Turnaround scenarios are known for their potential to yield impressive results, but it’s no easy feat to steer a company back on track once it’s lost its footing. Even with a new management team at the helm, regaining market share or profitability can be a daunting challenge. We’ve delved into the stories of numerous turnaround CEOs before, and now, Freshworks joins the list as the latest addition.
Freshworks (FRSH): $13.94
MarketCap: $4.17B
Enterprise Value: $2.98B
Key Insights
Company Profile
Freshworks Inc., a SaaS company, specializes in cloud-based solutions for CRM, IT service management, and e-commerce marketing. Founded in Chennai, India, it relocated its headquarters to San Mateo, California, in 2018. The company serves over 67,000 clients worldwide, including American Express, Blue Nile, Bridgestone, Databricks, Fila, and OfficeMax.
Leadership Transition
During the Q1 2024 earnings call on May 1, 2024, Mr. Mathrubootham revealed that he would be stepping down as CEO and move into the role of Executive Chairman at Freshworks. At the same time, Mr. Woodside, who’s currently the President, is stepping up as the new Chief Executive Officer. A technical founder stepping down was not anticipated by the market and the stock responded with a big drop from $18.25 to $14.67.
Girish Mathrubootham
Freshworks went public on the Nasdaq in September 2021, marking it as the first India-born SaaS firm to trade on a US exchange.
Freshworks made its debut with a valuation of $13 billion at the close of its first trading day. The company raised $1.03 billion by selling 28.5 million shares at $36 per share. The shares opened at a 21% premium to the IPO price and closed the day 32% higher, at $47.55.
During Mr. Mathrubootham’s tenure, Freshworks expanded its global reach, serving over 67,000 customers worldwide. The company now has a workforce of approximately 4,900 employees across 13 global locations.
However, every success story encounters its share of challenges. In March, the Freshworks board rescinded an award of 6 million shares to Mathrubootham, originally slated for distribution in tranches until 2029, contingent upon specific share price milestones being achieved. The decision was attributed to challenges stemming from macroeconomic conditions deemed “entirely outside the control of the company’s leadership.” However, Mr. Mathrubootham will be entitled to a new annual long-term equity incentive award with a fair value of $19 million. He currently maintains a 4.3% ownership stake in the company.
In his letter to his employees, Mr. Mathrubootham mentions that he recruited Mr. Woodside to Freshworks, hoping that one day he would eventually step into the role of the CEO, indicating a well-thought-out succession plan. Regarding their division of responsibilities, he explains that over the past six quarters or so, Mr. Mathrubootham was focused on the product while Mr. Woodside handled go-to-market strategies.
Dennis Woodside
Mr. Woodside assumed the role of president at Freshworks in September 2022, concurrently serving on the board.
Bringing a wealth of experience to the table, Mr. Woodside’s previous tenure as CEO of Motorola Mobility during Google’s ownership from 2012 to 2014 underscored his adept leadership abilities. During this period, he orchestrated a significant turnaround by assembling a new management team, reshaping product strategies, and reigniting growth in the mobile device sector, ultimately leading to its acquisition by Lenovo.
Before his tenure at Motorola Mobility, Mr. Woodside served in senior management roles across various geographical regions. Notably, his role as Chief Operating Officer at Dropbox (DBX) saw significant revenue growth from $300 million to $1.4 billion and the company raised over $1 billion in an IPO in 2018.
Before joining Freshworks, Mr. Woodside held a position on the board of its competitor, ServiceNow.
Under Mr. Woodside’s leadership, Freshworks strategically pivoted its focus towards mid-market and enterprise clients, seeking to broaden its customer base and secure high-value accounts.
Mr. Woodside didn’t stop at redefining strategy. In 2022, he brought on board Pradeep Rathinam as Chief Revenue Officer. More recently, the company welcomed Mika Yamamoto as Chief Customer and Marketing Officer, poaching her from F5 Networks.
Valuation
Since its public listing in 2021, Freshworks has recorded a consistent rise in revenue every quarter, handily beating revenue estimates for 11 straight quarters. The story for the company’s stock was, however very different. The company’s share price has tanked by about 70% and is down 41% since the beginning of this year, which has been of particular concern to the board.
The company has a market cap of $4.11 billion and an enterprise value of $2.92 billion, with $1.18 billion in net cash on the balance sheet. The company trades at 4.18 times forward sales, is GAAP unprofitable, but is free cash flow positive. As is usually the case with tech companies, stock-based compensation expense is high.
Based on the investor’s earnings call, Mr. Woodside believes the reason for the stock’s decline is attributed to concerns about the impact of generative AI on customer support and software operations. The company slightly adjusted its revenue guidance downward by around $5 million due to broader economic factors, particularly interest rate fluctuations affecting small businesses.
Freshworks has been facing challenges in translating its revenue growth into net income but the trend appears to be in the right direction.
Peers
The table below provides a comparison of four Freshworks peers.
AI Wave
Beyond routine cyclical fluctuations, all software-as-a-service (SaaS) enterprises now confront the evolving landscape shaped by AI-driven technologies. While Freshworks has already integrated some of these capabilities, competition within this domain remains fierce.
A critical consideration lies in the composition of Freshworks’ customer base, with over 51,000 clients categorized as small and medium-sized businesses (SMBs), defined by companies with up to 250 employees. This segment represents the primary target audience for transitioning to off-the-shelf AI-driven tools.
Freshworks, like many software companies, is integrating “generative” AI technology into its platform. Generative AI is poised to enhance the performance of “virtual agents” utilized in customer support. Freshworks recently unveiled new AI solutions, including Freddy Copilot aimed at facilitating customer service.
The company has implemented two strategies for monetizing AI. For Co-pilot, customers are charged $29 per seat to access AI features, resulting in a 30% increase in productivity upon deployment, which commenced midway through Q1 with favorable adoption rates. Additionally, Freddy Self Serve automates responses to common customer inquiries, with charges based on a per-session model. While still in the early stages of monetization, these initiatives are integral to Freshworks’ AI roadmap, which comprises three pillars: Freddy Self-Service, Freddy Co-pilot, and Freddy Insights.
Revenue Goal
In the 2023 Q3 earnings report, the company estimated that it would generate $1 billion in revenue by 2026, with a strategic focus on attracting larger and higher-yielding customers. Mr. Woodside confirmed that he is committed to continuing the journey of growth toward becoming a $1 billion revenue company and beyond in a LinkedIn post.
Freshworks Acquisition Strategy
Freshworks announced a partnership with Device42 18 months ago, aimed at enhancing sales strategies. Consequently, Device42 was co-sold alongside Freshservice in applicable deals, sparking discussions of an acquisition. Looking forward, Freshworks is keen on scouting for companies excelling in IT, support, and AI sectors. With a substantial balance sheet and ample cash reserves, they are well-positioned to leverage these opportunities to their advantage.
First Quarter 2024 Results (Press Release) (Investor Presentation)
Recent Business Highlights
Addressing the reduced overall revenue forecast for 2024, Mr. Mathrubootham stated that,
Conclusion
Freshworks has been on my watchlist since the company went public and this CEO transition came as a big surprise to me. A combination of a new CEO and a new strategy to target larger enterprise customers translate into increased execution risk and this was reflected in the big drop in the stock price.
If the company doesn’t falter and continues on the current trajectory of growth, it will reach an inflection point and turn profitable. The downward revenue guidance revision does not support that thesis. I continue to remain very interested in the company at these levels and will follow the company’s progress to see if this management and strategy transition is successful.
CEO
CFO
General Counsel/Chief Legal Officer
Others
Appointments
1. Aspen Technology (AZPN): $221.30
On May 7, 2024, Aspen Technology announced the appointment of David Baker as Chief Financial Officer, effective June 3, 2024.
MarketCap: $14.01B | Avg. Daily Volume (30 days): 273,941 | Revenue (TTM): $1.11B |
Net Income Margin (TTM): -2.46% | ROE (TTM): -0.21% | Net Cash: $14.73M |
P/E: N/A | Forward P/E: 30.86 | EV/EBIDTA (TTM): 37.82 |
P/S (TTM): 12.82 | P/B (TTM): 1.09 | 52 Week Range: $161.32 – $224.77 |
2. Coca-Cola Co (KO): $63.13
On May 2, 2024, The Coca-Cola Company announced that Erin May was appointed to the additional role of Chief Accounting Officer effective June 1, 2024.
MarketCap: $271.96B | Avg. Daily Volume (30 days): 13,099,072 | Revenue (TTM): $46.07B |
Net Income Margin (TTM): 23.41% | ROE (TTM): 39.31% | Net Debt: $26.85B |
P/E: 25.36 | Forward P/E: 22.42 | EV/EBIDTA (TTM): 20.49 |
P/S (TTM): 5.94 | P/B (TTM): 10.29 | 52 Week Range: $50.74 – $63.76 |
3. Cognex (CGNX): $47.44
On May 1, 2024, the Board of Directors of the company appointed Dennis Fehr as Chief Financial Officer of the company, effective May 3, 2024.
MarketCap: $8.15B | Avg. Daily Volume (30 days): 1,087,806 | Revenue (TTM): $847.22M |
Net Income Margin (TTM): 11.76% | ROE (TTM): 6.79% | Net Cash: $201.03M |
P/E: 83.18 | Forward P/E: 49.26 | EV/EBIDTA (TTM): 56.35 |
P/S (TTM): 9.69 | P/B (TTM): 5.47 | 52 Week Range: $33.90 – $58.77 |
4. Unity Software (U): $22.38
On May 1, 2024, Unity Software announced the appointment of Matthew S. Bromberg as Chief Executive Officer and President, effective May 15, 2024.
MarketCap: $8.75B | Avg. Daily Volume (30 days): 8,174,240 | Revenue (TTM): $2.15B |
Net Income Margin (TTM): -40.05% | ROE (TTM): -24.32% | Net Debt: $1.19B |
P/E: N/A | Forward P/E: N/A | EV/EBIDTA (TTM): N/A |
P/S (TTM): 3.99 | P/B (TTM): 2.75 | 52 Week Range: $21.60 – $50.08 |
5. Genuine Parts Co. (GPC): $155.01
On April 29, 2024, Genuine Parts Company announced that William P. Stengel, II, is appointed as Chief Executive Officer of the company, effective June 3, 2024.
MarketCap: $21.59B | Avg. Daily Volume (30 days): 1,272,564 | Revenue (TTM): $23.11B |
Net Income Margin (TTM): 5.46% | ROE (TTM): 30.19% | Net Debt: $3.90B |
P/E: 17.27 | Forward P/E: 15.67 | EV/EBIDTA (TTM): 11.88 |
P/S (TTM): 0.94 | P/B (TTM): 4.90 | 52 Week Range: $124.63 – $167.19 |
Departures
1. Datadog (DDOG): $118.47
On May 7, 2024, Datadog announced that Amit Agarwal would resign from his position as President of the Company, effective December 31, 2024.
MarketCap: $39.63B | Avg. Daily Volume (30 days): 4,846,434 | Revenue (TTM): $2.26B |
Net Income Margin (TTM): 5.11% | ROE (TTM): 6.21% | Net Cash: $1.82B |
P/E: N/A | Forward P/E: 70.42 | EV/EBIDTA (TTM): 16.57 |
P/S (TTM): 18.86 | P/B (TTM): 17.99 | 52 Week Range: $77.81 – $138.61 |
2. Genuine Parts Co. (GPC): $155.01
MarketCap: $28.01B | Avg. Daily Volume (30 days): 3,716,686 | Revenue (TTM): $10.90B |
Net Income Margin (TTM): 12.44% | ROE (TTM): 15.27% | Net Cash: $2.45B |
P/E: 21.22 | Forward P/E: 20.76 | EV/EBIDTA (TTM): 12.88 |
P/S (TTM): 2.63 | P/B (TTM): 3.19 | 52 Week Range: $4.34 – $6.45 |
3. Paramount Global (PARA): $12.56
On April 29, 2024, Paramount Global announced that Bob Bakish, President and CEO, is stepping down from his role as CEO and from the Board of Directors.
MarketCap: $8.75B | Avg. Daily Volume (30 days): 22,367,803 | Revenue (TTM): $30.07B |
Net Income Margin (TTM): -0.15% | ROE (TTM): -2.90% | Net Debt: $13.42B |
P/E: N/A | Forward P/E: 12.76 | EV/EBIDTA (TTM): 24.41 |
P/S (TTM): 0.27 | P/B (TTM): 0.38 | 52 Week Range: $10.07 – $17.24 |
4. Coca-Cola Co (KO): $63.13
On May 2, 2024, The Coca-Cola Company announced that Chief Accounting Officer Mark Randazza transitions to the role of Senior Vice President and Assistant Controller effective June 1, 2024.
MarketCap: $271.96B | Avg. Daily Volume (30 days): 13,099,072 | Revenue (TTM): $46.07B |
Net Income Margin (TTM): 23.41% | ROE (TTM): 39.31% | Net Debt: $26.85B |
P/E: 25.36 | Forward P/E: 22.42 | EV/EBIDTA (TTM): 20.49 |
P/S (TTM): 5.94 | P/B (TTM): 10.29 | 52 Week Range: $50.74 – $63.76 |
5. Unity Software (U): $22.38
MarketCap: $8.75B | Avg. Daily Volume (30 days): 8,174,240 | Revenue (TTM): $2.15B |
Net Income Margin (TTM): -40.05% | ROE (TTM): -24.32% | Net Debt: $1.19B |
P/E: N/A | Forward P/E: N/A | EV/EBIDTA (TTM): N/A |
P/S (TTM): 3.99 | P/B (TTM): 2.75 | 52 Week Range: $21.60 – $50.08 |
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