Freshworks Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Freshworks provides cloud-based SaaS products for customer experience, IT service management, and CRM. Comparisons are year over year unless noted.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $114.6 million | $80.6 million | Up 42%; subscription revenue was $111.4 million, up 43%. |
| Gross profit / margin | $92.2 million / 80% | $63.9 million / 79% | Margin improved 1 percentage point. |
| Operating expenses | $139.4 million | $65.6 million | Up 112%, including $46.6 million of stock-based compensation. |
| Operating loss | $47.1 million | $1.7 million | Operating margin was -41%, versus -2%. |
| Net loss | $49.1 million | $2.4 million | Net margin was -43%, versus -3%. |
| Operating cash flow / free cash flow | $1.4 million / -$1.4 million | $7.8 million / $4.8 million | Free cash flow reflects operating cash flow less property and equipment purchases and capitalized software. |
Revenue growth was attributed to expansion within existing customers, additional products and new customers. Customers contributing more than $5,000 in ARR grew 27% to 15,639; net dollar retention was 115%, versus 112%. Gross-margin improvement reflected scale benefits in hosting costs. Operating expense growth reflected higher headcount and post-IPO stock compensation.
Liquidity, balance sheet and obligations
- At March 31, 2022, cash and cash equivalents were $603.5 million and marketable securities were $594.3 million, totaling approximately $1.20 billion. Total current assets were $1.30 billion; current liabilities were $231.7 million.
- Accumulated deficit was $3.32 billion. The balance sheet reports no borrowings; it does report operating lease liabilities of $31.5 million, including $4.5 million current.
- Cash, cash equivalents and restricted cash fell $144.3 million during the quarter, principally reflecting $119.9 million paid for tax withholding on net share settlement of equity awards. Financing cash outflow totaled $120.0 million.
- Remaining performance obligations were $251.6 million, including $174.4 million deferred revenue and $77.2 million unbilled amounts; $196.0 million was expected to be recognized within 12 months.
- Estimated future contractual obligations totaled $165.1 million: $31.5 million of lease commitments and $133.6 million under other contractual commitments, primarily cloud infrastructure and service subscriptions.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in this filing. Management expects continued investment in research and development, sales and marketing, customer acquisition and retention, and higher operating expenses in dollar terms. It expects existing cash, cash equivalents and marketable securities to meet working-capital and capital-expenditure needs for at least 12 months.
- Management noted uncertainty from COVID-19, inflation, labor shortages and geopolitical conflicts, which could affect demand, sales cycles, customer spending, collections and retention. The company relies primarily on Amazon Web Services for cloud infrastructure.
- Cash and marketable securities are exposed to interest-rate and foreign-exchange risks. Available-for-sale securities recorded a $3.6 million unrealized loss in other comprehensive income. The company stated that a hypothetical 10% interest-rate movement would not materially affect their combined market value.
- Stock-based compensation was a significant unusual comparison factor: $46.6 million in Q1 2022 versus none reported in Q1 2021. A CEO performance-based award had $131.0 million grant-date fair value; $6.9 million of related expense was recognized in the quarter. Unrecognized stock compensation totaled $565.0 million, subject to future recognition.
- Freshworks adopted lease accounting in January 2022, recognizing $24.3 million of operating right-of-use assets and $28.8 million of lease liabilities on adoption; comparative periods were not restated. It reported no pending legal proceedings believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Investor verification priorities
- Track whether 42% revenue growth, 115% net dollar retention and customer expansion continue, and how much growth comes from existing versus new customers.
- Assess the sustainability of operating losses and cash generation, including the impact of stock compensation, hiring and post-IPO award-related tax withholding.
- Monitor liquidity and the timing and value of marketable securities, as well as the $133.6 million of other contractual commitments and operating lease payments.
- Review future expense and margin trends against management’s stated investment plans; this filing provides no formal numerical guidance.
- Evaluate exposure to AWS, macroeconomic conditions, foreign exchange and interest rates, and the potential realization and timing of remaining performance obligations.