Freshworks(FRSH) - 2023 Q3 - Quarterly Report

PART I PART I. FINANCIAL INFORMATION Presents Freshworks Inc.'s unaudited condensed consolidated financial statements and management's discussion for the period ended September 30, 2023 Item 1. Financial Statements (unaudited) Presents Freshworks Inc.'s unaudited condensed consolidated financial statements for Q3 2023, including Balance Sheets, Statements of Operations, and Cash Flows Condensed Consolidated Balance Sheets Summarizes Freshworks Inc.'s financial position as of September 30, 2023, detailing assets, liabilities, and stockholders' equity Balance Sheet Summary (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,319,501 | $1,277,010 | | Total assets | $1,418,088 | $1,380,216 | | Total current liabilities | $305,721 | $271,692 | | Total liabilities | $359,604 | $328,398 | | Total stockholders' equity | $1,058,484 | $1,051,818 | Condensed Consolidated Statements of Operations Details Freshworks Inc.'s financial performance for the three and nine months ended September 30, 2023, including revenue, gross profit, and net loss Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $153,550 | $128,760 | $436,321 | $364,829 | | Gross Profit | $127,287 | $104,581 | $359,961 | $294,213 | | Loss from operations | $(38,735) | $(58,288) | $(130,131) | $(172,764) | | Net loss | $(31,033) | $(57,843) | $(109,355) | $(176,655) | | Net loss per share | $(0.11) | $(0.20) | $(0.37) | $(0.62) | Condensed Consolidated Statements of Cash Flows Outlines Freshworks Inc.'s cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $55,312 | $(9,692) | | Net cash provided by (used in) investing activities | $146,280 | $(161,074) | | Net cash used in financing activities | $(47,409) | $(144,716) | | Net increase (decrease) in cash | $154,183 | $(315,482) | | Cash, cash equivalents and restricted cash, end of period | $458,341 | $432,382 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies and financial data, covering revenue recognition, marketable securities, and stock-based compensation Disaggregation of Revenue (in thousands) | Service Offering | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Subscription services | $150,033 | $425,755 | | Professional services | $3,517 | $10,566 | | Total revenue | $153,550 | $436,321 | - As of September 30, 2023, the company had $375.8 million in remaining performance obligations, of which $285.0 million is expected to be recognized as revenue in the next 12 months[55] Stock-Based Compensation Expense (in thousands) | Expense Category | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Cost of revenue | $1,710 | $5,137 | | Research and development | $9,623 | $28,662 | | Sales and marketing | $18,757 | $51,786 | | General and administrative | $25,035 | $74,482 | | Total | $55,125 | $160,067 | - As of September 30, 2023, total unrecognized stock-based compensation expense was $458.4 million, expected to be recognized over a weighted-average period of approximately 2.8 years for RSUs/PRSUs and 2.9 years for stock options[94] Revenue by Geographic Location (in thousands) | Region | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | North America | $68,847 | $194,158 | | Europe, Middle East and Africa | $59,128 | $168,332 | | Asia Pacific | $21,111 | $61,497 | | Other | $4,464 | $12,334 | | Total revenue | $153,550 | $436,321 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 financial performance, highlighting 19% revenue growth, improved operating losses, and positive free cash flow Overview and Key Business Metrics Freshworks' Q3 2023 revenue grew 19% to $153.6 million, with narrowed operating loss, tracking key metrics like large customers and net dollar retention Key Business Metrics | Metric | Sep 30, 2023 | Sep 30, 2022 | % Growth | | :--- | :--- | :--- | :--- | | Customers contributing >$5,000 in ARR | 19,551 | 16,713 | 17% | | Net dollar retention rate | 108% | 107% | N/A | - On a constant currency basis, the net dollar retention rate was 106% as of September 30, 2023, a decrease from 107% a year prior, primarily due to lower expansion within existing customers driven by macroeconomic pressures[116] Non-GAAP Financial Measures The company utilizes non-GAAP measures like non-GAAP income from operations and free cash flow to assess performance, reporting positive results for Q3 2023 Reconciliation of GAAP to Non-GAAP Income (Loss) from Operations (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Loss from operations (GAAP) | $(38,735) | $(58,288) | | Stock-based compensation expense | $55,125 | $53,892 | | Other adjustments | $1,008 | $1,270 | | Non-GAAP income (loss) from operations | $17,398 | $(3,126) | Reconciliation to Free Cash Flow (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $23,913 | $(4,223) | | Less: Purchases of property and equipment | $(278) | $(1,907) | | Less: Capitalized internal-use software | $(1,564) | $(1,106) | | Free cash flow | $22,071 | $(7,236) | Results of Operations Compares Q3 2023 and 2022 financial results, showing 19% revenue growth, improved gross margin, and controlled operating expense increases - Q3 2023 revenue increased by $24.8 million (19%) YoY, with $16.2 million from new customers and $8.6 million from existing customers[144] - Gross margin for Q3 2023 increased to 83% from 81% in Q3 2022, reflecting benefits from economies of scale and cost structure improvements[145][146] - Total operating expenses for Q3 2023 increased by only 2% YoY, primarily due to a 4% rise in Sales and Marketing costs, while Research and Development expenses decreased by 3%[147] Liquidity and Capital Resources Freshworks held $1.16 billion in cash and marketable securities as of September 30, 2023, generating $55.3 million in operating cash flow for the nine months - The company's cash, cash equivalents, and marketable securities totaled approximately $1.16 billion as of September 30, 2023[164] - For the nine months ended September 30, 2023, net cash provided by operating activities was $55.3 million, a significant improvement from a net cash use of $9.7 million in the same period of 2022[169][170][171] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency and interest rate fluctuations, using forward contracts to hedge Indian Rupee exposure - The company's primary foreign currency exposures are to the Indian Rupee, British Pound, and Euro[186] - To mitigate currency risk, the company entered into foreign exchange forward contracts to hedge a portion of forecasted expenses in Indian Rupee, with a total notional amount of $49.4 million outstanding as of September 30, 2023[187] - A sensitivity analysis indicates that a hypothetical 10% adverse change in foreign currency rates or a 100 basis point movement in interest rates would not have a material effect on the company's financial statements[189][191] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures are effective[192] - No changes were identified in the company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[193] PART II PART II. OTHER INFORMATION Details legal proceedings, risk factors, and other significant information not covered in the financial statements Item 1. Legal Proceedings The company faces securities class action and stockholder derivative complaints related to IPO disclosures, which it intends to vigorously defend - A securities class action complaint was filed on November 1, 2022, alleging violations of the Securities Act of 1933 in connection with the IPO[196] - A stockholder derivative complaint was filed on March 20, 2023, based on similar allegations as the class action, and this case has been stayed pending the securities class action[197] Item 1A. Risk Factors No material changes to the company's previously disclosed risk factors were reported in the current quarter - The company states there have been no material changes to the risks and uncertainties previously disclosed in its Q1 2023 Form 10-Q[199] Item 5. Other Information Discloses adoption of Rule 10b5-1 trading plans by officers and directors, and the departure of the Chief Marketing Officer Rule 10b5-1 Trading Plan Adoptions (Q3 2023) | Name | Title | Adoption Date | Total Securities to be Sold | | :--- | :--- | :--- | :--- | | Tyler Sloat | Chief Financial Officer | Sep 6, 2023 | Up to 400,000 shares | | Sameer Gandhi | Director | Sep 19, 2023 | Up to 100,000 shares | | Barry Padgett | Director | Sep 14, 2023 | Up to 38,356 shares | - Stacey Epstein, the company's former Chief Marketing Officer, departed the company on September 15, 2023[205]