Business software provider Freshworks (NASDAQ: FRSH) announced better-than-expected revenue in Q4 CY2024, with sales up 21.5% year on year to $194.6 million. The company expects next quarter’s revenue to be around $191.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.14 per share was 37.5% above analysts’ consensus estimates.
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Freshworks (FRSH) Q4 CY2024 Highlights:
- Revenue: $194.6 million vs analyst estimates of $189.5 million (21.5% year-on-year growth, 2.7% beat)
- Adjusted EPS: $0.14 vs analyst estimates of $0.10 (37.5% beat)
- Adjusted Operating Income: $40.31 million vs analyst estimates of $23.3 million (20.7% margin, 73% beat)
- Management’s revenue guidance for the upcoming financial year 2025 is $815 million at the midpoint, in line with analyst expectations and implying 13.1% growth (vs 20.7% in FY2024)
- Adjusted EPS guidance for the upcoming financial year 2025 is $0.53 at the midpoint, beating analyst estimates by 2.1%
- Operating Margin: -12.2%, up from -25% in the same quarter last year
- Free Cash Flow Margin: 21.4%, similar to the previous quarter
- Customers: 22,558 customers paying more than $5,000 annually
- Net Revenue Retention Rate: 103%, down from 107% in the previous quarter
- Market Capitalization: $5.54 billion
“Freshworks outperformed its previously provided estimates again in Q4 across all our key metrics, delivering another strong quarter with revenue growing 22% year over year to $194.6 million, operating cash flow margin of 21%, and an adjusted free cash flow margin of 21%,” said Dennis Woodside, Chief Executive Officer & President of Freshworks.
Company Overview
Founded in Chennai, India in 2010 with the idea of creating a “fresh” helpdesk product, Freshworks (NASDAQ: FRSH) offers a broad range of software targeted at small and medium-sized businesses.
Sales Software
Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrates data analytics with sales and marketing functions.
Sales Growth
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Freshworks grew its sales at a solid 24.8% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.
This quarter, Freshworks reported robust year-on-year revenue growth of 21.5%, and its $194.6 million of revenue topped Wall Street estimates by 2.7%. Company management is currently guiding for a 16% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 13.2% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is admirable and indicates the market is factoring in success for its products and services.
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Customer Retention
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
Freshworks’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 106% in Q4. This means Freshworks would’ve grown its revenue by 5.5% even if it didn’t win any new customers over the last 12 months.
Despite falling over the last year, Freshworks still has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
Key Takeaways from Freshworks’s Q4 Results
Revenue beat and operating profit beat even more convincingly in the quarter. We were impressed by Freshworks’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance came in higher than Wall Street’s estimates. Zooming out, we think this was a decent quarter featuring some key areas of strength. The stock traded up 11.8% to $19.97 immediately after reporting.
Is Freshworks an attractive investment opportunity right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
