Freshworks Inc. Q3 FY2021 earnings

We have incurred net losses in each fiscal year since founding and do not expect to be profitable in the near future. For FY2021 year to date, net loss widened to $117.3 million from $55.8 million and operating loss widened to $148.4 million from $52.7 million. As of September 30, 2021, accumulated deficit was $3.2 billion, and FY2021 Q3 gross margin decreased to 77.0% from 80.1%, which MD&A attributes to stock-based compensation and related taxes incurred in connection with the IPO.

In April 2021, a third-party vendor Codecov suffered unauthorized access, and through our investigation we determined a threat actor obtained access to credentials in our development environment and copied our source code and a limited amount of customer information. New information about scope or impact could result in litigation, liability, brand and reputation damage, and diversion of management attention.

The COVID-19 pandemic has disrupted operations and reduced productivity in the U.S. and India, where we have significant operations. It caused elevated churn and lower 2020 revenue from small and medium-sized customers in travel, hospitality, entertainment, and retail, and could reduce subscription value or duration, collections, and customer spending. MD&A notes sales and marketing travel costs decreased due to the pandemic and curtailment of in-person marketing events.

The market for customer experience, IT service management, and customer relationship management products is highly competitive and faces large competitors including Salesforce, Zendesk, Oracle, SAP, ServiceNow, BMC, Atlassian, HubSpot, and Microsoft Dynamics. Competitors may have greater resources, aggressive pricing, or offer price concessions during the COVID-19 pandemic, which could reduce our revenue, gross margin, and market share.

Sales to large customers involve longer sales cycles, more complex requirements, and substantial upfront costs. Our typical sales cycle is approximately 90 days for enterprise and mid-market customers versus 30 days for small- and mid-sized business customers, and large customers may demand pricing discounts or onerous terms with no guarantee of recouping upfront investment.

We must attract and retain highly qualified personnel in intensely competitive markets, including the San Francisco Bay Area and India. Post-IPO equity awards may be less effective as incentives, recruiting may be limited by immigration and travel restrictions, and we must maintain our reputation as a premier employer in India.

A substantial portion of our business and operations are located in India, subjecting us to regulatory, economic, social, and political uncertainties. Indian foreign exchange controls regulate borrowing in foreign currencies and could constrain financing, and COVID-19 has caused productivity losses in India where we have significant operations.

We derive, and expect to continue to derive, substantially all revenue from Freshdesk, Freshservice, and Freshsales. A decline in demand for these products, or failure to keep pace with CX, ITSM, or CRM trends, would harm our business.

Amazon Web Services provides the vast majority of our cloud computing infrastructure, and our commercial agreement may be terminated by AWS for convenience with at least two years' prior written notice or for cause under certain conditions. Any significant disruption or limitation of AWS access could harm operations and require significant time and expense to transition.

MD&A states that we expect our net dollar retention rate may decrease from the 117% level as of September 30, 2021 and could fluctuate in future periods. This could result from growth, penetration within our customer base, ability to upsell and cross-sell, and ability to retain customers.