Freshworks Reports Third Quarter 2021 Results

22

 – Total revenue grew 46% year-over-year

 – Net dollar retention rate of 117%, up 8 percentage points year-over-year

Girish Mathrubootham, CEO and Founder, Freshworks

Dubai, United Arab Emirates: Freshworks Inc. (NASDAQ: FRSH), a leading software company empowering businesses to delight their customers and employees, announced financial results for its third quarter ended September 30, 2021.

“Our strong third quarter results reflect the continued adoption of our modern and easy-to-use products by companies of all sizes,” said Girish Mathrubootham, CEO and founder of Freshworks. “We grew 46% year over year, and saw healthy expansion activity from our customer base.”

Third Quarter 2021 Financial Summary Results

Revenue: Total revenue was $96.6 million, representing growth of 46% compared to the third quarter of 2020.

GAAP (Loss) Income from Operations: GAAP (loss) from operations was $(140.3) million, compared to GAAP income from operations of $0.1 million in the third quarter of 2020.

Non-GAAP (Loss) Income from Operations: Non-GAAP (loss) from operations was $(1.5) million, compared to non-GAAP income from operations of $1.2 million in the third quarter of 2020.

GAAP Net (Loss) Per Share: GAAP net (loss) per share was $(24.72) based on 95.9 million weighted-average shares outstanding, compared to $(3.49) based on 76.9 million weighted-average shares outstanding in the third quarter of  2020.

Non-GAAP Net (Loss) Income Per Share: Non-GAAP basic and diluted net (loss) per share was $(0.04) based on 95.9 million weighted-average shares outstanding; compared to a non-GAAP basic and diluted net income per share of $0.03 and $0.01, respectively, based on 76.9 million and 233.6 million weighted-average shares outstanding, respectively, in the third quarter of 2020.

Net Cash (Used in) Provided by Operating Activities: Net cash (used in) operating activities was $(2.0) million, compared to net cash provided by operating activities of $12.8 million in the third quarter of 2020.

Free Cash Flow: Free cash flow was $(4.2) million, compared to $10.3 million in the third quarter of 2020.

Cash, Cash Equivalents and Restricted Cash and Marketable Securities: Cash, cash equivalents, and restricted cash and marketable securities were $1.3 billion as of September 30, 2021.

A description of non-GAAP financial measures is contained in the section titled “Explanation of Non-GAAP Financial Measures” below and a reconciliation of GAAP to non-GAAP financial measures is contained in the tables below. 

Third Quarter Key Metrics and Recent Business Highlights 

 – Number of customers contributing more than $5,000 in ARR was 14,079, an increase of 31% year-over-year.

 – Net dollar retention rate was 117%, compared to 118% in the second quarter of 2021 and 109% in the third quarter of 2020.

 – Completed an Initial Public Offering and listed as FRSH on NASDAQ.

 – Welcomed new customers to the Freshworks community including: Double Diamond Resorts, ForgeRock, Hunter College NY, Lucidworks, Phillips, Scotch and Soda, Smashburger, Toyota Connected India, Watsons, and more.

 – Included in the 2021 Gartner Magic Quadrant for IT Service Management (ITSM) Tools as a “Challenger”.

 – Promoted  Pam Sergeeff as its Chief Legal Officer & General Counsel.

 – Appointed former CEO of NetSuite, Zach Nelson, and  SVP and Chief Product Officer at Cloudflare, Jennifer Taylor, to the board of directors.

 – Announced Refresh, the Freshworks annual user conference, to be held November 11, with customer speakers from African Bank, Carrefour, Clopay, Dwyer, PowerSchool, Shopify, and more.

 – Realized gain from an equity investment in a private company resulting in cash proceeds of $24 million.

Financial Outlook

We are providing estimates for the fourth quarter and full year 2021 based on current market conditions and expectations. We emphasize that these estimates are subject to various important cautionary factors referenced in the section entitled “Forward-Looking Statements” below, including risks and uncertainties associated with the ongoing COVID-19 pandemic.

For the fourth quarter and full year 2021, Freshworks currently expects the following results:

Fourth Quarter 2021

Total revenue of $99.0 million – $101.0 million

Non-GAAP loss from operations of $13.5 million – $11.5 million

Non-GAAP net loss per share(1) of $0.07 – $0.05

Full Year 2021

Total revenue of $364.5 million – $366.5 million

Non-GAAP loss from operations of $21.0 million – $19.0 million

Non-GAAP net loss per share(1) of $0.22 – $0.20

(1) Non-GAAP net loss per share was estimated assuming 269.1 million and 130.4 million weighted-average shares outstanding for the fourth quarter and full year 2021, respectively.

These statements are forward-looking and actual results may differ materially. Refer to the “Forward-Looking Statements” safe harbor section below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Freshworks has not reconciled its estimates for non-GAAP loss from operations to GAAP loss from operations or non-GAAP net loss per share to GAAP net loss per share due to the uncertainty and potential variability of expenses that may be incurred in the future. Accordingly, a reconciliation is not available without unreasonable effort. Freshworks has provided a reconciliation of other GAAP to non-GAAP financial measures in the financial statement tables for its third quarter 2021 non-GAAP results included in this press release.

Explanation of Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), this press release and the accompanying tables contain non-GAAP financial measures, including, non-GAAP gross profit, non-GAAP gross margin, non-GAAP sales and marketing expense, non-GAAP research and development expense, non-GAAP general and administrative expense, non-GAAP loss from operations, non-GAAP operating margin, non-GAAP net loss, non-GAAP net loss per share, non-GAAP net loss attributable to common stockholders, and free cash flow. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP.

We use these non-GAAP measures in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We believe these non-GAAP measures provide investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of our operating results. We believe these non-GAAP measures are useful in evaluating our operating performance compared to that of other companies in our industry, as they generally eliminate the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. The non-GAAP measures we use may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. We compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures.

We exclude the following items from one or more of our non-GAAP financial measures, including the related income tax effect of these adjustments:

 – Stock-based compensation expense. We exclude stock-based compensation, which is a non cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. In particular, stock-based compensation expense is not comparable across companies given the variety of valuation methodologies and subjective assumptions.

 – Employer payroll taxes on employee stock transactions. We exclude the amount of employer payroll taxes on stock-based compensation because they are dependent on our stock price at the time of vesting or exercise and other factors that are beyond our control and do not correlate to the operation of the business.

 – Amortization of acquired intangibles. We exclude amortization of acquired intangibles, which is a non-cash expense, from certain of our non-GAAP financial measures. Our expenses for amortization of intangibles are inconsistent in amount and frequency because they are significantly affected by the timing, size of acquisitions and the inherent subjective nature of purchase price allocations. We exclude these amortization expenses because we do not believe these expenses have a direct correlation to the operation of our business.

 – Acquisition-related expenses. We exclude transaction, integration, and retention expenses that are directly related to business combinations from certain of our non-GAAP financial measures because we believe that excluding these items provides meaningful supplemental information regarding operational performance and investors to make more meaningful comparisons between our operating results and those of other companies.

 – Gain on sale of non-marketable equity investments. We exclude gains on sale of non-marketable equity investments from certain of our non-GAAP financial measures because we believe they are unrelated to our ongoing operating performance and are not expected to recur in our continuing operating results. 

We define free cash flow as net cash (used in) provided by operating activities, less purchases of property and equipment and capitalized internal-use software. We believe that free cash flow is a useful indicator of liquidity as it measures our ability to generate cash from our core operations after purchases of property and equipment. Free cash flow is a measure to determine, among other things, cash available for strategic initiatives, including further investments in our business and potential acquisitions of businesses.

Operating Metrics

Number of Customers Contributing More Than $5,000 in ARR. We define ARR as the sum total of the revenue we would contractually expect to recognize over the next 12 months from all customers at a point in time, assuming no increases, reductions or cancellations in their subscriptions. We define our total customers contributing more than $5,000 in ARR as of a particular date as the number of business entities or individuals, represented by a unique domain or a unique email address, with one or more paid subscriptions to one or more of our products that contributed more than $5,000 in ARR.
Net Dollar Retention Rate. To calculate net dollar retention rate as of a given date, we first determine Entering ARR, which is ARR from the population of our customers as of 12 months prior to the end of the reporting period. We then calculate the Ending ARR from the same set of customers as of the end of the reporting period. We then divide the Ending ARR by the Entering ARR to arrive at our net dollar retention rate. Ending ARR includes upsells, cross-sells, and renewals during the measurement period and is net of any contraction or attrition over this period.

About Freshworks Inc.:

Freshworks makes it fast and easy for businesses to delight their customers and employees. We do this by taking a fresh approach to building and delivering software that is affordable, quick to implement, and designed for the end user. Headquartered in San Mateo, California, Freshworks has a dedicated team operating from 13 global locations to serve 50,000+ customers including Bridgestone, Chargebee, DeliveryHero, ITV, Klarna, Multichoice, OfficeMax, TaylorMade and Vice Media.