Mini-Salesforce puts mighty multiple in $9 bln IPO
A fresh force
Freshworks, like Salesforce, helps businesses manage customers as a so-called software as a service company. Smaller organizations, like the Los Angeles Community College District, are its bread and butter. But helping salespeople keep track of leads is a valuable proposition for companies of all sizes, and Freshworks is supercharging its expansion by making inroads among bigger clients like Sotheby’s.
Revenue grew 53% in the first half of 2021, compared with the same period the previous year, to $169 million. The company is also churning out cash despite its expansion, an important but unusual quality. In the first half of the year, cash from operations was $8.7 million, resulting in free cash flow of $3.7 million after capital investment.
Even more encouraging is that revenue is growing faster than the number of paying customers, which grew just over 20% in 2020. It suggests that customers that try software from Freshworks tend to get hooked and sign up for more. The percentage of annual recurring revenue from customers paying over $5,000 is steadily rising, indicating the company is landing larger clients, too. That could supercharge growth for some time.
Assume Freshworks keeps growing at a 50% clip over the next four quarters, not a wild assumption given these characteristics. Its sales would be closing in on $500 million by this time next year. At the top of the company’s IPO range, it would be worth about 17 times sales, after netting out cash. Sure that’s twice the multiple attached to Salesforce, according to Refinitiv, yet Freshworks is projected to grow twice as fast.
The irony is that Salesforce might have offered not only a road map for Freshworks but opened up the market to a competitor, too. A some point customers might stop choosing the little guy over the established firm. But with Freshwork’s sales at about 1% of those at Salesforce, there is still plenty of business to go around.