Freshworks Sinks 14.7% Despite Solid Q3 Results


The first-ever public quarterly results of Freshworks Inc. (FRSH) exceeded both earnings and revenue estimates. However, annual revenue guidance fell marginally below investor expectations, causing shares to tumble by 14.7% during the extended trading session on November 2.

Freshworks is a software-as-a-Service (SaaS) provider enabling small and medium businesses to support customers through e-mail, phone, website, and social networks. The company started trading on September 22, 2021, and its shares have gained 5.3% since its first day of trading.

The company reported an adjusted quarterly loss of $0.04 per share, 6 cents better than analysts’ estimated loss of $0.10 per share. FRSH posted adjusted earnings of $0.01 per share for the same quarter last year.

Moreover, total revenue grew 46% year-over-year to $96.61 million, outpacing Street estimates of $90.83 million. During Q3, the number of customers contributing more than $5,000 in annual recurring revenue (ARR) increased 31% year-over-year, while the net dollar retention rate was 117%. (See Insiders’ Hot Stocks on TipRanks)

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

Based on the current economic environment and business momentum, Freshworks expects Q4 revenue to fall in the range of $99-$101 million, against the consensus of $96.77 million. Meanwhile, the fourth-quarter adjusted loss is expected to fall in the range of $0.07-$0.05 per share, versus the consensus estimate of a loss of 5 cents per share.

Additionally, FY 2021 revenue is expected to be in the range of $364.5-$366.5 million, along with an adjusted annual loss in the range of $0.22-$0.20 per share. Meanwhile, consensus estimates for revenue and loss are pegged at $366.53 million and $0.23 per share, respectively.

Responding to Freshworks’ quarterly performance, Oppenheimer analyst Brian Schwartz maintained a Buy rating on the stock with a price target of $50, which implies that shares are almost fully valued at current levels.

Schwartz said, “The fast growth trends and overall strength the company produced in 3Q:2021 point to sustainable 40%+ growth and lend good support to our thesis that FRSH has open-ended growth and is an attractive play on the customer engagement market themes. Over time, we believe Freshworks will remain a market leader and be a good compounding growth story to support a premium valuation.”

According to the analyst, Freshworks possesses a sustainable scale and a strong growth trajectory, and is capable of earning more than $1 billion in revenue by 2025 or earlier, provided it capitalizes on its technology leadership position in the small and medium business (SMB) customer engagement market.

Overall, the stock has a Moderate Buy consensus rating based on 8 Buys, and 5 Holds. The average Freshworks price target of $48.83 implies 2.48% downside potential to current levels.

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