarter and 22% for the first nine months. Professional services revenue, which makes up a smaller portion of total revenue, declined 38% in the third quarter and 31% for the first nine months compared to the same periods in the prior year.

Despite the revenue growth, Freshworks has continued to incur operating losses, though the losses have narrowed compared to the prior year. The company reported an operating loss of $38.9 million in the third quarter, compared to $38.7 million in the same period of 2023. For the first nine months of 2024, the operating loss was $114.8 million, down from $130.1 million in the same period of 2023.

Revenue and Profit Trends

Freshworks’ revenue growth has been driven by a combination of expansion within its existing customer base and the addition of new customers. The company’s net dollar retention rate, which measures its ability to retain and expand business with existing customers, was 107% as of September 30, 2024, down slightly from 108% a year earlier.

The company attributes the decline in net dollar retention primarily to lower expansion within existing customers due to macroeconomic pressures, though this was partially offset by the addition of revenue from the acquisition of Device42 in June 2024 and a slight improvement in overall customer churn rates.

While Freshworks has continued to invest in research and development, sales and marketing, and general and administrative functions to support its growth, the company has been able to improve its gross margin. Gross margin increased to 84% in the third quarter of 2024, up from 83% in the same period of 2023, as the company realized benefits from economies of scale in its third-party hosting costs.

However, the company’s operating expenses have continued to grow, increasing 18% in the third quarter and 14% for the first nine months of 2024 compared to the prior year periods. This has resulted in the company maintaining operating losses, though the losses have narrowed compared to the prior year.

Strengths and Weaknesses

One of Freshworks’ key strengths is its diversified product portfolio, which spans both customer experience (CX) and employee experience (EX) solutions. This has allowed the company to cross-sell and upsell its products to existing customers, contributing to its strong net dollar retention rate.

The acquisition of Device42 in June 2024 has also expanded Freshworks’ capabilities in the IT asset management space, providing additional growth opportunities. The company’s latest generative AI solutions, Freddy AI Agent and Freddy AI Copilot, have further enhanced the customer and employee experience offerings.

However, Freshworks continues to face macroeconomic headwinds that have impacted business spending and customer expansion. The company’s net dollar retention rate has declined, and it expects these pressures to persist in the near-term. Additionally, the company’s operating losses, while narrowing, remain a concern for investors.

Outlook and Future Prospects

Looking ahead, Freshworks remains focused on driving continued revenue growth and improving its profitability. The company has announced a restructuring plan that is expected to result in a 13% reduction in headcount and $11 million to $13 million in charges in the fourth quarter of 2024. This is aimed at better aligning the company’s talent with its strategic priorities and improving operating efficiency.

In November 2024, Freshworks’ Board of Directors also approved a $400 million share repurchase program, which the company believes will help create value for shareholders.

Despite the near-term macroeconomic challenges, Freshworks remains optimistic about its long-term prospects. The company’s diversified product portfolio, successful acquisitions, and investments in AI-powered solutions position it well to continue delivering exceptional customer and employee experiences. As the company executes on its strategic initiatives and navigates the current economic environment, investors will be closely watching Freshworks’ ability to drive sustainable profitability and create value for shareholders.

Key Metrics

Freshworks tracks several key business metrics to evaluate its performance, including:

Number of Customers Contributing More Than $5,000 in ARR As of September 30, 2024, Freshworks had 22,359 customers contributing more than $5,000 in annual recurring revenue (ARR), up 14% from 19,551 a year earlier. This metric indicates the company’s success in attracting and retaining larger business customers.

Net Dollar Retention Rate Freshworks’ net dollar retention rate, which measures the company’s ability to retain and expand business with existing customers, was 107% as of September 30, 2024, down slightly from 108% a year earlier. This decline was primarily due to lower expansion within existing customers driven by macroeconomic pressures, though it was partially offset by the addition of Device42 and a slight improvement in overall churn rates.

Non-GAAP Financial Measures In addition to its GAAP financial results, Freshworks also reports several non-GAAP financial measures, including non-GAAP income from operations, non-GAAP net income, and free cash flow. These measures exclude the impact of stock-based compensation, employer payroll taxes on employee stock transactions, and amortization of acquired intangibles, providing investors with a clearer view of the company’s underlying operating performance.

For the third quarter of 2024, Freshworks reported non-GAAP income from operations of $24.0 million and non-GAAP net income of $33.6 million, compared to $17.4 million and $25.6 million, respectively, in the same period of 2023. The company also generated $40.1 million in free cash flow during the third quarter, up from $22.1 million a year earlier.

Conclusion

Freshworks has delivered solid financial performance in the face of macroeconomic headwinds, with strong revenue growth and improving profitability. The company’s diversified product portfolio, successful acquisitions, and investments in AI-powered solutions have positioned it well for future growth.

However, the company continues to face challenges in the form of lower expansion within its existing customer base and persistent operating losses. Freshworks’ ability to navigate the current economic environment, execute on its strategic initiatives, and drive sustainable profitability will be key factors in determining its long-term success.

Overall, Freshworks remains a promising player in the customer and employee experience software market, and investors will be closely watching the company’s progress in the quarters and years ahead.