Freshworks Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 23, 2023. This is an annual report, not a standalone fourth-quarter report. Freshworks sells cloud-based SaaS products for customer experience, IT service management, sales, and marketing.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $498.0 million | $371.0 million |
| Revenue growth | 34% | 49% |
| Gross profit / margin | $402.2 million / 81% | $293.0 million / 79% |
| Operating loss / margin | $233.4 million / 47% | $204.8 million / 55% |
| Net loss | $232.1 million | $192.0 million |
| Operating cash flow | $(2.5) million | $11.5 million |
| Free cash flow | $(14.8) million | $2.3 million |
| Cash and cash equivalents | $304.1 million | $747.9 million |
| Marketable securities | $843.4 million | $575.7 million |
Subscription revenue was $485.3 million, up 35%; professional services revenue was $12.7 million. Operating expenses rose 28% to $635.6 million, led by sales and marketing spending of $343.2 million. Stock-based compensation was $207.7 million, a substantial component of reported expenses. The company reported no borrowings in the balance-sheet information provided; total liabilities were $328.4 million, including deferred revenue, leases, and other liabilities.
At year-end, remaining performance obligations were $301.5 million, including $205.6 million deferred revenue and $95.9 million unbilled revenue; $234.7 million was expected to be recognized within 12 months. Contractual commitments totaled $140.0 million, comprising $34.9 million of operating lease obligations and $105.1 million of other commitments.
Material changes and operating indicators
- Revenue growth slowed to 34% from 49% in 2021. Growth came from both existing customers and new customers; approximately $94.9 million of the increase was attributed to existing customers, net of contraction and churn, and $32.1 million to new customers, net of contraction and churn.
- Net dollar retention fell to 108% from 114%. Paying customers increased to more than 63,400 from more than 56,000. Customers contributing over $5,000 in ARR rose to 17,722 from 14,814.
- Gross margin improved to 81% from 79%, which management attributed partly to hosting-cost economies of scale.
- Operating loss widened by $28.6 million, while net loss increased by $40.1 million. Operating cash flow shifted from positive $11.5 million to negative $2.5 million; free cash flow shifted from positive $2.3 million to negative $14.8 million.
- Cash and cash equivalents declined substantially, while marketable securities increased. The company said operating cash outflow reflected the net loss, partly offset by noncash stock compensation and deferred revenue growth.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided in the filing. Management expects continued investment in product development, sales and marketing, and international expansion; it also says it expects to continue operating at a loss and does not expect near-term profitability.
- Management believes cash, cash equivalents, and marketable securities are sufficient for working capital and capital expenditure needs for at least the next 12 months. Longer-term needs may be funded by operating cash flow or additional equity or debt financing.
- Management cited macroeconomic uncertainty, inflation, geopolitical conditions, COVID-19 impacts, and foreign-exchange movements as risks. A stronger U.S. dollar negatively affected 2022 revenue growth; approximately 26% of revenue had Euro and British Pound exposure. The company began using Indian-rupee forward contracts in 2023 to hedge a portion of forecast expenses.
- Other significant risks include subscription renewal and customer retention, intense competition, cybersecurity and service availability, dependence on AWS, privacy regulation, and substantial operations in India. The company reported that about 85% of employees were based in India and 57% of revenue came from outside North America.
- Stock-based compensation was $207.7 million. The 2021 IPO triggered recognition of substantial stock compensation in that year, limiting comparability; 2022 also included substantial equity-award tax withholding cash payments of $167.2 million.
- In November 2022, a purported stockholder filed a securities class action alleging misstatements or omissions in IPO offering documents. Damages sought are unspecified; the company intends to defend the case. Management said it did not believe other pending legal matters would materially affect the financial statements.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. No material weakness was reported.
Investor facts to verify
- Whether slowing revenue growth and the decline in net dollar retention continue, particularly amid customer churn and contraction.
- How much of reported and future profitability depends on stock-based compensation adjustments; FY2022 GAAP net loss was $232.1 million versus non-GAAP net loss of $19.0 million.
- Whether cash generation improves, given negative FY2022 operating cash flow and free cash flow, and how the company deploys its $1.15 billion of cash and marketable securities.
- Potential dilution from outstanding equity awards: unrecognized stock-based compensation was $558.1 million, and 102.1 million shares were reserved for issuance at year-end.
- Developments in the IPO securities litigation, foreign-exchange exposure and hedging, and the company’s reliance on AWS and India-based operations.