FreshWorks the Next-Gen SaaS
Businesses These Days are Very Siloed, FreshWorks is Changing the Game
Emerging markets are becoming extremely important. International exposure to the Global economy has been a strong theme this year with some of the most successful IPO’s coming from international businesses. Two that I own are D-Local and Global-E and two on my watch list are Monday and UiPath. I bought FreshWorks on IPO day and this is the research I gathered to share with all of you. If you love this content, please don’t forget to subscribe (a link will be at the end of this article) and become a member!
FreshWorks planed to launch a $1B IPO at a share price of $32-$28 per share. This will put FRSH at a valuation of $10B. They will most likely do $380m - $400m this year in sales and, assuming similar growth trajectory, will do about $535m in sales in FY22. This will put them at a rough valuation of 25x EV/S FY21 and an 18x EV/S FY22. This is a high valuation but their GAAP gross margins are nearly 80% and nearing operating profit break even. FreshWorks performed well on IPO day seeing a 32% rise, which will place it approximately at a $13.2B market cap.
Table of contents:
Business Model
The Market Opportunity
Financial Performance
Strategy for Growth
Conclusion
FreshWorks - An All in One SaaS Solution
Business Model:
FreshWorks has grown nicely and innovated at a rapid pace. They are an Indian based company with the mission to “delight customers and employees”. The word “delight” is often repeated through their website and investor relations portal. They emphasize customers and employee’s because they believe traditional, first generation SaaS is extremely siloed which takes an immense amount of time managing and learning the systems. Basically, they are built for the leadership and not for the employees who use it or the customers of the business. They’re attempting to unify and take the complexity out of traditional SaaS. It is important to know that they are not just a CRM (mainstream news sources seem to categorize it as a Salesforce competitor). Although this is true, FreshWorks functionality expands much further from a CRM.
FreshDesk: Their original product, which offers multiple offers depending on the plan they choose. This can include Support Desk, Customer Success, Contact Center, or Messaging. This is directly related to assisting with customer support and time to resolution.
FreshSales: A CRM based solution and why most pundits call them a Salesforce competitor. This is their newest product and provides additional opportunity for growth. Separately, but included in this family of products, is Fresh Marketing which is made primarily for marketing teams. If they choose to implement both solutions this is a “FreshSales Suite”. Key capabilities include: AI driven pipeline, sales automation, quote creation and a dashboard to organize leads/prospects.
FreshService: An IT service management SaaS that’s specialized for IT teams. This is primarily designed to help organizations ensure the allocation and available of technology throughout the enterprise. FreshService offers workflow automations (like UiPath but not as robust) and a unified IT Help Desk Platform that can quickly resolve tickets. It comes in four different product offerings. Each offering upgrading the capabilities of the product
In addition to these offerings they are also beginning of launching new products for HR (full service from onboarding to daily HR workflows) and team collaboration. The best way to think of them as a product for SMB’s (like Shopify and Digital Ocean) due to their ease of use and structured plans.
FreshWorks Neo enables customers to unify different FreshWorks solutions and adapt to business changes in the future.
Key components of FreshWorks Neo include:
Developer platform: This allows businesses to customize various different API’s, webhooks and SDK’s to tailor FreshWorks solutions to core business needs.
Enterprise services: This includes; unified customer record, object creation, analytics, and collaborative capabilities
Foundational services: Events and notifications to trigger actions across the solution, Security, Customer channels, and unified administrative capabilities
FreshWorks, being in India, sells into multiple geographies. It’s very interesting to see how they’ve grown and where a majority of their sales come from. They currently operate in 120 different countries (very exciting) with their sales coming from:
North America: 45%
Europe: 40%
Middle East, Africa and rest of the world 15%
Any business that operates globally presents a very exciting opportunity for me. Especially when focused on emerging market opportunities and being primarily an SMB product. They are very well positioned to capture significant market share and experience rapid growth for years.
If I could sum up a one liner to their business model, ‘they’re a unified SaaS solution for the SMB cloud businesses that provide better backend and frontend work for customers and employees’. They’re simple, nimble, easy to deploy and easy to learn which increases time to adoption and ROI from business efficiencies.
The Market Opportunity:
Because they operate globally and they’re expanding their services to appeal to multiple different categories, their TAM is difficult to measure. They have based their assessment of the TAM from International Data Corporation (IDC), which is estimated to be approximately $120B today. To break this down, they are classified as part CRM and part SSM (customer relationship management and system service management). By 2025, the CRM TAM should be approximately $76B and SSM should be approximately $44B.
After adjusting the market data from the IDC and consolidating their current product profile they estimate their specific targeted market opportunity to be $77B. They anticipate that the addressable market to continue to expand as their product portfolio expands.
Because FreshWorks products expand across multiple product categories, Gartner Magic Quadrant has listed them in a few different markets. As a reminder on how to read these, it can be summed up like this:
Niche: Typically players that address a very niche segment of an overall market, may not be a terrific investment.
Challenger: Running a strong business model and can often be competitively priced but are not innovating as fast as some of their competitors.
Visionary: A business that’s leading the way in terms of innovation but their business may not be as competitive in the overall environment.
Leader: The best of visionaries and challengers, the higher and to the right emphasizes the dominant position in a particular market.
The CRM Magic Quadrant: Visionary
IT Service Management Magic Quadrant: Challenger
This is more impressive than it seems. When you historically look at the older MQ’s, FreshWorks has moved more up and toward the right. Investing in businesses that are up and coming can provide exceptional opportunity before they begin to become more “leaders”. However, it is important to know that they’re NOT focused on being the best in one specific category, but on a more unified, simple, solution that can address multiple business needs. I would never expect them to be the best in any one given segment because that’s not their business model. But to be competitive in each segment, yes, that’s where my expectations would be.
The uniqueness of the all-in-one solution presents opportunity but risk at the same time in terms of market positioning. I anticipate they will continue to expand on their product offering and innovations within their ecosystem for businesses to continue to maintain and grow market share.
Financial Performance:
FreshWorks financials are very impressive. An overlooked category is the CEO approval rating on GlassDoor. A well liked CEO = a good leader which typically translates to productive employee’s and business success.
The first 6 months of FY 21 financial highlights include:
Revenue of $169m which represents 53% YoY growth
GAAP Gross Margin 79%
Operating Margin of -4.8%
Net income of -$9.844
Cashflow from Operations $8.662m
Their previous quarterly revenue growth found all the way back to March 2019:
When looking at historical revenue results, it’s a very bullish sign to see steady revenue growth like what FreshWorks has demonstrated. What’s most interesting is that you can see accelerated revenue growth the past few quarters. As they scale, they are clearly investing in the business as you see Sales and Marketing expense increase along with R&D. This can create a self-fulfilling flywheel toward exponential growth. The more you grow, the better your products become, the more you invest into selling, which generates more revenue which comes in the form of shareholder returns. I love that they’re sacrificing short term earnings to invest into the business.
Their IPO was approximately $1B. FreshWorks has a balance sheet with a large, “fresh”, investment and I am excited to see the moves they make with their excess capital.
Strategy for Growth:
Leadership has provided the following elements for growth:
Focus on product led growth: They’ve found that when their businesses growth, these same businesses continue to expand the CRM, ITSM, sales and marketing products with FreshWorks. They want the product to speak for itself.
Net new customers: Their belief is that all the way from SMB’s to Large Enterprise stand to benefit from their products, they will continue to invest in sales to get there
Expand with existing customers: With a customer base of 52,000, there are large cross selling opportunities within their core base.
Innovate and expand platform capabilities: They’re investing heavily into AI and ML to expand their product offering. They believe this investment will drive further adoption of their products and capabilities.
Expand partner network: They are partnered with Amazon, Google and Microsoft. They plan on further leveraging these partnerships to continue to expand into new markets and opportunities as well as find new partners!
Expand global presence: They already operate in 120 countries but expect to continue their expansion efforts and footprint with existing countries.
Their growth is expected and supported a hypothesis I made from their financial statements. The idea of expanding platform capabilities using AI/ML is extremely interesting. When reviewing their previous quarterly financial data, you will notice R&D continues to pick up. The reason why this R&D investment is so important is that it turns into product capabilities. They have significant room to grow their capabilities and customer facing offering to become a large unified platform, sort of like Microsoft for SMB. I could also see them continue expansion into various other product categories in the years to come.
Conclusion:
I am long and did not anticipate buying this stock until I stumbled across it over the weekend. FreshWorks is an extraordinarily interesting business model and I like the idea of purchasing a company with exposure to 120 different countries. This can be considered “emerging market” exposure. The steady secular trends behind SaaS needs keep the wind and FreshWorks back. Couple this with global economic expansion, one can anticipate this being a major player for SMB’s and Enterprise businesses.
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Stay tuned… Stay classy…
Dillon