In my opinion, Freshworks (NASDAQ: FRSH) is still undervalued. I believe FRSH provides businesses with user-centric SaaS solutions that prioritize ease of use and unique customer requirements.
FRSH has an advantage over the competition due to the ease and scalability of its solutions, which allows organizations to undergo digital transformation in record time.
With the improved estimates and forward multiples, I am raising my price target on FRSH shares from $17 to $21.
Overview of Earnings
FRSH announced 4Q22 results that were better than projected in a still tough macro environment.
Billings increased by 29% year on year, just marginally slower from the prior quarter.
4Q22 was the company’s most successful quarter for new projects to date, with greater win rates for both its CX and ITSM services.
During the quarter, DBNRR declined 300 basis points to 110% as churn rates for smaller customers grew by less than 100 basis points while growth slowed.
Last but not least, FRSH, like many other growth software firms, forecasted 17.5% y/y revenue growth in FY23.
However, margins and FCF forecasts both reset to higher levels than expected by the market.
Despite a shifting macroenvironment, I am encouraged by the strong execution so far.
In the long run, I continue to believe that FRSH is a compelling investment due to its solid product portfolio and the fact that the market for its solutions is vast yet underserved.
Metrics
Even while it isn’t a huge issue right now, the slower expansion movement reduces NRR, with Freshworks experiencing higher churn at the bottom.
With the economy slowing and company expansion slowing, FRSH recorded an NRR of 110%, down 300 basis points from the previous quarter’s 113%.
Gross dollar churn increased somewhat as well, indicating a spike in churn towards the bottom of the market, according to FRSH.
Fortunately for FRSH, adjustments to the product market team and the goods themselves have made the platform more relevant to larger clients.
These aspects help to compensate for the more subdued upsell environment caused by slower hiring.
Management anticipates that its NRR would drop to 105% in Q1 due to elevated risk, before leveling off in Q2.
My forecast includes the likelihood of a minor increase in gross churn in FY23, but I believe the expansion will be the key drag.
As the software industry as a whole is experiencing the consequences of the weak macro environment,
I believe FRSH can continue to operate with these deteriorating metrics for the time being.
Once we get over this, we need to show an improvement in these measures, or else FRSH may appear to be losing the war.
The Customer Wins
FRSH is seeing increased upmarket success, particularly in ITSM, thanks to FreshService, in addition to improved win rates.
Larger customer victories appear to be the outcome of the market’s appreciation for FRSH’s economic effectiveness, as well as the investments made to cater to larger customers.
During the quarter, the number of clients with annualized revenue of more than $50,000 climbed by 35% year on year to 1,908, with mid-market or larger customers accounting for about 60% of all customers.
Guidance
FRSH guidance, which aimed for a 17.5% y/y increase in constant currency, indicated a considerable deceleration in growth.
Furthermore, an operating profit range of -$14 million to -$6 million predicts a 1.7% margin for FY23.
Also worth noting is that management has committed to achieving positive FCF each year in the future. Freshworks also predicts a 20% year-on-year growth in computed billings.
Overall, the estimates were consistent with the consensus.
Conclusion
In my perspective, FRSH is still undervalued.
Despite the present challenging macroeconomic situation, the company posted better-than-expected 4Q22 earnings, with billings up 29% year on year and increased win rates for its CX and ITSM services.
Fundamentally, FRSH benefits from its user-centric SaaS solutions, which are easy and scalable, making digital transformation more realistic for enterprises.
There is some concern about the slowdown in business expansion and rising attrition, but Freshworks’ performance with larger customers and strong forward cash flow estimates compensate.
I raised their price target from $17 to $21, meaning that the company has a 24% upside potential.
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