Freshworks Inc. — Q2 2022 Form 10-Q
Business context and period: Freshworks provides cloud-based SaaS products for customer experience, IT service management, sales and marketing. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $121.4 | $88.3 | $236.1 | $168.9 |
| Gross profit / margin | $97.4 / 80% | $69.6 / 79% | $189.6 / 80% | $133.5 / 79% |
| Operating loss | $(67.4) | $(6.4) | $(114.5) | $(8.2) |
| Net loss | $(69.8) | $(7.4) | $(118.8) | $(9.8) |
| Non-GAAP net loss | $(17.6) | $(6.4) | $(19.7) | $(7.7) |
| Operating cash flow | $(6.8) | $0.9 | $(5.5) | $8.7 |
| Free cash flow | $(10.2) | $(1.1) | $(11.6) | $3.7 |
Revenue grew 37% year over year in Q2 and 40% in H1. Subscription services generated $118.4 million of Q2 revenue; professional services contributed $3.0 million. Q2 operating expenses rose 117% to $164.7 million, including $50.1 million of stock-based compensation (SBC). H1 SBC expense was $96.8 million. The prior-year Q2 and H1 net losses attributable to common stockholders were unusually affected by preferred-stock accretion; that accretion did not recur in 2022.
Liquidity, capital and operating indicators
- At June 30, 2022, cash and cash equivalents were $590.1 million and marketable securities were $584.0 million, totaling approximately $1.17 billion. Total assets were $1.38 billion and total liabilities $298.7 million.
- The balance sheet reports no interest-bearing debt. Current liabilities were $248.3 million, including $182.8 million of deferred revenue. Management said existing cash, cash equivalents and marketable securities should cover working capital and capital expenditure needs for at least 12 months.
- Cash declined by $157.7 million during H1. Financing cash outflow was $131.4 million, primarily due to $138.3 million of tax withholding on net-settled equity awards, including IPO-related RSU settlements.
- Customers contributing more than $5,000 in ARR increased 22% to 16,212. Net dollar retention was 111%, down from 118% a year earlier.
- Remaining performance obligations were $266.8 million, of which $207.5 million was expected to be recognized as revenue in the next 12 months. The filing cautions that this balance is not necessarily a reliable indicator of future revenue.
Changes, outlook and risks
- Growth remained strong, but operating and net losses widened substantially as R&D, sales and marketing, and G&A spending increased. Management attributed expense growth principally to higher headcount, compensation, post-IPO SBC, sales and marketing activity, and public-company costs. Gross margin improved one percentage point to 80%.
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in product development, customer acquisition and retention, and infrastructure; expenses are expected to rise in dollars. Longer-term profitability is not assured.
- Unrecognized SBC expense was $631.6 million at quarter-end, expected to be recognized over a weighted-average 3.2 years for RSUs and PRSUs and 1.1 years for ESPP awards. The CEO’s performance award has a $131.0 million grant-date fair value and vesting conditions extending through 2029.
- Macroeconomic risks cited include inflation, market volatility, geopolitical conflict, foreign-exchange movements and continuing uncertainty from COVID-19. These could affect demand, sales cycles, collections, customer spending and retention. The company also relies primarily on Amazon Web Services for cloud infrastructure.
- Marketable securities were exposed to interest-rate changes; unrealized losses on available-for-sale securities were $6.3 million at June 30. The company reported no foreign-exchange hedging transactions. Contractual commitments included $123.2 million for cloud infrastructure and service subscriptions and $31.4 million for operating leases. No pending legal proceeding was identified as likely to have a material adverse effect.
- The company adopted lease accounting Topic 842 on January 1, 2022, recognizing operating lease assets and liabilities; comparative periods were not restated. Management reported disclosure controls effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether customer growth and retention stabilize or improve, particularly given NDR’s decline to 111%.
- How much of the widening GAAP loss reflects recurring operating costs versus SBC, and the future effect of the substantial unrecognized SBC balance on expenses and share dilution.
- Whether revenue growth converts into improved operating cash flow and free cash flow; H1 operating cash flow and free cash flow were both negative.
- Liquidity trajectory after equity-award tax withholding, and the timing and use of remaining cash and marketable securities.
- Potential impact of macroeconomic conditions, foreign exchange, cloud-provider concentration, and contractual commitments on results and cash needs.