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Freshworks - $FRSH - Earnings Analysis: Strong revenue growth and improved operating margin in Q4 2024.

By sagebytes in Business —

Business Model

Freshworks generates revenue from its suite of customer and employee experience software solutions offered through a subscription-based model.

Revenue Sources

  • Subscription revenue from CX products (Freshdesk, Freshchat, Freshsales, Freshmarketer)
  • Subscription revenue from EX products (Freshservice, Device42, Freshservice for Business Teams)
  • Professional services (smaller portion of revenue as Freshworks shifts to a partner-driven model)

Revenue Distribution by Channel

  • Partner network touches one third of ARR

Income Statement Analysis

  • Revenue increased by 22% year-over-year, indicating strong growth in the business.
  • Cost of revenue increased which can be tied to Device42 acquisition.
  • Loss from operations decreased significantly, suggesting improved operational efficiency. Sales and marketing was down.
  • The company reported a GAAP net loss, but it was smaller than the net loss in the same quarter of the previous year.

Balance Sheet Analysis

  • Cash and cash equivalents increased, indicating a stronger liquidity position.
  • Total assets increased, reflecting overall growth and acquisitions.
  • Total liabilities increased, possibly due to higher deferred revenue and accrued liabilities, in line with business expansion. Total liabilities were $473.963, this is calculated by substracting Total assets from Total Stockholders equity.
  • Total stockholders' equity increased, driven by capital raises and retained earnings.

Cash Flow Analysis

  • Net cash provided by operating activities increased, reflecting improved profitability and efficiency.
  • Net cash used in investing activities increased, driven by increased purchase of property and equipment.
  • Net cash used in financing activities increased, primarily due to payment of witholding taxes on net share settlement of equity awards.

Capital Allocation

Freshworks is allocating capital towards share repurchases, strategic acquisitions (e.g., Device42), and reinvestment in the business, particularly in R&D and go-to-market initiatives. They are also focused on efficiently managing share count dilution through net settling vested equity amounts.

Management Commentary

Freshworks outperformed its previously provided estimates again in Q4 across all our key metrics

Companies are leaving legacy vendors and coming to Freshworks for our uncomplicated, modern employee and customer experience service solutions.

We observed a notable shift in FX rates throughout the quarter driven by the strengthening of the U. S. Dollar

Overall Sentiment: Positive, with an emphasis on growth, profitability, and strategic execution.

Recommendation

Rating: Hold

Reason for Rating: Freshworks demonstrates a solid growth trajectory and improving profitability, balanced by the near-term impact of currency fluctuations and integration costs. The company's strong cash position and focus on strategic initiatives support a Hold rating.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/12/2025, 3:54:59 AM