The Chennai and California-based technology firm Freshworks that rivals Salesforce, plans to raise up to $912 million via the Initial Public Offering (IPO) in the U.S. and to list on the NASDAQ on 22nd September under the ticker FRSH.

This California-headquartered software as a service (SaaS) company was founded in 2010 in Chennai by Girish Mathrubootham and Shan Krishnasamy after the founders had a poor customer service experience. What began as a single product focused on customer service, is now a global business with a comprehensive suite of products. As per the company’s S-1 filing, it has about 52,500 customers globally, operating in over 13  locations that serve over 120 countries, including the U.S. Europe, Asia and Australia.

 Freshworks’ growth and key milestones

Initial Investors

The company has previously raised funds from marquee investors and adds venture capital firms Accel Partners, Sequoia Capital, New York-based technology investment giant Tiger Global Management and Capital G (formerly Google Capital which is Alphabet’s independent growth fund) among its largest investors. It was valued at around $3.5 billion during its last round of funding in November 2019. In July last year, the company entered the unicorn club of startups that are valued at $1 billion or more. 

Key Highlights of the listing

• Freshworks is likely to be aiming at a valuation of around $9 billion in this U.S. IPO listing on 22nd September, as per the regulatory filing of the company.
• The company plans to raise between $798 million and $912 million via the IPO in the U.S. and expect the IPO price to be between $28-$32 per share. At the top end of the price range, the company would raise $912 million. 
• Freshworks is offering 28,500,000 (or 28.5 million) shares of Class A common stock.
• The company will list its Class A common stock on the Nasdaq Global Select Market under the symbol FRSH.
• Investment bankers like Morgan Stanley, J.P. Morgan Bank of America Securities are the lead underwriters of the issue.
• As per the company’s S-1 filings with the SEC, the net proceeds from the IPO will be used for general corporate purposes including working capital, operating expenses and the overall company’s capital expenditures. 

Global Customer Relationship Management (CRM) Industry to grow at a CAGR of over 10% from 2021-2028E and Freshworks stands to benefit

The Global CRM industry which was estimated at $43.7 billion in 2020 is likely to grow at a CAGR of 10.6% from 2021-2028 and likely to reach $98 billion by 2028. The graph below shows the projected future growth trajectory for the U.S. CRM industry by type of solution. The growing demand for integrated software suites with the need to automate customer engagement is likely to witness unprecedented growth which is beneficial for Freshworks.

Product Offerings

The company has a suite of products that help businesses with customer management like a messaging platform and an AI-powered chatbot for customer support. The company operates in three main products: 

• Freshdesk: which is the customer experience product
• Freshservice: which is the company’s IT service management product, &
• Freshsales: the customer relationship management solution which includes sales force and marketing automation.

How does the company generate revenue?

The company primarily generates its revenue from the sale of subscriptions for Freshworks products. The company offers different subscription plans within the three main product lines of Freshdesk, Freshservice and Freshsales. The company had around 35,800 customers using the Freshdesk family of products, about 8,900 customers using the Freshservice products and approximately 6,500 customers who were using the Freshsales products at the end of December 2020. 

Exhibit 1: Freshdesk’s subscription plans

Source: Company’s S-1 filings, August 2021

Freshworks’ Business Model

The company’s business model is powered by strong product-led growth (PLG) which helps businesses of all sizes. The company’s go-to-market strategy has centred on offering products that are designed for the users and PLG remains the core foundation of the company.

The company focuses its go-to-market motion on businesses based on their size:

Small & Mid-Sized Businesses (SMB): which are organizations with 250 or fewer employees

Mid-Market customers: which are usually organizations with 250-5,000 employees &

Enterprise: customers are organizations with 5,000 or more employees.

Exhibit 2: Freshworks’ segment-wise customers

Source: Company’s S-1 filings, August 2021

Key Financials 

• The company has seen a strong topline growth each quarter as a result of the increased adoption of subscription plans across its products. 
• The total revenues were at $168.9 million for the six months ended June 2021 which was an increase of 53% year-on-year from $110.5 million in June 2020.
• Gross profits grew by 54% year-on-year for the first half of 2021 and gross profit margins of 79% for the six months ended June 2021.  
• The company had a free cash flow (FCF) of $3.7 million as of June 2021, which almost tripled in 1H of 2021 as against $1.3 million a year ago.
• Net losses of the company have drastically reduced $9.8 million in June 2021 as against $57.1 million in the same period a year ago.

Exhibit 3: Quarterly revenue growth (March 2019-June 2021)

Source: Company’s S-1 filings, August 2021

Growth in Annual Recurring Revenue (ARR) signifies acceptance of the products across larger businesses/customers

One of the key financial metrics to define growth for the company is ARR which is the total subscription revenue the company is likely to expect over the next 12 months from all its customers. At the end of June 2021, the company had about 13,326 of its customers contributing more than $5,000 which was about 84% of the ARR, grown from 8,588 customers at the end of December 2019. 

Additionally, the customers contributing more than $50,000 in ARR represented around 37% of the total ARR as of June 2021 and no single customer accounted for more than 1% on ARR which represents no significant concentration among single customers. 

Exhibit 4: Customers contributing more than $5,000 as a percentage of ARR (Dec 19-June 21)

Source: Company’s S-1 filings, August 2021

ARR of the company’s cohorts

The chart below shows the total ARR of each cohort as of December 2020. Each cohort represents the customers who made their first purchase from the company in a given year. Growth in ARR indicates the company’s success in expanding its product offerings to larger businesses. 

Exhibit 5: Total ARR of each cohort over the years

Source: Company’s S-1 filings, August 2021

The net revenue retention rate of over 100% implies the strength to retain existing customers

One of the key performance metrics apart from ARR is the company’s net revenue retention (NRR) rate which measures how much additional revenues is generated over time from each cohort of customers. The company’s dollar-based NRR as of June 2021 was a solid 118% which implies that the company is generating more revenue from the same customer cohort over time. This retention rate of over 100% indicates good product fit and efficient sales of products by the company.

Competitive Analysis

When you look at the company’s direct competitors in the industry, Freshworks is growing at least two- times ahead of its peers (Chart below) although the company has smaller revenue numbers and maintaining its profitability is only a matter of time as the 1H of 2021 saw a drastic improvement in net losses. 

Exhibit 6: Sales growth of Freshworks and its competitors

Data as of the end of Q2 2021 | Source: Company financials

Valuations look fairly priced as compared to its competitors

The company plans to sell 28.5 million shares and considering the proposed mid-point of the listing price of $30 per share, the gross proceeds would be approximately $855 million (ex- underwriter options). If the company has a successful IPO at $30 per share (Which is the mid-point of the proposed price range of $28-$32 per share), the company’s Enterprise Value (Ex-underwriter) would be around $8.3 billion and the price/sales multiple would be 27.10 for the company. 

The chart below gives a comparison of the P/S of the competitors on a trailing twelve month (TTM) basis. So given how fast the company’s revenues are growing, its fair price/sales (TTM) of 27.10 for Freshworks which is still lower than HubSpot or Atlassian.

Exhibit 7: Valuations in terms of Price/Sales multiples

Data as of 14 Sept 2021 | Source: Company Financials, Seeking Alpha

Risk factors

The company has identified the following key risks to business in its D-1 filings.

1. Impact of COVID-19 pandemic: The company has stated that the pandemic has impacted its operations including productivity and remains uncertain with the duration and extent to which the pandemic is likely to impact future business operations.
2. Revenues are directly impacted if the company is unable to attract new customers and are directly linked to converting the trial version customers into payment version customers.
3. A decline in customer retention: The business of the company is largely dependent on the existing customers renewing their subscription plans and purchasing additional subscriptions. Declines in the company’s customer retention would likely impact the future operations 

Freshworks Customers

Conclusion

The overall customer relationship management (CRM) industry is likely to see exponential growth as the need for integrated software suites to automate customer engagement has gained traction in the recent past. The company is growing at an impressive rate and has made a sharp turn toward operating breakeven. Freshworks’ debut on the U.S. exchanges joins a slew of listings from the software and technology sector and most of such debuts are likely to see strong interest from investors in the IPO and post-listing who expect such companies to benefit from the shift to hybrid work post the pandemic. Investors should look to invest in this Indian startup with tremendous growth potential as it will be available for trading on our platform post the listing.