Freshworks raised its profit target. Most of the upgrade was already earned.
Our comparison finds that the quarterly profit beat accounts for about 94% of the annual upgrade. The implied Q4 outlook changed little.
Freshworks raised its annual adjusted operating-profit target after a strong September quarter. Most of the increase reflects profit it has already delivered, while its revenue forecast barely changed.
The software company earned $73.2 million of adjusted operating profit in Q3, above the $59 million to $61 million it forecast in August. Revenue of $245.4 million remained inside its earlier $244.5 million to $245.5 million range.
The annual upgrade is mostly already earned
Research by Ticker Byline shows that Q3 profit exceeded the old forecast midpoint by $13.2 million. That accounts for about 94% of the $14 million increase in the annual profit midpoint, from $225 million to $239 million.
Subtracting first-half actual profit and August's Q3 midpoint from the old annual midpoint leaves about $68.1 million for Q4. The new annual midpoint, less nine-month actual profit, leaves about $69 million. The new company forecast for Q4 is $68 million to $70 million.
| Comparison | August | November |
|---|---|---|
| Full-year midpoint | 225 | 239 |
| Implied Q4 | 68.1 | 69.0 |
The annual revenue midpoint moved just $0.5 million, to $965.5 million. The profit upgrade therefore reflects stronger profitability more than a larger sales forecast.
The improvement also reaches GAAP profit and cash
Adjusted operating profit excludes stock compensation, acquired-intangible amortization and specified other costs. GAAP operating income was $28.2 million, compared with a $7.5 million loss a year earlier. Lower stock compensation helped that improvement.
Operating cash rose to $77.7 million from $63.5 million. Adjusted free cash flow reached $73.9 million, after subtracting capital spending and capitalized software and adding back $1.2 million of acquisition and restructuring cash costs.
The larger-customer strategy continues to grow. Customers contributing more than $100,000 in annual recurring revenue increased 25% from a year earlier. Net dollar retention was 104%, unchanged from Q2, measuring spending from the same existing customer group.
Acquisitions add another use for cash
Freshworks completed the Torii and Robusta acquisitions in October for preliminary combined consideration of about $102.5 million, paid mainly in cash. The deals expand its software-management and IT troubleshooting capabilities and closed after the reported quarter.
The Freshworks company profile tracks those additions, the company-wide recurring-revenue milestone and the profit forecast against its earlier targets.