Freshworks Inc. Q1 FY2024 earnings

Freshworks reported first quarter revenue of $165.1 million, up 19.9% from $137.7 million in the prior-year quarter. Growth was 19% after adjusting for constant currency. Gross profit rose 23.8% to $139.3 million, and gross margin expanded to 84.3% from 81.7%. The company is still unprofitable on a GAAP basis, but the losses are shrinking. Operating loss was $32.2 million, narrower than the $48.1 million loss a year earlier, and operating margin improved to -19.5% from -34.9%. Net loss was $23.3 million versus $42.7 million, and diluted loss per share was $0.08 compared with $0.15.

Cash generation was the strongest part of the quarter. Operating cash flow was $40.6 million, up from $11.5 million a year earlier. Free cash flow, which the company defines as operating cash flow less purchases of property and equipment and capitalized internal-use software, was $38.7 million versus $9.1 million. Capital expenditures were $0.7 million, up from $0.4 million. On a non-GAAP basis, income from operations was $21.8 million compared with $3.9 million, and non-GAAP diluted net income per share was $0.10 versus $0.03. The gap between the two sets of numbers stays wide because the non-GAAP figures exclude stock-based compensation, employer payroll taxes on employee stock transactions, and amortization of acquired intangibles.

The customer base kept moving upmarket. Customers contributing more than $5,000 in annual recurring revenue totaled 20,549, an increase of 11% year over year, and that group accounted for 89% of total ARR, up from 87%. Net dollar retention rate was 106%, down from 107% a year earlier and 108% in the fourth quarter of 2023. Management tied the decline to lower expansion within existing customers as macroeconomic pressures weighed on spending. Deferred revenue was $275.9 million, up 25.1%, and remaining performance obligations were $435.4 million, up 33.7%. Subscription revenue rose 21% to $162.6 million, while professional services revenue fell 30% to $2.6 million. Of the total revenue increase, roughly $12.5 million came from existing customers and roughly $15.0 million from new customers. Monthly subscriptions represented 16% of ARR, down from 19% a year earlier.

Guidance for the second quarter of 2024 calls for year-over-year revenue growth of 16% to 17%, non-GAAP income from operations of $6.5 million to $8.5 million, and non-GAAP net income per share of $0.05 to $0.06. For the full year 2024, the company guided to revenue growth of 17% to 18%, non-GAAP income from operations of $58.0 million to $64.0 million, and non-GAAP net income per share of $0.32 to $0.35. The outlook assumes exchange rates as of April 26, 2024 for currencies other than the U.S. dollar.

Two corporate actions frame the rest of the year. Founder Girish Mathrubootham moved from chief executive to Executive Chairman, and Dennis Woodside became CEO and President. The company also signed a definitive agreement to acquire Device42, an IT asset management company with more than 800 customers in over 60 countries, for $230 million. The deal is meant to strengthen the IT service management offering for mid-market and enterprise buyers. Risks include macroeconomic uncertainty, inflationary pressure, and foreign currency volatility. About 28% of revenue was exposed to the Euro and British Pound in the quarter, up from 26% a year earlier. Freshworks also carries a history of net losses, and management noted it may seek additional equity or debt financing for acquisitions, which could dilute stockholders.