Freshworks Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Freshworks provides cloud-based SaaS products for customer experience, IT service management, sales and marketing, and messaging. This unaudited report covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $153.6 million | $128.8 million | $436.3 million | $364.8 million |
| Gross margin | 83% | 81% | 82% | 81% |
| Operating loss | $38.7 million | $58.3 million | $130.1 million | $172.8 million |
| Net loss | $31.0 million | $57.8 million | $109.4 million | $176.7 million |
| GAAP net loss per share, diluted | $0.11 | $0.20 | $0.37 | $0.62 |
| Operating cash flow | $23.9 million | $(4.2) million | $55.3 million | $(9.7) million |
| Free cash flow (non-GAAP) | $22.1 million | $(7.2) million | $49.2 million | $(18.8) million |
Q3 revenue grew 19% year over year, driven by subscription services, up 20%; nine-month revenue grew 20%. Q3 GAAP gross margin was approximately 83%, while operating and net margins were approximately negative 25% and negative 20%, respectively. Nine-month net loss narrowed year over year. Non-GAAP operating income was $17.4 million in Q3 and $33.0 million for the nine months; non-GAAP net income was $25.6 million and $55.4 million, respectively. These non-GAAP measures exclude stock-based compensation and other specified items.
Stock-based compensation was $55.1 million in Q3 and $160.1 million for the nine months, a significant non-cash expense. Interest and other income was $11.0 million in Q3 and $31.7 million for the nine months, substantially above prior-year levels, largely reflecting interest earned on investments and higher average rates.
Financial position and liquidity
At September 30, 2023, Freshworks reported cash and cash equivalents of $458.2 million and marketable securities of $706.5 million, or approximately $1.165 billion combined. Current assets were $1.320 billion and current liabilities were $305.7 million. Deferred revenue was $246.1 million. The balance sheet reports no borrowings; it does report operating lease liabilities, including $30.8 million in total present-value lease obligations. The company had an accumulated deficit of $3.6 billion.
For the first nine months, investing activities provided $146.3 million, mainly reflecting net maturities and purchases of marketable securities; financing activities used $47.4 million, primarily for taxes withheld on equity award settlements. Management stated that existing cash, cash equivalents and marketable securities should meet working-capital and capital-expenditure needs for at least the next 12 months.
Material changes and operating indicators
- Q3 gross margin improved to 83% from 81%, as revenue growth and scale benefits outweighed higher hosting, software-license and internal-use software costs.
- Operating expenses rose 2% in Q3 and 5% for the nine-month period. Management attributed the nine-month increase mainly to personnel costs, partly offset by lower advertising, marketing and branding expenses.
- Customers contributing more than $5,000 in ARR increased 17% to 19,551. They represented 88% of ARR, versus 86% a year earlier.
- Net dollar retention was 108%, versus 107% a year earlier; on a constant-currency basis it was 106%. Management cited lower expansion among existing customers, primarily due to macroeconomic pressures. Monthly subscriptions accounted for 18% of ARR, down from 21%.
- Remaining performance obligations were $375.8 million, including $246.1 million deferred revenue and $129.7 million unbilled revenue; $285.0 million was expected to be recognized within 12 months.
Outlook, risks and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management expects cost of revenue and operating expenses to rise in dollars as the company invests in infrastructure, product development, sales and marketing, and public-company functions; it expects these expenses to decline as a percentage of revenue over the longer term. Management cautions that subscription-based revenue may delay the effects of macroeconomic conditions.
Risks highlighted include uncertain business spending and macroeconomic conditions, foreign-exchange volatility, competition, and reliance on Amazon Web Services for cloud infrastructure. Approximately 27% of revenue was exposed to the Euro and British Pound in Q3. The company had $49.4 million of Indian-rupee forward contracts outstanding; derivative fair values and related gains or losses were not material. Its securities portfolio had $4.3 million of gross unrealized losses at quarter end, and management reported no material sensitivity from its specified 100-basis-point interest-rate scenario.
A securities class action related to alleged IPO offering-document misstatements survived in part a motion to dismiss on September 28, 2023; the company stated it would defend the remaining claims. A related derivative action was stayed. The complaints seek unspecified damages and other relief; the filing does not provide a clear estimate of potential loss. Other contractual commitments totaled $73.7 million through 2025, in addition to lease obligations.
Important facts for investors to verify
- Whether revenue growth and customer additions continue, and whether constant-currency retention stabilizes or improves.
- How much of the GAAP loss and operating-cost profile is driven by recurring stock-based compensation, and how non-GAAP results reconcile to GAAP.
- Whether positive operating cash flow and free cash flow are sustained, including the contribution from deferred revenue and working-capital movements.
- Changes in investment balances, unrealized securities losses, interest income, and foreign-exchange exposure.
- Developments in the IPO-related litigation, cloud-provider dependence, and the company’s stated liquidity outlook and contractual commitments.