Freshworks (NASDAQ:FRSH) Q3 Revenue Beats Expectations, Shares Rise 16.9%

Business software provider Freshworks (NASDAQ: FRSH) reported third-quarter 2024 results that exceeded market revenue expectations, with revenue up 21.5% year over year to $186.6 million. The company expects revenue next quarter to be around $189.3 million, close to analyst estimates. Non-GAAP earnings of $0.11 per share were also 41.5% above analyst consensus estimates.

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• Gain: $186.6 million vs. analyst estimates of $181.7 million (2.7% better)

• Custom EPS: $0.11 vs. analyst estimates of $0.08 (41.5% better)

• Adjusted operating result: $23.96 million vs. analyst estimates of $14.31 million (67.5% better)

• Revenue guidance for Q4 CY2024 is $189.3 million in the middle, about in line with what analysts expected

• The adjusted full-year EPS guidance is $0.39 in the middle, beating analyst estimates by 15.3%

• Gross margin (GAAP): 84%, compared to 82.9% in the same quarter last year

• Operating margin: -20.8%, compared to -25.2% in the same quarter last year

• Free cash flow margin: 21.5%, compared to 18.8% in the previous quarter

• Net Revenue Retention Rate: 107%, compared to 106% in the previous quarter

• Customers: 22,359 customers pay more than $5,000 annually

• Market capitalization: $3.76 billion

“Freshworks delivered a strong third quarter, with revenue growth of 22% year over year to $186.6 million, net cash from operations improving to 23% and free cash flow margin improving to 21%,” said Dennis Woodside, CEO and President. from Freshworks.

Founded in Chennai, India in 2010 with the idea of ​​creating a “new” helpdesk product, Freshworks (NASDAQ: FRSH) offers a wide range of software aimed at small and medium-sized businesses.

Companies must be able to communicate with their customers and sell to their customers as efficiently as possible. This reality, coupled with the continued migration of enterprises to the cloud, is driving demand for cloud-based CRM (Customer Relationship Management) software that integrates data analytics with sales and marketing functions.

A company’s long-term performance is an indicator of overall business quality. While any company can experience short-term success, the best performers can experience sustained growth for several years. Fortunately, Freshworks’ 26.5% annualized revenue growth over the past three years has been solid. This is a good starting point for our analysis.

This quarter, Freshworks reported robust year-over-year revenue growth of 21.5%, and revenue of $186.6 million exceeded Wall Street estimates by 2.7%. Management currently expects an 18.2% year-over-year increase next quarter.

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Looking further ahead, sell-side analysts expect revenue to grow 16.5% over the next twelve months, a slowdown from the past three years. Still, this forecast is commendable and shows that the market is achieving success with its products and services.

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One of the best parts of the software-as-a-service business model (and one reason they trade at high valuations) is that customers typically spend more on a company’s products and services over time.

Freshworks’ net revenue retention, a key performance metric that measures how much money existing customers from a year ago are spending today, was 107% in the third quarter. This means that even if Freshworks had not won any new customers in the last twelve months, revenue would have increased by 6.7%.

Freshworks has a decent net retention rate, which shows us that its customers not only tend to stick around, but also get more and more value from the software over time.

We were impressed by Freshworks’ optimistic full-year EPS forecast, which exceeded analyst expectations. We were also pleased that revenue and earnings per share exceeded Wall Street expectations this quarter. Overall, this was a good quarter. The stock rose 16.9% to $15.30 immediately after the report.

Should you buy the shares or not? What happened in the last quarter matters, but not as much as business quality and longer-term valuation, when deciding whether to invest in this stock. We cover that in our useful full research report which you can read here. It’s free.