Freshworks(FRSH) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) The unaudited condensed consolidated financial statements for Freshworks Inc. as of June 30, 2024, show total assets of $1.54 billion, up from $1.46 billion at year-end 2023, with revenue of $339.3 million for the six months ended June 30, 2024, a 20% increase year-over-year, and a net loss of $43.5 million, an improvement from the $78.3 million loss in the prior year period, reflecting the recent acquisition of Device42 in June 2024 Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased to $1.54 billion, primarily driven by a significant rise in Goodwill and Intangible Assets from the Device42 acquisition, while cash and cash equivalents decreased to $310.3 million from $488.1 million at the end of 2023, and total liabilities grew to $428.5 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $310,266 | $488,121 | | Marketable securities | $708,848 | $699,506 | | Goodwill | $147,014 | $6,181 | | Intangible assets, net | $98,024 | $— | | Total Assets | $1,543,584 | $1,456,772 | | Liabilities & Equity | | | | Deferred revenue | $287,629 | $266,399 | | Total Liabilities | $428,485 | $384,510 | | Total Stockholders' Equity | $1,115,099 | $1,072,262 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2024, revenue grew 20% year-over-year to $174.1 million, with the net loss for the quarter improving to $20.2 million from a $35.7 million loss in the same period of 2023, and for the six-month period, revenue also grew 20% to $339.3 million, with the net loss narrowing to $43.5 million from $78.3 million year-over-year Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $174,131 | $145,079 | $339,274 | $282,771 | | Gross Profit | $145,956 | $120,218 | $285,209 | $232,674 | | Loss from operations | $(43,787) | $(43,289) | $(75,954) | $(91,396) | | Net loss | $(20,184) | $(35,658) | $(43,509) | $(78,322) | | Net loss per share | $(0.07) | $(0.12) | $(0.15) | $(0.27) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2024, net cash provided by operating activities more than doubled to $77.0 million from $31.4 million in the prior year period, while net cash used in investing activities was $220.5 million, primarily due to the $213.9 million cash payment for the Device42 acquisition, and net cash used in financing activities increased to $34.3 million Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76,955 | $31,399 | | Net cash provided by (used in) investing activities | $(220,495) | $44,136 | | Net cash used in financing activities | $(34,318) | $(23,380) | - The significant use of cash in investing activities in 2024 was driven by $213.9 million paid for a business combination (Device42), net of cash acquired[305] Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, the impact of the Device42 acquisition, revenue recognition, fair value measurements, and commitments, noting that on June 6, 2024, the company acquired Device42 for approximately $238.1 million, resulting in $140.8 million of goodwill, and that the company also faces a securities class action lawsuit filed in November 2022, with total remaining performance obligations standing at $469.8 million as of June 30, 2024 - On June 6, 2024, the Company acquired IT asset management company Device42 for approximately $238.1 million, consisting of $225.3 million in cash and $12.9 million in stock and options[85][132][214] - The acquisition of Device42 added $140.8 million in goodwill and $99.0 million in identifiable intangible assets (customer relationships, developed technology, trademarks)[158][134] - As of June 30, 2024, the company had $469.8 million in remaining performance obligations, with $341.9 million expected to be recognized as revenue in the next 12 months[121] - The company is defending against a securities class action lawsuit filed in November 2022 and a related stockholder derivative complaint, both alleging material misstatements in IPO offering documents[164][33] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports 20% year-over-year revenue growth for both the three and six months ended June 30, 2024, driven by new customers and expansion within the existing base, noting that the net dollar retention rate was 106%, down from 108% a year prior, reflecting macroeconomic pressures on customer expansion, though partially offset by the Device42 acquisition, and the company maintains a strong liquidity position with over $1 billion in cash, cash equivalents, and marketable securities Overview and Key Business Metrics The company's revenue grew 20% YoY for the six months ended June 30, 2024, with the number of customers with over $5,000 in ARR increasing by 14% to 21,744, but the net dollar retention rate decreased to 106% from 108% in the prior year, primarily due to lower expansion within existing customers driven by macroeconomic pressures, partially offset by the addition of Device42 Key Business Metrics as of June 30 | Metric | 2024 | 2023 | % Growth | | :--- | :--- | :--- | :--- | | Customers with >$5,000 in ARR | 21,744 | 19,105 | 14% | | ARR from customers >$5,000 as % of total ARR | 90% | 88% | N/A | | Net dollar retention rate | 106% | 108% | N/A | - The decrease in net dollar retention rate from 108% to 106% was primarily due to lower expansion within existing customers, attributed to macroeconomic pressures[40] - Macroeconomic uncertainties, including inflation and geopolitical developments, have adversely impacted the net dollar retention rate and may continue to affect demand for the company's products[39] Results of Operations For Q2 2024, revenue increased 20% YoY to $174.1 million, with subscription and related services growing 21% and gross margin improving to 84% from 83%, while operating expenses rose 16% to $189.7 million, driven by higher personnel costs and marketing spend, and for the six-month period, revenue also grew 20% to $339.3 million, with operating expenses increasing 11%, and a tax benefit of $14.3 million from the Device42 acquisition significantly impacted the provision for income taxes Revenue Comparison - Q2 2024 vs Q2 2023 (in thousands) | Revenue Type | Q2 2024 | Q2 2023 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Subscription, licenses, maintenance | $171,604 | $141,699 | $29,905 | 21% | | Professional services | $2,527 | $3,380 | $(853) | (25)% | | Total revenue | $174,131 | $145,079 | $29,052 | 20% | - The increase in Q2 2024 revenue was driven by $10.9 million from existing customers and $18.2 million from new customers acquired in the last twelve months, including Device42[311] - For the six months ended June 30, 2024, the company recorded an income tax benefit of $6.4 million, compared to a $7.6 million expense in the prior year, primarily due to a $14.3 million tax benefit from the Device42 acquisition[330][236] Liquidity and Capital Resources As of June 30, 2024, the company had a strong liquidity position with $310.3 million in cash and cash equivalents and $708.8 million in marketable securities, and management believes existing cash and marketable securities are sufficient to meet working capital and capital expenditure needs for at least the next 12 months, with operating activities generating $77.0 million in cash for the first six months of 2024, a significant increase from $31.4 million in the same period of 2023 - The company holds $310.3 million in cash and cash equivalents and $708.8 million in marketable securities as of June 30, 2024[302] - Net cash from operating activities for the first six months of 2024 was $77.0 million, up from $31.4 million in the prior year, driven by improved net loss and non-cash adjustments like stock-based compensation[354][332] - Principal commitments consist of operating leases for office space and contractual obligations under third-party cloud infrastructure and service subscription agreements[6] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from fluctuations in foreign currency exchange rates and interest rates, with primary foreign currency exposures to the Indian Rupee, British Pound, and Euro, and to mitigate this risk, the company uses foreign exchange forward contracts, with a total notional amount of $61.6 million outstanding as of June 30, 2024, while interest rate risk affects investment income and the fair value of its marketable securities portfolio, but a hypothetical 100 basis point change in rates is not expected to have a material effect - The company's primary market risk exposures are from foreign currency exchange rates (particularly INR, GBP, EUR) and interest rates[9] - To hedge against foreign currency risk, the company entered into foreign exchange forward contracts with a total notional amount of $61.6 million as of June 30, 2024[10] - The company's investment portfolio, consisting of cash, cash equivalents, and marketable securities, is subject to interest rate risk, but management does not believe a 100 basis point change would have a material impact[11][362] ITEM 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, and consistent with SEC guidance, the evaluation of internal control over financial reporting excluded the recently acquired Device42, which represented less than 2% of consolidated total assets and revenues for the quarter, with the company currently integrating Device42's internal controls - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of the end of the period[341] - Management's evaluation of internal controls excluded the recently acquired Device42, as permitted by SEC guidance, with Device42 constituting less than 2% of total assets and revenues for the quarter[13] - There were no material changes in internal control over financial reporting during the most recent fiscal quarter[342] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The company is involved in a securities class action lawsuit and a related stockholder derivative complaint concerning alleged misstatements in its IPO offering documents, and the company intends to vigorously defend against these claims and does not currently believe any pending legal proceedings will have a material adverse impact - The company is subject to a securities class action complaint and a stockholder derivative complaint related to its IPO, which it intends to defend vigorously[164][33] - Information regarding legal proceedings is incorporated by reference from Note 9 of the financial statements[16] ITEM 1A. Risk Factors There have been no material changes from the risks and uncertainties previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - The company states there have been no material changes to the risk factors disclosed in its 2023 Annual Report on Form 10-K[344] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds On June 6, 2024, the company issued 686,812 shares of Class A common stock to the founder of Device42 and his affiliates as part of the acquisition consideration, with this issuance not registered under the Securities Act, as it was exempt as a transaction not involving a public offering - In connection with the Device42 acquisition, the company issued 686,812 shares of Class A common stock in an unregistered sale, exempt from registration under Section 4(a)(2) of the Securities Act[345] ITEM 5. Other Information During the second quarter of 2024, two company officers, the Chief Product Officer and the Chief Financial Officer, adopted Rule 10b5-1 trading plans for the future sale of company securities Adoption of Rule 10b5-1 Trading Plans | Name | Title | Adoption Date | Total Securities to be Sold | | :--- | :--- | :--- | :--- | | Srinivasagopalan Ramamurthy | Chief Product Officer | June 14, 2024 | Up to 400,000 shares | | Tyler Sloat | Chief Financial Officer | June 6, 2024 | Up to 500,000 shares | ITEM 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, and XBRL data files - The report includes various exhibits, such as the CEO and CFO certifications pursuant to the Sarbanes-Oxley Act (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL interactive data files[21][350][371] SIGNATURES The report was duly signed on July 30, 2024, by Dennis Woodside, Chief Executive Officer and President, and Tyler Sloat, Chief Financial Officer - The Form 10-Q was signed on July 30, 2024, by the company's Chief Executive Officer and Chief Financial Officer[352][376]