Freshworks(FRSH) - 2023 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements (unaudited) The unaudited financial statements for Q2 and H1 2023 reflect revenue growth, a reduced net loss, and a positive operating cash flow, with total assets reaching $1.40 billion Condensed Consolidated Balance Sheets As of June 30, 2023, total assets were $1.40 billion, a slight increase from $1.38 billion at December 31, 2022, driven by higher cash and cash equivalents and deferred revenue Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $356,220 | $304,083 | | Marketable securities | $804,646 | $843,405 | | Total current assets | $1,303,296 | $1,277,010 | | Total assets | $1,400,307 | $1,380,216 | | Liabilities & Equity | | | | Deferred revenue | $234,358 | $205,626 | | Total current liabilities | $291,556 | $271,692 | | Total liabilities | $342,654 | $328,398 | | Total stockholders' equity | $1,057,653 | $1,051,818 | Condensed Consolidated Statements of Operations For Q2 2023, revenue grew 19% year-over-year to $145.1 million, and net loss narrowed significantly to $35.7 million, with similar improvements for the six-month period Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $145,079 | $121,432 | $282,771 | $236,069 | | Gross Profit | $120,218 | $97,390 | $232,674 | $189,632 | | Loss from operations | $(43,289) | $(67,352) | $(91,396) | $(114,476) | | Net loss | $(35,658) | $(69,753) | $(78,322) | $(118,812) | | Net loss per share | $(0.12) | $(0.24) | $(0.27) | $(0.42) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company generated $31.4 million in cash from operating activities, a significant turnaround from the prior year's cash usage Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $31,399 | $(5,469) | | Net cash provided by (used in) investing activities | $44,136 | $(20,864) | | Net cash used in financing activities | $(23,380) | $(131,351) | | Net increase (decrease) in cash | $52,155 | $(157,684) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies and provide breakdowns of financial statement items, including revenue by service and geography, stock-based compensation, and contractual commitments Revenue by Service Offering (in thousands) | Service Offering | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Subscription services | $141,699 | $118,393 | $275,722 | $229,790 | | Professional services | $3,380 | $3,039 | $7,049 | $6,279 | | Total revenue | $145,079 | $121,432 | $282,771 | $236,069 | - As of June 30, 2023, the company had $350.8 million in remaining performance obligations, of which $267.8 million is expected to be recognized as revenue in the next 12 months[54] Revenue by Geographic Location (in thousands) | Region | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | North America | $64,244 | $52,117 | $125,311 | $100,890 | | Europe, Middle East and Africa | $56,338 | $47,878 | $109,204 | $93,383 | | Asia Pacific | $20,361 | $18,240 | $40,386 | $35,719 | | Other | $4,136 | $3,197 | $7,870 | $6,077 | | Total revenue | $145,079 | $121,432 | $282,771 | $236,069 | - As of June 30, 2023, total unrecognized stock-based compensation expense was $533.8 million, expected to be recognized over a weighted-average period of approximately 2.9 years for RSUs/PRSUs and 3.2 years for stock options[97] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 revenue growth driven by customer expansion, a net dollar retention rate of 108%, improved non-GAAP operating income, and positive free cash flow, affirming sufficient liquidity Overview and Macroeconomic Factors Freshworks provides modern SaaS products for customer and employee engagement, with Q2 2023 revenue growing 19% year-over-year despite macroeconomic uncertainties and foreign currency risks - The company's mission is to make it fast and easy for businesses to delight their customers and employees through modern SaaS products[106] - Macroeconomic uncertainties, including inflation and geopolitical developments, could adversely affect demand for the company's products and services[109] - Approximately 27% of revenue in Q2 2023 was exposed to the Euro and British Pound, highlighting foreign currency risk[109] Key Business Metrics As of June 30, 2023, customers with over $5,000 in ARR grew 18% year-over-year to 19,105, accounting for 88% of total ARR, though the net dollar retention rate decreased to 108% due to macroeconomic pressures Key Business Metrics Comparison | Metric | June 30, 2023 | June 30, 2022 | % Growth | | :--- | :--- | :--- | :--- | | Customers > $5,000 in ARR | 19,105 | 16,212 | 18% | | ARR from Customers > $5,000 in ARR | 88% | 86% | N/A | | Net dollar retention rate | 108% | 111% | N/A | - The decrease in net dollar retention rate from 111% to 108% was primarily due to lower expansion within existing customers, attributed to macroeconomic pressures[116] Non-GAAP Financial Measures Freshworks uses non-GAAP measures, reporting Q2 2023 non-GAAP income from operations of $11.7 million and free cash flow of $18.1 million, indicating improved profitability Reconciliation of GAAP Loss from Operations to Non-GAAP Income (Loss) from Operations (in thousands) | Description | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Loss from operations (GAAP) | $(43,289) | $(67,352) | | Stock-based compensation expense | $54,248 | $50,135 | | Other adjustments | $763 | $1,422 | | Non-GAAP income (loss) from operations | $11,722 | $(15,795) | Reconciliation to Free Cash Flow (in thousands) | Description | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $19,895 | $(6,824) | | Less: Purchases of property and equipment | $(329) | $(1,984) | | Less: Capitalized internal-use software | $(1,486) | $(1,378) | | Free cash flow | $18,080 | $(10,186) | Results of Operations Q2 2023 revenue increased 19% year-over-year to $145.1 million, driven by customer growth and improved gross margin, leading to a reduced operating loss despite higher personnel costs - Q2 2023 revenue increased by $23.6 million (19%) YoY, with $16.3 million from new customers and $7.3 million from existing customers[145] - Q2 2023 sales and marketing expense decreased by $2.1 million (2%) YoY, primarily due to a $5.2 million reduction in advertising, marketing, and branding expenses[150] - Interest income for Q2 2023 surged 434% YoY to $11.3 million, driven by higher interest rates on the company's marketable securities portfolio[152] Liquidity and Capital Resources As of June 30, 2023, Freshworks maintained a strong liquidity position with $356.2 million in cash and $804.6 million in marketable securities, generating positive operating cash flow and affirming sufficient funds for the next 12 months - The company has a strong liquidity position with $356.2 million in cash and cash equivalents and $804.6 million in marketable securities as of June 30, 2023[165] - The company believes its existing cash, cash equivalents, and marketable securities will be sufficient to meet its needs for at least the next 12 months[168] - As of June 30, 2023, remaining performance obligations totaled $350.8 million, consisting of $234.4 million in deferred revenue and $116.4 million in unbilled revenue[177] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign currency fluctuations and interest rate risk, which are mitigated by hedging strategies and are not expected to materially affect financial statements - The company is primarily exposed to market risks from fluctuations in foreign currency exchange rates (especially INR, GBP, EUR) and interest rates[185][186] - To reduce foreign currency risk, the company entered into foreign exchange forward contracts to hedge a portion of its forecasted expenses in Indian Rupee, with a total notional amount of $43.6 million as of June 30, 2023[187] - A sensitivity analysis indicates that a hypothetical 10% adverse change in foreign currency rates or a 100 basis point change in interest rates would not materially affect the company's financial statements[189][191] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[192] - No changes were identified in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[193] Part II. OTHER INFORMATION Legal Proceedings The company is facing two significant legal actions: a securities class action complaint alleging material misstatements in IPO documents and a related stockholder derivative complaint - A securities class action complaint was filed against the company, certain officers, directors, and IPO underwriters, alleging violations of the Securities Act of 1933. A motion to dismiss is pending[197] - A stockholder derivative complaint was filed against the company's current directors, which has been stayed pending the outcome of the securities class action[198] Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 - The company states there have been no material changes from the risks and uncertainties previously disclosed in its Q1 2023 Form 10-Q[200] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no use of proceeds from such sales during the period - There were no unregistered sales of equity securities during the reporting period[201][202] Other Information During the second quarter of 2023, several Section 16 officers and directors adopted Rule 10b5-1 trading plans for the potential sale of company securities Adoption of Rule 10b5-1 Trading Plans | Name | Title | Adoption Date | Total Securities to be Sold (shares) | | :--- | :--- | :--- | :--- | | Rathna Girish Mathrubootham | Chief Executive Officer and Chairman | June 14, 2023 | Up to 1,900,000 | | Srinivasagopalan Ramamurthy | Chief Product Officer | June 16, 2023 | Up to 400,000 | | Johanna Flower | Director | June 14, 2023 | Up to 55,400 | | Jennifer Taylor | Director | May 9, 2023 | Up to 95,242 | Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the CEO and CFO, and XBRL data files - The report includes required certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002, as well as XBRL interactive data files[210]