Freshworks' next big milestone: operational profitability by year's end

Freshworks is aiming to become profitable at the operating level in the fourth quarter, mainly due to new deals with significant revenue contribution and higher business flowing in from the mid-market and enterprise segments.

The company also turned free cash flow positive by the last quarter of 2022—$4 million as against $2.8 million in the fourth quarter of 2021, Chief Financial Officer Tyler Sloat said in an earnings call.

That said, the San Mateo-based software-as-a-service company expects revenue in the ongoing first quarter to be nearly unchanged at $133 million to $135 million from the preceding the December quarter, owing to the current slowdown in the tech spending.

But it expects the situation to improve, projecting a 15-18% increase in revenue to $575 million to $590 million for the full year.

"As we head into 2023, we're driving additional efficiencies to show quarter-over-quarter improvement throughout the year," said Tyler.

"And we plan to maintain sustained profitability in the years ahead,” he said, adding that the management was providing their best views as they see things today.

Freshworks expects non-GAAP operating loss to improve to negative $6 million in Q2, near breakeven in Q3, and then turn positive by Q4.

Foreign exchange pressures resulted in a negative impact on Freshworks’ revenue and billing metrics on an annual basis. The SaaS firm said it started hedging a small portion of its Indian currency-based expenses in January and it expected its impact to increase over the next 11 months, which will help “improve the predictability for operating expenses moving forward”.

“The company is going to cross several positive financial metrics this year. They are going to be profitable exiting the calendar year of 2023 for the first time," said Scott Berg, Managing Director/Senior Research Analyst, Needham & Company, an investment banking and asset management firm.

"They are going to generate positive free cash flow for the entire year. Those are two metrics investors will be very happy with,” he added.

Q4 of 2022

For the last quarter of 2022, Freshworks posted revenue of $133.2 million, registering a 26% growth compared to the same period last year. During this quarter, Freshworks surpassed the $500-million ARR mark for the first time.

The company's total revenue for the calendar year 2022 was just shy of the $500-million-mark (at $498 million), a 34% increase from the previous year.

The only SaaS company with Indian roots to be listed on the NASDAQ, Freshworks said its net loss for the three months ended December 2022 had narrowed by 25.7% to $55.5 million from $74.7 million in the same quarter a year ago. However, for the entire 2022 year, its net loss widened by 20.9% to $232.1 million from nearly $192 million in 2021.

Net income (loss) per share was $0.01 (based on 292.2 million weighted-average shares outstanding) in the quarter ended December 2022 compared to -$0.06 (based on 269.5 million weighted-average shares outstanding) in the fourth quarter of 2021.

Factors for growth

The company said it has improved its business efficiency as suggested by its guidance on free cash flow numbers as well as net cash from operating activities, which improved to $7.2 million in the October-December quarter compared to $4.8 million in the same period last year.

One of the factors that seems to have helped Freshworks to face the slowing economic conditions and other headwinds is that larger customers are taking to SaaS solutions, even as small and medium businesses struggle with sluggish growth and shrinking balance sheets.

In the earnings call, Dennis Woodside, who joined Freshworks as president in September to lead the company’s global business operations and strategy, said customers contributing over $50,000 in ARR grew 35% on an annual basis, accounting for 44% of Freshworks’ business.

He also said mid-market companies with 251-5,000 employees and enterprise firms with over 5,000 employees account for nearly 60% of the firm’s business. The number of customers that contributed over $5,000 in ARR grew 20% on a year-on-year basis to 17,722 in the fourth quarter of 2022.

Freshworks’ net dollar retention, a metric that indicates the percentage of revenue a company retains from its existing customers over a period of time, dropped to 108% in the December quarter of 2022 compared to 114% in the same period last year.

Freshworks’ share price closed at $16.39, up 0.74%. In the after-hours, it went up by 0.67% to $16.5 apiece.

(The copy was updated with information on the company's ARR and net income per share.)

Disclaimer: As a former employee of Freshworks, the writer holds a few shares (converted as part of the employee stock options) of the company and the reporting has been done in an independent manner.