A Member of Pat McKeough’s Inner Circle recently asked for his advice on a Software as a Service (SaaS) company that caters to customer service needs at small and medium-sized businesses.
Pat likes the firm’s steady revenue growth and expanding customer base. However, he notes that consistent profitability has been elusive, and competition is especially fierce in the company’s chosen sector.
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Freshworks Inc. (Symbol FRSH on Nasdaq; www.freshworks.com), develops AI-driven SaaS (software-as-a-service) products for IT teams, customer support teams, and sales and marketing teams. As of June 30, 2024, it had over 68,000 customers worldwide, including American Express, Bridgestone, Databricks, Fila, Nucor and Sony.
The company was founded in August 2010 under the corporate name Freshdesk Inc. Freshdesk was the company’s customer experience product, launched in 2011. Following several more product launches, the company changed its name to Freshworks in June 2017 to reflect its broader software offerings.
In September 2021, the company went public, selling 28.5 million shares at $36 each through its IPO.
Freshworks offers both free and paid subscription plans for its SaaS products. Its growth strategy continues to add subscribers, either paid from the start, or converted to paid from free plans.
With “software as a service” (SaaS), instead of charging customers a one-time fee on the initial sale of software, the company charges a smaller but recurring fee every month (or year, etc.). For the customer, it’s like renting the software instead of owning it.
Freshworks now has three product groups: Freshdesk; Freshservice, its IT service management product; and Freshsales, its customer relationship management software.
Inner Circle: AI-Powered suite should help drive ongoing revenue growth
On August 3, 2023, Freshworks launched its AI-powered Customer Service Suite, which combines its Freshchat and Freshdesk applications with Freddy AI, the company’s generative AI product. The software suite provides customers with an all-in-one solution for their customer support needs by automating many customer service functions.
Over the four years from 2019 to 2022, the company increased its revenue by 188.9%, from $172.4 million in 2019 to $498.0 million in 2022. This reflected an increase in both the number of customers and the amount spent by those customers each year. In 2023, revenue rose a further 19.8%, to $596.4 million.
In the three months ended June 30, 2024, Freshwork’s revenue increased 20% to $174.1 million from $145.1 million a year earlier. Excluding one-time items, it lost $23.0 million, or $0.08 a share. That’s compared to a loss of $19.8 million, or $0.07 a share.
The company continues to expand its customer base. However, it operates in very competitive markets. That means it will need to keep spending heavily on research as well as marketing to stay ahead of its rivals and to add new customers.
The stock performance has also been disappointing with a -43.8% one year return as compared to a 24.3% return for the S&P500 over the same time period.
Recommendation in Pat’s Inner Circle: Freshworks Inc. is a hold, but only for aggressive investors.
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